Filed with the Securities and Exchange Commission on April 29, 1997.

                                                               File No. 2-96461
                                                               File No. 811-4257

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

         Pre-Effective Amendment No.     
                                         --

         Post-Effective Amendment No.    22
                                         --

                                       and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

         Amendment No.    26
                          --

                      Scudder Variable Life Investment Fund
               (Exact Name of Registrant as Specified in Charter)

                 Two International Place, Boston, MA 02110-4103
               (Address of Principal Executive Offices) (Zip Code)

       Registrant's Telephone Number, including Area Code: (617) 295-2567

                               Thomas F. McDonough
                         Scudder, Stevens & Clark, Inc.
                 Two International Place, Boston, MA 02110-4103
                       (Name Address of Agent for Service)

It is proposed that this filing will become effective

                  immediately upon filing pursuant to paragraph (b)
           -                                                        

           X       on May 1, 1997 pursuant to paragraph (b)
           -                              

                  60 days after filing pursuant to paragraph (a)(i)
           -                                                    

                  on                pursuant to paragraph (a)(i)
           -         --------------

                  75 days after filing pursuant to paragraph (a)(ii)
           -                                                      

                  on               pursuant to paragraph (a)(ii) of Rule 485.
           -         ------------- 

If appropriate, check the following box:

____     This post-effective amendment designates a new effective date for a
         previously filed post-effective amendment.

The Registrant has filed a declaration registering an indefinite amount of
securities pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended. The Registrant has filed the notice required by Rule 24f-2 for its most
recent fiscal year on February 28, 1997.


<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                             MONEY MARKET PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------
<TABLE>
<CAPTION>

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------
<S>    <C>           <C>                            <C>
        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                             Cross Reference-Page 1
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                             MONEY MARKET PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS



                             Cross Reference-Page 2
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                                 BOND PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                             Cross Reference-Page 3
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                                 BOND PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS



                             Cross Reference-Page 4
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                               BALANCED PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE



                             Cross Reference-Page 5
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                               BALANCED PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS


                             Cross Reference-Page 6
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                           GROWTH AND INCOME PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                             Cross Reference-Page 7
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                           GROWTH AND INCOME PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS


                             Cross Reference-Page 8
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                            CAPITAL GROWTH PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                             Cross Reference-Page 9
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                            CAPITAL GROWTH PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS


                            Cross Reference-Page 10
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                           GLOBAL DISCOVERY PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                            Cross Reference-Page 11
<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                           GLOBAL DISCOVERY PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS


                            Cross Reference-Page 12
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                             INTERNATIONAL PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART A
------

     Item No.        Item Caption                   Prospectus Caption
     --------        ------------                   ------------------

        1.           Cover Page                     COVER PAGE

        2.           Synopsis                       NOT APPLICABLE

        3.           Condensed Financial            NOT APPLICABLE
                     Information

        4.           General Description of         INVESTMENT CONCEPT OF THE FUND;
                     Registrant                     INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIO; SPECIAL RISK
                                                    CONSIDERATIONS; POLICIES AND TECHNIQUES APPLICABLE TO THE
                                                    PORTFOLIO;
                                                    INVESTMENT RESTRICTIONS

        5.           Management of the Fund         INVESTMENT ADVISER; PORTFOLIO MANAGEMENT;
                                                    ADDITIONAL INFORMATION

        5A.          Management's Discussion of     NOT APPLICABLE
                     Fund Performance

        6.           Capital Stock and Other        TAX STATUS, DIVIDENDS AND DISTRIBUTIONS;
                     Securities                     SHAREHOLDER COMMUNICATIONS; ADDITIONAL INFORMATION

        7.           Purchase of Securities         DISTRIBUTOR; PURCHASES AND REDEMPTIONS;
                     Being Offered                  NET ASSET VALUE

        8.           Redemption or Repurchase       PURCHASES AND REDEMPTIONS;
                                                    NET ASSET VALUE

        9.           Pending Legal Proceedings      NOT APPLICABLE


                            Cross Reference-Page 13
<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND
                             INTERNATIONAL PORTFOLIO
                              CROSS-REFERENCE SHEET

                           Items Required By Form N-1A
                           ---------------------------


PART B
------

                                                       Caption in Statement of
    Item No.        Item Caption                       Additional Information
    --------        ------------                       ----------------------

       10.          Cover Page                         COVER PAGE

       11.          Table of Contents                  TABLE OF CONTENTS

       12.          General Information and History    ORGANIZATION AND CAPITALIZATION

       13.          Investment Objectives and          INVESTMENT OBJECTIVE AND POLICIES;
                    Policies                           POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIO; INVESTMENT
                                                       RESTRICTIONS; PORTFOLIO TURNOVER

       14.          Management of the Fund             MANAGEMENT

       15.          Control Persons and Principal      TRUSTEES AND OFFICERS
                    Holders of Securities

       16.          Investment Advisory and Other      INVESTMENT ADVISER AND DISTRIBUTOR; EXPERTS
                    Services

       17.          Brokerage Allocation               ALLOCATION OF PORTFOLIO BROKERAGE

       18.          Capital Stock and Other            ORGANIZATION AND CAPITALIZATION;
                    Securities                         ADDITIONAL INFORMATION

       19.          Purchase, Redemption and           PURCHASES AND REDEMPTIONS;
                    Pricing of Securities Being        NET ASSET VALUE;
                    Offered                            DIVIDENDS AND DISTRIBUTIONS

       20.          Tax Status                         TAX STATUS; DIVIDENDS AND DISTRIBUTIONS

       21.          Underwriters                       INVESTMENT ADVISER AND DISTRIBUTOR

       22.          Calculations of                    PERFORMANCE INFORMATION
                    Performance Data

       23.          Financial Statements               FINANCIAL STATEMENTS

</TABLE>

                            Cross Reference-Page 14



                                       
<PAGE>


                                                                         SCUDDER
                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                             Two International Place
                        Boston, Massachusetts 02110-4103
                                 (A Mutual Fund)


Scudder  Variable Life  Investment  Fund (the "Fund") is an open-end  management
investment  company  which  offers  shares  of  beneficial   interest  of  seven
diversified Portfolios:

o    Money Market  Portfolio seeks stability and current income from a portfolio
     of money market  instruments.  The Money Market  Portfolio  will maintain a
     dollar-weighted  average portfolio maturity of 90 days or less in an effort
     to maintain a constant net asset value of $1.00 per share.

o    Bond Portfolio seeks high income from a high quality portfolio of bonds.

o    Balanced  Portfolio  seeks a  balance  of  growth  and  income,  as well as
     long-term  preservation of capital,  from a diversified portfolio of equity
     and fixed-income securities.

o    Growth and Income  Portfolio  seeks  long-term  growth of capital,  current
     income and growth of income from a portfolio consisting primarily of common
     stocks and securities convertible into common stocks.

o    Capital Growth Portfolio seeks to maximize  long-term capital growth from a
     portfolio consisting primarily of equity securities.

o    Global Discovery  Portfolio seeks above-average  capital  appreciation over
     the long term by  investing  primarily  in the equity  securities  of small
     companies located throughout the world.

o    International  Portfolio seeks long-term growth of capital principally from
     a diversified portfolio of foreign equity securities.

   
This  prospectus  sets forth  concisely  the  information  about the Fund that a
prospective  investor should know before applying for certain  variable  annuity
contracts ("VA contracts") and variable life insurance policies ("VLI policies")
offered in the separate accounts of certain insurance companies  ("Participating
Insurance  Companies").  Please  read it  carefully  and  retain  it for  future
reference.  The prospectus should be read in conjunction with the VA contract or
VLI  policy  prospectus  which  accompanies  it.  Shares  of  the  Money  Market
Portfolio,  and Class A shares of all other  Portfolios,  are offered herein. If
you require more detailed  information,  a Statement of  Additional  Information
dated May 1, 1997, as supplemented  from time to time, is available upon request
without charge and may be obtained by calling a Participating  Insurance Company
or by writing to  broker/dealers  offering the above  mentioned VA contracts and
VLI policies,  or Scudder  Investor  Services,  Inc., Two  International  Place,
Boston, Massachusetts 02110-4103. The Statement of Additional Information, which
is  incorporated  by  reference  into this  prospectus,  has been filed with the
Securities  and Exchange  Commission  and is available  along with other related
materials  on  the  Securities  and  Exchange  Commission's  Internet  Web  site
(http://www.sec.gov).
    

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

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

SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED  EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR LIFE INSURANCE  COMPANIES  WRITING ALL TYPES OF VA CONTRACTS
AND VLI POLICIES.
   
                                   PROSPECTUS
                                   May 1, 1997
    

                      CLASS A SHARES OF BENEFICIAL INTEREST
<PAGE>

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

                                TABLE OF CONTENTS
 ------------------------------------------------------------------------------
                                                                            Page

INVESTMENT CONCEPT OF THE FUND                                                 1
FINANCIAL HIGHLIGHTS                                                           2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS                           9
     Money Market Portfolio                                                    9
     Bond Portfolio                                                            9
     Balanced Portfolio                                                       10
     Growth and Income Portfolio                                              11
     Capital Growth Portfolio                                                 12
     Global Discovery Portfolio                                               13
     International Portfolio                                                  14
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS                          15
     Repurchase Agreements                                                    15
     Debt Securities                                                          15
     Illiquid or Restricted Investments                                       15
     Convertible Securities                                                   16
     Mortgage and Other Asset-Backed Securities                               16
     Foreign Securities                                                       16
     When-Issued Securities                                                   17
     Indexed Securities                                                       17
     Loans of Portfolio Securities                                            17
     Zero Coupon Securities                                                   18
     Real Estate Investment Trusts                                            18
     Derivatives                                                              18
     Options                                                                  18
     Options on Securities Indexes                                            18
     Futures Contracts                                                        18
     Forward Foreign Currency Exchange Contracts, Foreign Currency Futures 
       Contracts and Foreign Currency Options                                 19
     Strategic Transactions and Derivatives Applicable to Global Discovery 
       Portfolio                                                              19
     Special Situation Securities                                             20
INVESTMENT RESTRICTIONS                                                       21
INVESTMENT ADVISER                                                            22
     Portfolio Management                                                     23
     Money Market Portfolio                                                   23
     Bond Portfolio                                                           24
     Balanced Portfolio                                                       24
     Growth and Income Portfolio                                              24
     Capital Growth Portfolio                                                 24
     Global Discovery Portfolio                                               24
     International Portfolio                                                  24
DISTRIBUTOR                                                                   25
PURCHASES AND REDEMPTIONS                                                     25
NET ASSET VALUE                                                               26
PERFORMANCE INFORMATION                                                       26
     Money Market Portfolio                                                   26
     Bond Portfolio                                                           26
     All Portfolios                                                           26
VALUATION OF PORTFOLIO SECURITIES                                             27
     Money Market Portfolio                                                   27
     Other Portfolios                                                         27
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS                                       27
SHAREHOLDER COMMUNICATIONS                                                    28
ADDITIONAL INFORMATION                                                        28
     Fund Organization and Shareholder Indemnification                        28
     Other Information                                                        29
TRUSTEES AND OFFICERS                                                         30
   
APPENDIX                                                                      31
    

<PAGE>


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

                         INVESTMENT CONCEPT OF THE FUND
 ------------------------------------------------------------------------------

Scudder  Variable Life Investment  Fund (the "Fund") is an open-end,  registered
management investment company comprised of the following diversified series: the
Money Market Portfolio,  Bond Portfolio,  Balanced Portfolio,  Growth and Income
Portfolio,   Capital  Growth   Portfolio,   Global  Discovery   Portfolio,   and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the  "Portfolios").  Additional  Portfolios may be created from
time to time.  The Fund is intended to be the funding  vehicle for VA  contracts
and VLI policies to be offered by the separate accounts of certain Participating
Insurance  Companies.  The Fund currently does not foresee any  disadvantages to
the holders of VA  contracts  and VLI  policies  arising  from the fact that the
interests   of  the  holders  of  such   contracts   and  policies  may  differ.
Nevertheless,  the Fund's Trustees intend to monitor events in order to identify
any material irreconcilable  conflicts which may possibly arise and to determine
what action, if any, should be taken in response  thereto.  The VA contracts and
the VLI  policies  are  described  in the  separate  prospectuses  issued by the
Participating  Insurance Companies.  The Fund assumes no responsibility for such
prospectuses.

Individual VA contract holders and VLI policyholders are not the  "shareholders"
of the Fund.  Rather, the Participating  Insurance  Companies and their separate
accounts are the shareholders or investors (the  "Shareholders"),  although such
companies  may  pass  through  voting  rights  to  their  VA  contract  and  VLI
policyholders.

                                       1

<PAGE>


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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Money Market Portfolio

The following table includes  selected data for a share  outstanding  throughout
each period and other performance information derived from the audited financial
statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                               ------------------------------------------------------------------------------------------------
                                1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of period ......   $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from investment
    operations:
  Net investment
    income .................     .050      .055      .037      .025      .033      .057      .076      .088      .068      .060
Less distributions from
  net investment income ....    (.050)    (.055)    (.037)    (.025)    (.033)    (.057)    (.076)    (.088)    (.068)    (.060)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
end of period ..............   $ 1.00    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ...........     5.09      5.65      3.72      2.54      3.33      5.81      7.83      8.84      7.08      5.95
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ......       98        80        90        49        34        28        32        15        11         8
Ratio of operating
  expenses, net to
  average daily net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .72       .75       .75
Ratio of operating expenses
  before expense reductions,
  to average daliy net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .81      1.04      1.12
Ratio of net
  investment income
  to average daily
  net assets (%) ...........     4.98      5.51      3.80      2.55      3.26      5.67      7.57      8.53      6.99      6.06
</TABLE>
    
                                       2


<PAGE>


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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Bond Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout  each  period  and other  performance  information  derived  from the
audited financial statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31, (a)
                               ------------------------------------------------------------------------------------------------
                                1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of  period .....   $ 7.16    $ 6.48    $ 7.42    $ 7.19    $ 7.37    $ 6.73    $ 6.72    $ 6.39    $ 6.47    $ 6.67
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from
  investment operations:
    Net investment
      income ...............      .41       .44       .43       .48       .49       .52       .53       .54       .54       .49
    Net realized and
      unrealized gain
      (loss) on
      investment
    transactions ...........     (.22)      .69      (.77)      .38      (.02)      .61      (.02)      .18      (.19)     (.40)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total from investment
operations .................      .19      1.13      (.34)      .86       .47      1.13       .51       .72       .35       .09
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Less distributions from:
  Net investment
    income .................     (.62)     (.45)     (.43)     (.48)     (.46)     (.47)     (.50)     (.39)     (.43)     (.29)
  Net realized gains
    on investment
    transactions ...........     --        --        (.17)     (.15)     (.19)     (.02)     --        --        --        --
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total distributions ........     (.62)     (.45)     (.60)     (.63)     (.65)     (.49)     (.50)     (.39)     (.43)     (.29)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
end of period ..............   $ 6.73    $ 7.16    $ 6.48    $ 7.42    $ 7.19    $ 7.37    $ 6.73    $ 6.72    $ 6.39    $ 6.47
                               ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ...........     2.82     18.17     (4.79)    12.38      7.01     17.61      8.06     11.65      5.46      1.22
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ......       66        73       142       129       113        74        42        22         3         3
Ratio of operating
  expenses, net to
  average net
  assets (%) ...............      .61       .56       .58       .61       .63       .69       .73       .75       .75       .75
Ratio of operating expenses
  before expense reductions,
  to average daliy net
  assets (%) ...............      .61       .56       .58       .61       .63       .69       .73       .84      1.40      2.01
Ratio of net investment
  income to average
  net assets (%) ...........      6.2      6.29      6.43      6.59      6.89      7.51      8.05      8.04      7.86      7.53
Portfolio turnover
  rate (%) .................    85.11    177.21     96.55    125.15     87.00    115.86     71.02    103.41    245.23    186.05

(a) Based on monthly average shares outstanding during the period.
</TABLE>
    

                                       3
<PAGE>


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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Balanced Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout  each  period  and other  performance  information  derived  from the
audited financial statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31, (a)
                               ---------------------------------------------------------------------------------------------------
                                  1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ---------------------------------------------------------------------------------------------------
<S>                              <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of period ........   $10.95    $ 8.97    $10.23    $10.02     $ 9.85    $ 8.10    $ 8.75    $ 7.62    $ 6.88    $ 7.35
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Income from
  investment operations:
  Net investment income ......      .31       .30       .29       .30        .29       .35       .42       .40       .33       .34
  Net realized and unrealized
    gain (loss) on investment
    transactions .............      .95      2.04      (.48)      .42        .36      1.77      (.59)     1.06       .64      (.45)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Total from investment
  operations .................     1.26      2.34      (.19)      .72        .65      2.12      (.17)     1.46       .97      (.11)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Less distributions from:
  Net investment income ......     (.30)     (.30)     (.30)     (.28)      (.29)     (.37)     (.43)     (.33)     (.23)     (.23)
  Net realized gains on
    investment transactions ..     (.30)     (.06)     (.77)     (.23)      (.19)     --        (.05)     --        --        (.13)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Total distributions ..........     (.60)     (.36)    (1.07)     (.51)      (.48)     (.37)     (.48)     (.33)     (.23)     (.36)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Net asset value,
  end of period ..............   $11.61    $10.95    $ 8.97    $10.23     $10.02    $ 9.85    $ 8.10    $ 8.75    $ 7.62    $ 6.88
                                 ======    ======    ======    ======     ======    ======    ======    ======    ======    ======
Total Return (%) .............    11.89     26.67     (2.05)     7.45       6.96     26.93     (1.91)    19.50     14.21     (1.68)
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ........       88        68        46        45         37        25        16        18        11        12
Ratio of operating expenses,
  net to average net
  assets (%) .................      .60       .65       .75       .75        .75       .75       .75       .75       .75       .75
Ratio of operating expense
  before expense reductions,
  to average daily net assets       .60       .65       .75       .75        .75       .81       .75       .89      1.14      1.20
Ratio of net investment income
  to average net assets (%) ..     2.82      3.01      3.19      3.01       3.01      4.00      5.15      4.74      4.48      4.42
Portfolio turnover rate (%) ..    67.56     87.98    101.64    133.95*     51.66     62.03     49.03     77.98    109.95    111.00
Average commission
  rate paid (b) ..............   $.0535    $ --      $ --      $ --       $ --      $ --      $ --      $ --      $ --      $ --

(a)  Based on monthly average shares outstanding during the period.
(b)  Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
     September 1, 1995.
*    On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income, as
     well as long-term preservation of capital, from a diversified portfolio of equity and fixed income securities. Prior to that
     date, the Portfolio was known as the Managed Diversified Portfolio and its investment objective was to realize a high level of
     long-term total rate of return consistent with prudent investment risk. The portfolio turnover rate increased due to
     implementing the present investment objective. Financial highlights for the seven periods ended December 31, 1993 should not be
     considered representative of the present Portfolio.
</TABLE>
    



                                       4
<PAGE>

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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Growth and Income Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout the period and other performance information derived from the audited
financial statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
                                                                                                                  For the Period
                                                                                                                    May 2, 1994
                                                                                                                   (commencement
                                                                                    Years Ended December 31,       of operations)
                                                                                    -------------------------      to December 31,
                                                                                      1996             1995             1994
                                                                                    -------------------------     ----------------
<S>                                                                                 <C>              <C>              <C>        
Net asset value, beginning of period ............................................   $   7.98         $   6.26         $   6.00(b)
                                                                                    --------         --------         --------
Income from investment operations:
  Net investment income .........................................................        .27              .23              .13
  Net realized and unrealized gain on investment transactions ...................       1.46             1.72              .17(d)
                                                                                    --------         --------         --------
Total from investment operations ................................................       1.73             1.95              .30
                                                                                    --------         --------         --------
Less distributions from:
  Net investment income .........................................................       (.23)            (.19)            (.04)
  Net realized gains on investment transactions .................................       (.11)            (.04)            --
                                                                                                     --------         --------
Total distributions .............................................................       (.34)            (.23)            (.04)
                                                                                    --------         --------         --------
Net asset value, end of period ..................................................   $   9.37         $   7.98         $   6.26
                                                                                    ========         ========         ========
Total Return (%) ................................................................      22.17            31.74             4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..........................................         91               52               20
Ratio of operating expenses, net to average net assets (%) ......................        .66              .75              .75*
Ratio of operating expenses, before reductions, to average daily net assets (%) .        .66              .75             1.62*
Ratio of net investment income to average net assets (%) ........................       3.14             3.18             3.63*
Portfolio turnover rate (%) .....................................................      32.18            24.33            28.41*
Average commission rate paid (c) ................................................   $  .0502         $   --           $   --

(a)  Based on monthly average shares outstanding during the period.
(b)  Original capital
(c)  Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
     September 1, 1995.
(d)  The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and
     losses in the portfolio securities during the period because of the timing of sales and purchases of Portfolio shares in
     relation to fluctuating market values during the period.
*    Annualized
**   Not annualized
</TABLE>
    


                                       5
<PAGE>



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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Capital Growth Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout  each  period  and other  performance  information  derived  from the
audited financial statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

<TABLE>
<CAPTION>
                                                                    Years Ended December 31, (a)
                                ---------------------------------------------------------------------------------------------------
                                   1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                                ---------------------------------------------------------------------------------------------------
<S>                               <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   

Net asset value,
  beginning of period .........   $15.08    $12.23    $14.95    $12.71    $12.28    $ 8.99    $10.21    $ 8.53    $ 7.06    $ 7.67
                                  ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from
  investment operations:
  Net investment income .......      .19       .14       .06       .06       .11       .16       .25       .35       .16       .15
  Net realized and unrealized
    gain (loss) on investment
    transactions ..............     2.68      3.25     (1.42)     2.52       .66      3.35     (1.00)     1.58      1.40      (.28)
                                  ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total from investment
  operations ..................     2.87      3.39     (1.36)     2.58       .77      3.51      (.75)     1.93      1.56      (.13)
                                  ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Less distributions from:
  Net investment income .......     (.19)     (.11)     (.05)     (.07)     (.11)     (.22)     (.24)     (.25)     (.09)     (.09)
  Net realized gains on
    investment transactions ...    (1.26)     (.43)    (1.31)     (.27)     (.23)     --        (.23)     --        --        (.39)
                                  ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total distributions ...........    (1.45)     (.54)    (1.36)     (.34)     (.34)     (.22)     (.47)     (.25)     (.09)     (.48)
                                  ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
  end of period ...............   $16.50    $15.08    $12.23    $14.95    $12.71    $12.28    $ 8.99    $10.21    $ 8.53    $ 7.06
                                  ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ..............    20.13     28.65     (9.67)    20.88      6.42     39.56     (7.45)    22.75     22.07     (1.88)
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) .........      440       338       257       257       167       108        45        45        17        10
Ratio of operating expenses,
  net to average net
  assets (%) ..................      .53       .57       .58       .60       .63       .71       .72       .75       .75       .75
Ratio of operating expenses
  before expense reductions, to
  average daily net assets (%)       .53       .57       .58       .60       .63       .71       .72       .85      1.11      1.24
Ratio of net investment income
  to average net assets (%) ...     1.27      1.06       .47       .46       .95      1.49      2.71      3.51      2.17      1.68
Portfolio turnover rate (%) ...    65.56    119.41     66.44     95.31     56.29     58.88     61.39     63.96    129.75    113.34
Average commission
  rate paid (b) ...............   $.0585    $ --      $ --      $ --      $ --      $ --      $ --      $ --      $ --      $ --

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
    September 1, 1995.
</TABLE>
    

                                       6
<PAGE>

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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
Global Discovery Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout  the period (a) and other  performance  information  derived from the
audited financial statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to broker/dealers offering the previously mentioned VA contracts and VLI
policies, or Scudder Investor Services, Inc.

                                                                 For the Period
                                                                  May 1, 1996  
                                                                 (commencement 
                                                                 of operations)
                                                                 to December 31,
                                                                      1996      
                                                                 ---------------
Net asset value, beginning of period ............................   $   6.00(c)
                                                                    --------
Income from investment operations:
  Net investment loss ...........................................       (.01)
  Net realized and unrealized gain on investment transactions ...        .34
                                                                    --------
Total from investment operations ................................        .33
                                                                    --------
Net asset value, end of period ..................................   $   6.33
                                                                    ========
Total Return (%) ................................................       5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..........................         17
Ratio of operating expenses, net to average net assets (%) ......       1.50*
Ratio of operating expenses before expense reductions, to
  average daily net assets (%) ..................................       2.32*
Ratio of net investment loss to average net assets (%) ..........       (.13)*
Portfolio turnover rate (%) .....................................      50.31*
Average commission rate paid (b) ................................   $  .0029

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks.
(c) Original capital
* Annualized
**Not annualized
    


                                       7
<PAGE>


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

                              FINANCIAL HIGHLIGHTS
 ------------------------------------------------------------------------------

   
International Portfolio

The  following  table  includes  selected  data for a Class A share  outstanding
throughout  each  period  and other  performance  information  derived  from the
audited  financial  statements.  If you  would  like more  detailed  information
concerning the Portfolio's performance, a complete portfolio listing and audited
financial  statements  are available in the Fund's Annual Report dated  December
31, 1996 and may be obtained without charge by calling a Participating Insurance
Company or by writing to  broker/dealers  offering the  previously  mentioned VA
contracts and VLI policies, or Scudder Investor Services, Inc.
<TABLE>
<CAPTION>
                                                                                                                     For the Period
                                                                                                                      May 1, 1987
                                                                                                                     (commencement
                                                           Years Ended December 31,                                of operations) to
                           ----------------------------------------------------------------------------------------    December 31,
                           1996(a)   1995(a)   1994(a)   1993(a)   1992(a)   1991(a)   1990(a)   1989(a)      1988        1987
                           ----------------------------------------------------------------------------------------    ----------
<S>                        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>         <C>         <C>      
Net asset value,                                                                                                       
  beginning of                                                                                                         
  period ...............   $11.82    $10.69    $10.85    $ 8.12    $ 8.47    $ 7.78    $ 8.46    $ 6.14      $ 5.26      $ 6.00(c)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------   
Income from investment                                                                                                 
  operations:                                                                                                          
  Net investment                                                                                                       
    income .............      .12       .11       .06       .09       .10       .12       .25       .10         .09        --
  Net realized and                                                                                                     
    unrealized gain                                                                                                    
    (loss) on investment                                                                                               
    transactions .......     1.60      1.07      (.15)     2.90      (.36)      .77      (.89)     2.22(d)      .79        (.64)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------ 
Total from investment                                                                                                  
  operations ...........     1.72      1.18      (.09)     2.99      (.26)      .89      (.64)     2.32         .88        (.64)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------ 
Less distributions:                                                                                                    
  From net investment                                                                                                  
    income .............     (.29)     (.01)     (.07)     (.14)     (.09)     (.20)     (.04)     --          --          --
  In excess of net                                                                                                     
    investment income ..     --        --        --        (.12)     --        --        --        --          --          --
  From net realized                                                                                                    
    gains on investment                                                                                                
    transactions .......     --        (.04)     --        --        --        --        --        --          --          (.10)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------ 
  Total distributions ..     (.29)     (.05)     (.07)     (.26)     (.09)     (.20)     (.04)     --          --          (.10)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------ 
Net asset value, end                                                                                                   
  of period ............   $13.25    $11.82    $10.69    $10.85    $ 8.12    $ 8.47    $ 7.78    $ 8.46      $ 6.14      $ 5.26
                           ======    ======    ======    ======    ======    ======    ======    ======      ======      ======
Total Return (%) .......    14.78     11.11      (.85)    37.82     (3.08)    11.45     (7.65)    37.79       16.73      (10.64)**
Ratios and                                                                                                             
Supplemental Data                                                                                                      
Net assets, end of                                                                                                     
  period ($ millions) ..      726       548       472       238        65        41        35        17           3           2
Ratio of operating                                                                                                     
  expenses, net to                                                                                                     
  average net assets                                                                                                   
  (%) ..................     1.05      1.08      1.08      1.20      1.31      1.39      1.38      1.50        1.50        1.50*
Ratio of operating                                                                                                     
  expenses before                                                                                                      
  expense reductions,                                                                                                  
  to average daily net                                                                                                 
  assets (%) ...........     1.05      1.08      1.08      1.20      1.31      1.39      1.38      1.80        4.15        4.06*
Ratio of net investment                                                                                                
  income to average                                                                                                    
  net assets (%) .......      .95       .95       .57       .91      1.23      1.43      2.89      1.30        1.59         .02*
Portfolio turnover                                                                                                     
  rate (%) .............    32.63     45.76     33.52     20.36     34.42     45.01     26.67     57.69      110.42      146.08*
Average commission                                                                                                     
  rate paid (b) ........   $.0002    $ --      $ --      $ --      $ --      $ --      $ --      $ --        $ --        $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
    calculated for fiscal years beginning on or after September 1, 1995.
(c) Original capital
(d) Includes provision for federal income tax of $.03 per share.
* Annualized
**Not annualized
    


                                       8
<PAGE>

 ------------------------------------------------------------------------------
                            INVESTMENT OBJECTIVES AND
                           POLICIES OF THE PORTFOLIOS
 ------------------------------------------------------------------------------

Each Portfolio has a different  investment  objective  which it pursues  through
separate investment policies,  as described below. The differences in objectives
and policies among the Portfolios can be expected to affect the degree of market
and  financial  risk to which each  Portfolio  is subject and the return of each
Portfolio.  The investment objectives and policies of each Portfolio may, unless
otherwise  specifically stated, be changed by the Trustees of the Fund without a
vote of the  Shareholders.  There is no  assurance  that the  objectives  of any
Portfolio will be achieved. 

MONEY MARKET PORTFOLIO

The Money  Market  Portfolio  seeks to maintain  the  stability  of capital and,
consistent  therewith,  to  maintain  the  liquidity  of capital  and to provide
current  income.  The Portfolio  seeks to maintain a constant net asset value of
$1.00 per share,  although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.

The Money  Market  Portfolio  purchases  money  market  securities  such as U.S.
Treasury, agency and instrumentality obligations,  finance company and corporate
commercial paper,  bankers'  acceptances and certificates of deposit of domestic
and foreign  banks  (i.e.,  banks which at the time of their most recent  annual
financial  statements  show  total  assets in excess of $1  billion),  including
foreign  branches of domestic  banks,  which involve  different risks than those
associated with  investments in  certificates of deposit of domestic banks,  and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements.  The Money  Market  Portfolio  may also  invest in  certificates  of
deposit issued by banks and savings and loan institutions  which had at the time
of their most recent annual  financial  statements  total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are  insured  by an  agency  of the U.S.  Government,  (ii) at no time  will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's  assets  (taken at current  value) are invested in  certificates  of
deposit of such banks having total assets not in excess of $1 billion.

   
Investments are limited to those that are  dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e.,  rated in the two highest  quality
rating  categories)  by any two  nationally-recognized  rating  services such as
Moody's Investors Service,  Inc.  ("Moody's") and Standard & Poor's ("S&P").  In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality  instruments  presenting  minimal credit risks. The portfolio is
subject to certain additional quality and diversification restrictions which are
set forth in the Fund's Statement of Additional Information.
    

The remaining  maturity of each investment in the Money Market  Portfolio is 397
calendar days or less. The  dollar-weighted  average maturity of the Portfolio's
investments varies with money market conditions,  but is always 90 days or less.
As a money  market  fund with a  short-term  maturity,  the  Portfolio's  income
fluctuates  with  changes  in  interest  rates,  but its price to the  public or
"offering price," is expected to remain fixed at $1.00 per share. 

BOND PORTFOLIO

The Bond  Portfolio  pursues a policy of  investing  for a high  level of income
consistent  with a high  quality  portfolio  of debt  securities.  Under  normal
circumstances,  the  Portfolio  invests  at least  65% of its  assets  in bonds,
including  those  of  the  U.S.  Government  and  its  agencies,  and  those  of
corporations  and other notes and bonds  paying  high  current  income.  It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term  bond by  investing  in  securities  with  varying  maturities  and by
entering  into futures  contracts  on debt  securities  and related  options for
hedging purposes.

The Portfolio is actively managed.  The Portfolio may invest in a broad range of
short-,  intermediate-,  and long-term securities.  Proportions among maturities
and  types of  securities  may vary  depending  upon the  prospects  for  income
relative to the outlook for the economy and the securities markets,  the quality
of available  investments,  the level of interest rates, and other factors.  The
Portfolio may also invest in preferred  stocks  consistent  with the Portfolio's
objectives.

                                       9
<PAGE>

   
The Bond  Portfolio  may purchase  corporate  notes and bonds  including  issues
convertible into common stock and obligations of municipalities. It may purchase
U.S.  Government  securities and  obligations  of federal  agencies that are not
backed by the full faith and credit of the U.S. Government,  such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation.  In addition, it may purchase obligations of international agencies
such as the  International  Bank for  Reconstruction  and  Development,  and the
Inter-American  Development  Bank.  Other eligible  investments  include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee  Bonds,  mortgage  and other  asset-backed  securities,  and money market
instruments such as commercial paper, and bankers'  acceptances and certificates
of deposit issued by domestic and foreign  branches of U.S. banks. The Portfolio
may also  enter into  repurchase  agreements  and may invest in trust  preferred
securities and zero coupon securities.

The Bond Portfolio  invests primarily in high quality  securities.  Under normal
market  conditions,  the  Portfolio  will  invest at least 65% of its  assets in
securities  rated within the three highest quality rating  categories of Moody's
(Aaa,  Aa and A) or S&P (AAA,  AA and A), or if unrated,  in bonds judged by the
Fund's  Adviser,  to be of  comparable  quality  at the  time of  purchase.  The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated,  of equivalent  quality as determined by the Adviser,
but will not  purchase  bonds  rated  below B3 by  Moody's or B- by S&P or their
equivalent.

The Portfolio may, for hedging  purposes,  enter into forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.
    

Except for limitations imposed by the Bond Portfolio's  investment  restrictions
(see "INVESTMENT RESTRICTIONS"),  there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments;  however, it
is a policy  of the  Portfolio  that its  non-governmental  investments  will be
spread  among a  variety  of  companies  and  will  not be  concentrated  in any
industry.

   
The Bond  Portfolio  cannot  guarantee a gain or eliminate the risk of loss. The
net asset value of the  Portfolio's  shares will  fluctuate  with changes in the
market price of the Portfolio's  investments,  which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates. 
    

BALANCED PORTFOLIO

The Balanced  Portfolio  seeks a balance of growth and income from a diversified
portfolio  of equity  and fixed  income  securities.  The  Portfolio  also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.

In  seeking  its  objectives  of a balance  of  growth  and  income,  as well as
long-term  preservation  of  capital,  the  Portfolio  invests in a  diversified
portfolio of equity and fixed income securities.  The Portfolio  invests,  under
normal  circumstances,  at least 50%, but no more than 75%, of its net assets in
common stocks and other equity  investments.  The Portfolio's equity investments
consist of common stocks,  preferred stocks, warrants and securities convertible
into common  stocks,  of  companies  that,  in the  Adviser's  judgment,  are of
above-average  financial quality and offer the prospect for above-average growth
in earnings,  cash flow, or assets  relative to the overall market as defined by
the Standard and Poor's 500  Composite  Price Index ("S&P 500").  The  Portfolio
will invest  primarily in securities  issued by medium- to large-sized  domestic
companies  with  annual  revenues  or  market  capitalization  of at least  $600
million, and which, in the opinion of the Adviser, offer above-average potential
for price  appreciation.  The Portfolio  seeks to invest in companies  that have
relatively consistent and above-average rates of growth; companies that are in a
strong financial  position with high credit standings and  profitability;  firms
with important business franchises,  leading products, or dominant marketing and
distribution systems; companies guided by experienced and motivated managements;
and companies selling at attractive market valuations. The Adviser believes that
companies with these  characteristics will be rewarded by the market with higher
stock prices over time and provide investment  returns, on average, in excess of
the S&P 500.

At least 65% of the value of the  Portfolio's  common  stocks will be of issuers
which  qualify,  at the time of purchase,  for one of the three  highest  equity
earnings  and  dividends  ranking  categories  (A+,  A, or A-) of S&P, or if not
ranked by S&P,  are  judged to be of  comparable  quality  by the  Adviser.  S&P
assigns  earnings and dividends  rankings to  corporations  based on a number of


                                       10
<PAGE>

factors,  including stability and growth of earnings and dividends.  Rankings by
S&P are not an appraisal of a company's  creditworthiness,  as is true for S&P's
debt security  ratings,  nor are these rankings intended as a forecast of future
stock  market  performance.  In addition to using S&P  rankings of earnings  and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.

   
To enhance income and stability,  the Portfolio's remaining assets are allocated
to bonds and  other  fixed  income  securities,  including  cash  reserves.  The
Portfolio  will  normally  invest 25% to 50% of its net  assets in fixed  income
securities.  However,  at least 25% of the Portfolio's net assets will always be
invested in fixed income  securities.  The Portfolio can invest in a broad range
of corporate bonds and notes,  convertible  bonds, and preferred and convertible
preferred  securities.  It may also  purchase  U.S.  Government  securities  and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home  Loan  Banks,  Farm  Credit  Banks,  and the  Federal  Home  Loan  Mortgage
Corporation.  The  Portfolio  may also invest in  obligations  of  international
agencies,  foreign debt securities (both U.S. and non-U.S.  dollar-denominated),
mortgage-backed and other asset-backed securities,  municipal obligations, trust
preferred  securities,  restricted  securities issued in private  placements and
zero coupon securities.
    

For liquidity and defensive purposes,  the Portfolio may invest without limit in
cash  and  in  money  market  securities  such  as  commercial  paper,  bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S.  banks.  The Portfolio may also enter into  repurchase  agreements  with
respect to U.S.
Government securities.

   
Not less than 50% of the  Portfolio's  debt  securities will be invested in debt
obligations,  including  money  market  instruments,  that  (a)  are  issued  or
guaranteed by the U.S. Government,  (b) are rated at the time of purchase within
the two highest ratings categories by any  nationally-recognized  rating service
or (c) if not rated, are judged by the Adviser to be of a quality  comparable to
obligations  rated as  described  in (b)  above.  Not less  than 80% of the debt
obligations  in which the Portfolio  invests  will, at the time of purchase,  be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable  quality by the Adviser.  Up to 20% of
the  Portfolio's  debt  securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated  securities  judged by the Adviser to
be of comparable quality.
    

The Portfolio  will,  on occasion,  adjust its mix of  investments  among equity
securities,  bonds, and cash reserves. In reallocating investments,  the Adviser
weighs the  relative  values of different  asset  classes and  expectations  for
future returns. In doing so, the Adviser analyzes,  on a global basis, the level
and  direction  of  interest  rates,  capital  flows,  inflation   expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market."  Shifts  between stocks and
fixed income  investments  are expected to occur in generally  small  increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.

While the Portfolio emphasizes U.S. equity and debt securities,  it may invest a
portion of its assets in foreign securities,  including depositary receipts. The
Portfolio's  foreign holdings will meet the criteria  applicable to its domestic
investments.  The international  component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.

In addition,  the Portfolio may invest in securities on a when-issued or forward
delivery  basis.  The  Portfolio  may, for hedging  purposes,  purchase  forward
foreign currency exchange  contracts and foreign  currencies in the form of bank
deposits.   The  Portfolio   may  also  purchase   other  foreign  money  market
instruments,  including, but not limited to, bankers' acceptances,  certificates
of deposit,  commercial paper,  short-term government obligations and repurchase
agreements.

The Balanced  Portfolio  cannot  guarantee a gain or eliminate the risk of loss.
The net asset  value of the shares of the  Portfolio  will  increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates.

GROWTH AND INCOME PORTFOLIO

The Growth and Income  Portfolio  seeks  long-term  growth of  capital,  current
income and growth of income. In pursuing these three  objectives,  the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies  which offer the prospect for growth of earnings
while paying higher than average current dividends.  Over time, continued growth


                                       11
<PAGE>

of earnings tends to lead to higher  dividends and enhancement of capital value.
The  Portfolio   allocates  its  investments  among  different   industries  and
companies,  and changes its portfolio  securities for investment  considerations
and not for trading purposes.

   
The  Portfolio  attempts  to achieve  its  investment  objectives  by  investing
primarily in dividend  paying common  stocks,  preferred  stocks and  securities
convertible into common stocks.  The Portfolio may also purchase such securities
which do not pay  current  dividends  but which  offer  prospects  for growth of
capital and future income.  Convertible  securities (which may be current coupon
or zero coupon securities) are bonds,  notes,  debentures,  preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into  underlying  shares of common stock.  The Portfolio may also
invest  in  nonconvertible  preferred  stocks  consistent  with the  Portfolio's
objectives.  From  time to time,  when the  Adviser  feels  such a  position  is
advisable in light of economic or market  conditions,  the  Portfolio may invest
without limit in cash and cash equivalents.  The Portfolio may invest in foreign
securities and in repurchase agreements.
    

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.

The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset value of the  Portfolio's  shares will increase or decrease
with  changes in the market  prices of the  Portfolio's  investments  and,  to a
lesser extent, changes in foreign currency exchange rates.

CAPITAL GROWTH PORTFOLIO

The Capital Growth Portfolio seeks to maximize  long-term capital growth through
a broad and flexible  investment  program.  The Portfolio  invests in marketable
securities,  principally  common  stocks and,  consistent  with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic  conditions  periodically  warrant,  the  Portfolio  may also
invest up to 25% of its assets in short-term debt instruments.

In its examination of potential investments,  the Adviser considers, among other
things, the issuer's financial strength,  management  reputation,  absolute size
and overall industry position.

Equity investments can have diverse financial characteristics,  and the Trustees
believe that the  opportunity  for capital growth may be found in many different
sectors of the market at any  particular  time.  In contrast to the  specialized
investment  policies  of some  capital  appreciation  funds,  the  Portfolio  is
therefore free to invest in a wide range of marketable  securities  offering the
potential for growth.  This enables the Portfolio to pursue investment values in
various sectors of the stock market including:

     1.   Companies  that generate or apply new  technologies,  new and improved
          distribution  techniques,  or  new  services,  such  as  those  in the
          business equipment,  electronics,  specialty merchandising, and health
          service industries.

     2.   Companies  that  own or  develop  natural  resources,  such as  energy
          exploration or precious metals companies.

     3.   Companies  that  may  benefit  from  changing   consumer  demands  and
          lifestyles,    such   as   financial    service    organizations   and
          telecommunications companies.

     4.   Foreign companies.

While emphasizing  investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects,  but seem undervalued due to factors thought
to be of a temporary  nature which may cause their securities to be out of favor
and to trade at a price below their potential value.

The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net  assets in  intermediate  to longer  term debt  securities  when  management
anticipates  that the  total  return  on debt  securities  is likely to equal or
exceed the total  return on common  stocks over a selected  period of time.  The
Portfolio may purchase  investment-grade debt securities,  which are those rated
Aaa, Aa, A or Baa by Moody's,  or AAA,  AA, A or BBB by S&P, or, if unrated,  of
equivalent quality as determined by the Adviser. The Portfolio's intermediate to
longer  term debt  securities  may also  include  those  which  are rated  below
investment  grade,  as long as no more than 5% of its net assets are invested in
such securities.       

                                       12
<PAGE>

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.

The Capital Growth  Portfolio  cannot  guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.

GLOBAL DISCOVERY PORTFOLIO

The Global Discovery Portfolio seeks above-average capital appreciation over the
long term by investing  primarily in the equity  securities  of small  companies
located  throughout the world.  The Portfolio is designed for investors  looking
for  above-average  appreciation  potential  (when  compared  with  the  overall
domestic  stock  market as reflected  by Standard & Poor's 500  Composite  Price
Index) and the  benefits of  investing  globally,  but who are willing to accept
above-average  stock market risk, the impact of currency  fluctuation and little
or no current income.

In pursuit of its objective,  the Portfolio generally invests in small,  rapidly
growing companies that offer the potential for above-average returns relative to
larger  companies,  yet are frequently  overlooked  and thus  undervalued by the
market.  The Portfolio has the flexibility to invest in any region of the world.
It can invest in companies based in emerging markets, typically in the Far East,
Latin  America and lesser  developed  countries  in Europe,  as well as in firms
operating in developed economies,  such as those of the United States, Japan and
Western  Europe.  The Portfolio will limit  investments in securities of issuers
located in Eastern Europe to 5% of its total assets.

The Adviser  invests  the  Portfolio's  assets in  companies  it believes  offer
above-average  earnings, cash flow or asset growth potential. It also invests in
companies  that may receive  greater market  recognition  over time. The Adviser
believes  these  factors offer  significant  opportunity  for long-term  capital
appreciation.  The Adviser  evaluates  investments for the Portfolio from both a
macroeconomic  and  microeconomic   perspective,   using  fundamental  analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible  investments.  When  evaluating  an  individual  company,  the
Adviser  takes into  consideration  numerous  factors,  including  the depth and
quality  of  management;   a  company's  product  line,  business  strategy  and
competitive  position;  research and development  efforts;  financial  strength,
including  degree of  leverage;  cost  structure;  revenue and  earnings  growth
potential;   price-earnings   ratios  and  other   stock   valuation   measures.
Secondarily,  the Adviser weighs the attractiveness of the country and region in
which a company is located.

Under  normal  circumstances,  the  Portfolio  invests at least 65% of its total
assets in the equity  securities of small companies.  While the Adviser believes
that smaller,  lesser-known  companies can offer greater  growth  potential than
larger,  more established  firms, the former also involve greater risk and price
volatility.  To help reduce  risk,  the  Portfolio  expects,  under usual market
conditions,  to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate  investments among at least three countries at
all times, including the United States.

   
The Portfolio  may invest up to 35% of its total assets in equity  securities of
larger  companies  throughout  the world and in debt  securities  if the Adviser
determines that the capital  appreciation of debt securities is likely to exceed
the capital  appreciation  of equity  securities.  The  Portfolio  may  purchase
investment-grade  bonds,  those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A
or BBB by S&P or,  if  unrated,  of  equivalent  quality  as  determined  by the
Adviser.  The  Portfolio  may also  invest  up to 5% of its net  assets  in debt
securities rated below investment-grade.  The Portfolio may invest in securities
rated D by S&P at the time of purchase,  which may be in default with respect to
payment of principal or interest.
    

The Portfolio  invests  primarily in companies  whose  individual  equity market
capitalizations  would  place  them in the  same  size  range  as  companies  in
approximately  the lowest 20% of world market  capitalization  as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small,  medium and large-sized  companies based in 22 markets
around the globe.  Based on this policy,  the  companies  held by the  Portfolio
typically  will  have  individual  equity  market   capitalizations  of  between
approximately $50 million and $2 billion (although the Portfolio will be free to
invest in smaller  capitalization  issues  that  satisfy  the  Portfolio's  size
standard).  Furthermore,  the median market capitalization of the Portfolio will
not exceed $750 million.

                                       13
<PAGE>

The  equity  securities  in which the  Portfolio  may  invest  consist of common
stocks,  preferred  stocks (either  convertible or  nonconvertible),  rights and
warrants.  These  securities  may be listed on the U.S.  or  foreign  securities
exchanges or traded  over-the-counter.  For capital appreciation  purposes,  the
Portfolio may purchase notes, bonds, debentures,  government securities and zero
coupon bonds (any of which may be convertible or nonconvertible).  The Portfolio
may invest in foreign securities and American  Depositary  Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities,  and engage in strategic transactions.  In
addition,  the Portfolio may invest in illiquid or  restricted  securities.  For
temporary  defensive  purposes,  the  Portfolio  may,  during  periods  in which
conditions in securities markets warrant,  invest without limit in cash and cash
equivalents.

The Global Discovery  Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease  with changes in the market price of the  Portfolio's  investments  and
changes in foreign currency exchange rates.

SPECIAL RISK CONSIDERATIONS FOR GLOBAL DISCOVERY PORTFOLIO

The Portfolio is designed for long-term  investors who can accept  international
investment  risk.  Since the  Portfolio  normally  will invest in both U.S.  and
foreign  securities  markets,  changes in the Portfolio's share price may have a
low  correlation  with  movements  in  the  U.S.  markets,  which  enhances  the
Portfolio's  appeal as a diversification  tool. The Portfolio's share price will
reflect the movements of the different stock markets in which it is invested and
the different currencies in which the investments are denominated.  The strength
or weakness of the U.S. dollar against  foreign  currencies is likely to account
for  part  of the  Portfolio's  investment  performance,  although  the  Adviser
believes that,  over the long term, the impact of currency  changes on Portfolio
performance will not be as significant as changes in the underlying investments.
As with any long-term investment, the value of shares when sold may be higher or
lower than when purchased.

Global investing  involves economic and political  considerations  not typically
found in U.S. markets. These considerations,  which may favorably or unfavorably
affect  the  Portfolio's  performance,  include  changes in  exchange  rates and
exchange rate controls (which may include  suspension of the ability to transfer
currency  from  a  given  country),   costs  incurred  in  conversions   between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility,  the difficulty of enforcing
obligations  in other  countries,  less  securities  regulation,  different  tax
provisions  (including  withholding  on  interest  and  dividends  paid  to  the
Portfolio), war, expropriation, political and social instability, and diplomatic
developments.

Further, the settlement period of securities transactions in foreign markets may
be longer than in domestic markets. These considerations generally are more of a
concern in  developing  countries.  For example,  the  possibility  of political
upheaval and the  dependence on foreign  economic  assistance  may be greater in
these countries than in developed  countries.  The Adviser seeks to mitigate the
risks associated with these  considerations  through  diversification and active
professional management.

There is typically less publicly  available  information  concerning foreign and
smaller companies than for domestic and larger, more established companies. Some
small companies have limited product lines,  distribution channels and financial
and managerial  resources.  Also,  because smaller companies normally have fewer
shares  outstanding than larger  companies and trade less frequently,  it may be
more  difficult  for the Portfolio to buy and sell  significant  amounts of such
shares without an unfavorable  impact on prevailing  market prices.  Some of the
companies  in which the  Portfolio  may invest may  distribute,  sell or produce
products  which have recently been brought to market and may be dependent on key
personnel with varying degrees of experience.

INTERNATIONAL PORTFOLIO

   
The International  Portfolio seeks long-term growth of capital primarily through
diversified  holdings of marketable  foreign equity  investments.  The Portfolio
invests in companies,  wherever  organized,  which do business primarily outside
the United States. The Portfolio intends to diversify  investments among several
countries and to have  represented  in its holdings  business  activities in not
less than three different countries, excluding the United States.
    

The Portfolio invests  primarily in equity securities of established  companies,
listed  on  foreign  exchanges,   which  the  Adviser  believes  have  favorable
characteristics.  It may also  invest  in fixed  income  securities  of  foreign
governments and companies.  However,  management intends to maintain a portfolio
consisting  primarily of equity securities.  Investing in foreign securities may
involve a greater  degree of risk than  investing in domestic  securities due to


                                       14
<PAGE>

the  possibility  of exchange  rate  fluctuations  and exchange  controls,  less
publicly  available   information,   more  volatile  markets,   less  securities
regulation,  less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").

The Portfolio has no present  intention of altering its general  policy of being
primarily invested under normal conditions in foreign  securities.  However,  in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian  or U.S.  Government  obligations  or
currencies,  or  securities  of  companies  incorporated  in  and  having  their
principal activities in Canada or the United States.

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts,  foreign currency options and futures contracts and foreign
currencies in the form of bank  deposits.  The Portfolio may also purchase other
foreign  money  market  instruments,  including,  but not limited  to,  bankers'
acceptances,  certificates of deposit,  commercial paper,  short-term government
and corporate obligations and repurchase agreements.

The  International  Portfolio  cannot  guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease  with changes in the market price of the  Portfolio's  investments  and
changes in foreign currency exchange rates.

 ------------------------------------------------------------------------------
                             POLICIES AND TECHNIQUES
                          APPLICABLE TO THE PORTFOLIOS
 ------------------------------------------------------------------------------

Except as  otherwise  noted  below,  the  following  description  of  additional
investment policies and techniques is applicable to all of the Portfolios.

REPURCHASE AGREEMENTS

As a means of earning  income for periods as short as  overnight,  the Fund,  on
behalf of a  Portfolio,  may enter  into  repurchase  agreements  with U.S.  and
foreign  banks,  and  any  broker-dealer  which  is  recognized  as a  reporting
government   securities  dealer,  if  the   creditworthiness   of  the  bank  or
broker-dealer  has been  determined by the Adviser to be of a sufficiently  high
quality. Under a repurchase agreement, a Portfolio acquires securities,  subject
to the seller's agreement to repurchase those securities at a specified time and
price.  Securities  subject to a repurchase  agreement  are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the  repurchase  price on a daily basis.  If the seller
under a repurchase  agreement becomes insolvent,  the Fund's right to dispose of
the securities may be restricted. In the event of the commencement of bankruptcy
or insolvency  proceedings of the seller of the securities  before repurchase of
the securities  under a repurchase  agreement,  the Fund may encounter delay and
incur costs,  including a decline in value of the securities,  before being able
to sell the securities.

   
DEBT SECURITIES

The Bond,  Balanced,  Capital  Growth and Global  Discovery  Portfolios may each
invest in debt securities rated below investment-grade (those rated below Baa or
BBB). These  securities are commonly  referred to as "junk bonds" and can entail
greater price volatility and involve a higher degree of speculation with respect
to the  payment of  principal  and  interest  than higher  quality  fixed-income
securities.  The market prices of such lower rated debt  securities  may decline
significantly in periods of general economic difficulty.  The trading market for
these securities is generally less liquid than for higher rated securities,  and
a Portfolio  may have  difficulty  disposing of these  securities at the time it
wishes to do so. The lack of a liquid  secondary  market for certain  securities
may also  make it more  difficult  for a  Portfolio  to obtain  accurate  market
quotations for purposes of valuing its portfolio and  calculating  its net asset
value.  The lower the ratings of such debt  securities,  the greater their risks
render them like equity  securities.  In addition,  as interest  rates fall, the
prices of debt securities tend to rise and vice versa.  Should the rating of any
security  held by a Portfolio  be  downgraded  after the time of  purchase,  the
Adviser will  determine  whether it is in the best  interest of the Portfolio to
retain or dispose of the security. 

ILLIQUID OR RESTRICTED INVESTMENTS

The Portfolios may each invest in illiquid or restricted securities. The absence
of a trading  market  can make it  difficult  to  ascertain  a market  value for
illiquid  or  restricted  investments.   Disposing  of  illiquid  or  restricted
investments may involve  time-consuming  negotiation and legal expenses,  and it
may be  difficult  or  impossible  for a Portfolio  to sell them  promptly at an
acceptable price.
    

                                       15
<PAGE>

CONVERTIBLE SECURITIES

The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios  may each  invest in  convertible  securities  (bonds,
notes, debentures, preferred stocks and other securities convertible into common
stocks) which may offer higher income than the common stocks into which they are
convertible.  The  convertible  securities  in which each  Portfolio  may invest
include fixed income or zero coupon debt  securities,  which may be converted or
exchanged at a stated or determinable  exchange ratio into underlying  shares of
common  stock.  Prior  to  their  conversion,  convertible  securities  may have
characteristics similar to non-convertible securities.

While convertible  securities  generally offer lower yields than non-convertible
debt  securities  of similar  quality,  their prices may reflect  changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities  generally,  the  market  value of  convertible  securities  tends to
decline as  interest  rates  increase  and,  conversely,  tends to  increase  as
interest rates decline.  Convertible securities entail less credit risk than the
issuer's common stock.  The ratings of the  convertible  securities in which the
Portfolios  invest will be  comparable to the ratings of the  Portfolios'  fixed
income securities.

MORTGAGE AND OTHER ASSET-BACKED SECURITIES

The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities,  which are  securities  representing  interests in pools of mortgage
loans.  These securities provide  shareholders with payments  consisting of both
interest and principal as the  mortgages in the  underlying  mortgage  pools are
paid off.

The timely  payment of  principal  and  interest on  mortgage-backed  securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full  faith  and  credit  of the U.S.  Government.  These
guarantees,   however,   do  not  apply  to  the   market   value  or  yield  of
mortgage-backed  securities or to the value of Portfolio shares.  Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the  underlying  mortgages.  This premium is not guaranteed and will be
lost  if  prepayment  occurs.  In  addition,  either  Portfolio  may  invest  in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover,  the Portfolios may invest in debt  securities  which are secured with
collateral  consisting of  mortgage-backed  securities,  such as  collateralized
mortgage   obligations   ("CMOs"),   and  in  other  types  of  mortgage-related
securities.

Unscheduled  or early  payments  on the  underlying  mortgages  may  shorten the
securities'  effective  maturities  and lessen  their growth  potential.  Either
Portfolio  may agree to  purchase  or sell these  securities  with  payment  and
delivery  taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to  a  lower  rate  of  return  upon  reinvestment.  To  the  extent  that  such
mortgage-backed  securities are held by the Portfolio,  the prepayment  right of
mortgagors  may limit the increase in net asset value of the  Portfolio  because
the  value  of the  mortgage-backed  securities  held by the  Portfolio  may not
appreciate as rapidly as the price of non-callable debt securities.

The Portfolios may also invest in securities  representing interests in pools of
certain  other  consumer  loans,   such  as  automobile  loans  or  credit  card
receivables.  In some cases,  principal  and  interest  payments  are  partially
guaranteed  by a letter of credit  from a  financial  institution.  Asset-backed
securities  are  subject  to the  risk of  prepayment  and  the  risk  that  the
underlying loans will not be repaid. 

FOREIGN SECURITIES

The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios  may  each  invest  without  limit,  except  as may be
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities  (including  those issued by the Dominion of Canada and its provinces
and other debt  securities  which meet the criteria  applicable to a Portfolio's
domestic  investments),  and in  certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser.  The Bond  Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its  debt  securities  in  non-U.S.  dollar-denominated  foreign  debt
securities,  and may  invest  up to 25% of its  equity  securities  in  non-U.S.
dollar-denominated  foreign equity  securities.  The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S.  dollar-denominated securities of
foreign  issuers.  The  Capital  Growth  Portfolio  may  invest up to 25% of its
assets,  and the Global Discovery and  International  Portfolios may each invest
without  limit,  in non-U.S.  dollar-denominated  equity  securities  of foreign


                                       16
<PAGE>

issuers.  Global investing  involves economic and political  considerations  not
typically found in U.S. markets.  These  considerations,  which may favorably or
unfavorably affect the Fund's performance, include changes in exchange rates and
exchange rate controls (which may include  suspension of the ability to transfer
currency  from  a  given  country),   costs  incurred  in  conversions   between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility,  the difficulty of enforcing
obligations  in other  countries,  less  securities  regulation,  different  tax
provisions  (including  withholding on interest and dividends paid to the Fund),
war,   expropriation,   political  and  social   instability,   and   diplomatic
developments.  Further,  the  settlement  period of securities  transactions  in
foreign  markets may be longer than in domestic  markets.  These  considerations
generally  are more of a concern  in  developing  countries.  For  example,  the
possibility  of  political  upheaval  and the  dependence  on  foreign  economic
assistance may be greater in these  countries than in developed  countries.  The
Adviser seeks to mitigate the risks associated with these considerations through
diversification and active professional management. 

WHEN-ISSUED SECURITIES

   
A Portfolio may from time to time  purchase  securities  on a  "when-issued"  or
"forward  delivery"  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 such
securities  take place at a later date.  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;
however,  it is the Fund's  intention that each Portfolio will be fully invested
to the extent  practicable  and  subject to the  policies  stated  above.  While
when-issued or forward  delivery  securities may be sold prior to the settlement
date,  the  Portfolio  intends to purchase such  securities  with the purpose of
actually acquiring them unless a sale appears desirable for investment  reasons.
At the time a  Portfolio  makes the  commitment  to  purchase  a  security  on a
when-issued  or forward  delivery  basis,  it will  record the  transaction  and
reflect  the amount due and the value of the  security  in  determining  the net
asset  value of a  Portfolio.  The market  value of the  when-issued  or forward
delivery  securities  may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward  delivery basis.  Each Portfolio will establish a segregated  account
with its custodian in which it will maintain cash,  U.S.  Government  securities
and other liquid assets at least equal in value to commitments  for  when-issued
or forward delivery  securities.  Such segregated  securities either will mature
or, if necessary, be sold on or before the settlement date. 
    

INDEXED SECURITIES

The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in  indexed
securities,  the  value  of which  is  linked  to  currencies,  interest  rates,
commodities,  indices or other financial indicators  ("reference  instruments").
The interest rate or (unlike most fixed-income  securities) the principal amount
payable at  maturity  of an indexed  security  may be  increased  or  decreased,
depending  on  changes  in  the  value  of  the  reference  instrument.  Indexed
securities may be positively or negatively  indexed, so that appreciation of the
reference  instrument may produce an increase or a decrease in the interest rate
or value at maturity of the  security.  In addition,  the change in the interest
rate or value at maturity of the security may be some  multiple of the change in
the value of the reference  instrument.  Thus, in addition to the credit risk of
the  security's  issuer,  the Fund will bear the  market  risk of the  reference
instrument. 

LOANS OF PORTFOLIO SECURITIES

The Fund may lend the  portfolio  securities  of any  Portfolio  (other than the
Money  Market  Portfolio)  provided:  (1) the loan is  secured  continuously  by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities  loaned; (2) the Fund may at any time call the loan and regain
the securities  loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities;  and (4) the value of such securities loaned will
not at any time  exceed 10% of the value of the  Portfolio's  total  assets.  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 a  Portfolio  enters  into a loan,  the  Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower. 

                                       17
<PAGE>

ZERO COUPON SECURITIES

   
The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios may each invest in zero coupon  securities,  including
U.S.  Government  securities and privately  stripped coupons on and receipts for
U.S. Government  securities.  These securities pay no cash income but are issued
at substantial  discounts  from their value at maturity.  When held to maturity,
their entire return, which consists of the accretion of discount, comes from the
difference  between their issue price and their maturity value.  Because they do
not pay interest until  maturity,  zero coupon  securities tend to be subject to
greater  interim  fluctuation of market value in response to changes in interest
rates than interest-paying securities of similar maturities.

REAL ESTATE INVESTMENT TRUSTS

The Bond  Portfolio  and the  Growth  and  Income  Portfolio  each may  purchase
instruments such as real estate  investment  trusts,  commercial and residential
mortgage-backed  securities,  and real estate  financings.  Real  estate-related
instruments  are  sensitive to factors such as changes in real estate values and
property  taxes,  interest  rates,  cash flow of underlying  real estate assets,
supply and demand, and the management skill and  creditworthiness of the issuer.
Real  estate-related  instruments  may also be  affected  by tax and  regulatory
requirements. 
    

DERIVATIVES

The following  descriptions of Options,  Options on Securities Indexes,  Futures
Contracts,  and Forward Foreign Currency  Exchange  Contracts,  Foreign Currency
Futures  Contracts and Foreign  Currency Options discuss types of derivatives in
which certain of the Portfolios may invest.

OPTIONS

   
The Fund may write covered call options on  securities  of any Portfolio  (other
than the Money Market  Portfolio)  in an attempt to earn income.  The  Balanced,
Growth and Income,  Capital  Growth and  International  Portfolios may each also
write put options to a limited extent in an attempt to earn additional income on
their  portfolios,  consistent with their  investment  objectives,  and they may
purchase  call and put options  for  hedging  purposes.  Risks  associated  with
writing  put  options   include  the  possible   inability  to  effect   closing
transactions  at  favorable  prices.  In  addition,   the  Fund  may  engage  in
over-the-counter  options  transactions with  broker-dealers who make markets in
these  options.  Over-the-counter  options  purchased by the Fund and  portfolio
securities  "covering"  the Fund's  obligation  pursuant to an  over-the-counter
option  may be deemed to be  illiquid  and may not be  readily  marketable.  The
Adviser will monitor the  creditworthiness  of dealers with whom the Fund enters
into such  options  transactions  under the  general  supervision  of the Fund's
Trustees.  The Fund may forego the benefit of  appreciation in its Portfolios on
securities sold pursuant to call options. 
    

OPTIONS ON SECURITIES INDEXES

The  Bond,  Balanced,  Growth  and  Income,  Capital  Growth  and  International
Portfolios may each purchase put and call options on securities indexes to hedge
against the risk of unfavorable price movements adversely affecting the value of
a Portfolio's  securities.  Options on securities indexes are similar to options
on securities except that settlement is made in cash.

Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the  difference  between the  exercise  price of the option and the value of the
underlying  stock index on the exercise date,  multiplied by (ii) a fixed "index
multiplier."  In  exchange  for  undertaking  the  obligation  to make such cash
payment, the writer of the securities index option receives a premium.

Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a  particular  industry  or  segment  of the  market)  rather  than the price
movements of  individual  securities  held by a Portfolio  of the Fund.  In this
respect,  purchasing  a stock index put option is analogous to the purchase of a
put on a securities index futures contract.

A Portfolio  may sell  securities  index options prior to expiration in order to
close out its positions in securities  index options which it has  purchased.  A
Portfolio may also allow options to expire unexercised.

FUTURES CONTRACTS

To protect against the effects of adverse  changes in interest rates  (sometimes
known as "hedging"),  the Bond, Balanced, and International Portfolios may each,
to a limited  extent,  enter into  futures  contracts on debt  securities.  Such


                                       18
<PAGE>

futures  contracts  obligate the Fund, at maturity,  to purchase or sell certain
debt  securities.  The Bond,  Balanced,  Growth and Income,  Capital  Growth and
International  Portfolios may each enter into securities index futures contracts
to protect  against  changes in  securities  market  prices.  Each of these five
Portfolios  may purchase and write put and call options on futures  contracts of
the type  which such  Portfolio  is  authorized  to enter into and may engage in
related  closing  transactions.  This type of option must be traded on a U.S. or
foreign exchange or board of trade.

When interest rates are rising or stock or security prices are falling,  futures
contracts can offset a decline in the value of a Portfolio's  current  portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio  than might later be
available in the market when it makes anticipated purchases.

   
The Fund will engage in  transactions  in futures  contracts and options thereon
only in an effort to protect a  Portfolio  against a decline in the value of the
Portfolio's  securities  or an  increase  in the  price of  securities  that the
Portfolio  intends to acquire.  Also,  the initial  margin  deposits for futures
contracts  and  premiums  paid for related  options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and other
liquid  assets,  of a Portfolio  to cover  contracts  which would  require it to
purchase  securities.   A  Portfolio  may  lose  the  expected  benefit  of  the
transactions if interest rates or stock prices move in an unanticipated  manner.
Such unanticipated  changes in interest rates or stock prices may also result in
poorer overall  performance in a Portfolio than if the Fund had not entered into
any futures  transactions  for that Portfolio.  A Portfolio would be required to
make and maintain  "margin"  deposits in connection with transactions in futures
contracts. 
    

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND FOREIGN CURRENCY OPTIONS

The  Bond,  Balanced,  Growth  and  Income,  Capital  Growth  and  International
Portfolios  may each enter into  forward  foreign  currency  exchange  contracts
("forward  contracts")  to the  extent of 15% of the  value of their  respective
total  assets,   for  hedging  purposes.   A  forward  contract  is  a  contract
individually  negotiated  and  privately  traded by  currency  traders and their
customers.  A forward  contract  involves  an  obligation  to purchase or sell a
specific  currency for an agreed price at a future date,  which may be any fixed
number of days from the date of the  contract.  The agreed price may be fixed or
with a specified range of prices.

The  International  Portfolio  may also  enter  into  foreign  currency  futures
contracts and foreign  currency options to the extent of 15% of the value of its
total assets,  for hedging  purposes.  Foreign  currency  futures  contracts are
standardized   contracts  traded  on  commodities  exchanges  which  involve  an
obligation  to  purchase  or  sell  a  predetermined  amount  of  currency  at a
predetermined  date at a specified  price.  The  purpose of entering  into these
contracts is to minimize the risk to the Portfolio  from adverse  changes in the
relationship  between the U.S. dollar and foreign currencies.  At the same time,
such  contracts  may  limit  potential  gain  from  a  positive  change  in  the
relationship  between the U.S. dollar and foreign currencies.  The Portfolio may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts.  Unanticipated  changes in
currency prices may result in poorer overall  performance for the Portfolio than
if it had not engaged in forward  contracts,  foreign currency futures contracts
and foreign currency options.

STRATEGIC TRANSACTIONS AND DERIVATIVES APPLICABLE TO GLOBAL
DISCOVERY PORTFOLIO

The Global  Discovery  Portfolio  may, but is not required to,  utilize  various
other  investment  strategies as described  below to hedge various  market risks
(such as interest rates,  currency  exchange rates, and broad or specific equity
or fixed-income market movements),  to manage the effective maturity or duration
of fixed-income  securities in the Portfolio or to enhance potential gain. These
strategies  may be  executed  through  the  use of  derivative  contracts.  Such
strategies are generally  accepted as a part of modern portfolio  management and
are regularly utilized by many mutual funds and other  institutional  investors.
Techniques  and  instruments  may  change  over  time  as  new  instruments  and
strategies are developed or regulatory changes occur.

In the  course of  pursuing  these  investment  strategies,  the  Portfolio  may
purchase and sell  exchange-listed and  over-the-counter put and call options on
securities,  equity and  fixed-income  indices 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").

                                       19
<PAGE>

Strategic  Transactions  may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased by
the  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  fixed-income
securities  in the  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 enhance  potential
gain  although no more than 5% of the  Portfolio's  assets will be  committed to
Strategic  Transactions  entered into for  non-hedging  purposes.  Any or all of
these investment techniques may be used at any time and in any combination,  and
there is no particular  strategy  that dictates the use of one technique  rather
than  another,  as use of any  Strategic  Transaction  is a function of numerous
variables  including market conditions.  The ability of the Portfolio to utilize
these Strategic  Transactions  successfully will depend on the Adviser's ability
to predict  pertinent market movements,  which cannot be assured.  The Portfolio
will comply with applicable  regulatory  requirements  when  implementing  these
strategies,   techniques  and  instruments.   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 and
not for speculative purposes.

Strategic  Transactions,  including derivative contracts,  have risks associated
with them  including  possible  default by the other  party to the  transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect,  the risk that the use of such Strategic Transactions could result
in losses  greater  than if they had not been used.  Use of put and call options
may result in losses to the  Portfolio,  force the sale or purchase of portfolio
securities  at  inopportune  times or for prices higher than (in the case of put
options)  or lower than (in the case of call  options)  current  market  values,
limit the amount of appreciation the Portfolio can realize on its investments or
cause the  Portfolio  to hold a security  it might  otherwise  sell.  The use of
currency  transactions can result in the Portfolio  incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements or the inability to deliver or receive a specified currency.  The
use of  options  and  futures  transactions  entails  certain  other  risks.  In
particular,  the  variable  degree of  correlation  between  price  movements of
futures contracts and price movements in the related  portfolio  position of the
Portfolio  creates the possibility that losses on the hedging  instrument may be
greater  than  gains in the  value of the  Portfolio's  position.  In  addition,
futures and options markets may not be liquid in all  circumstances  and certain
over-the-counter  options may have no markets.  As a result, in certain markets,
the  Portfolio  might not be able to close out a transaction  without  incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions  for  hedging  should  tend to  minimize  the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any  potential  gain  which  might  result  from an  increase  in  value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential  financial risk than would purchases of
options,  where the  exposure  is  limited to the cost of the  initial  premium.
Losses resulting from the use of Strategic  Transactions  would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions  had  not  been  utilized.  The  Strategic  Transactions  that  the
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.

SPECIAL SITUATION SECURITIES

From time to time, the Global  Discovery  Portfolio may invest in equity or debt
securities  issued by companies  that are  determined  by the Adviser to possess
"special situation" characteristics.  In general, a special situation company is
a company whose securities are expected to increase in value solely by reason of
a development  particularly or uniquely applicable to the company.  Developments
that may  create  special  situations  include,  among  others,  a  liquidation,
reorganization,  recapitalization or merger, material litigation,  technological
breakthrough  and new  management or  management  policies.  The principal  risk
associated  with  investments  in  special  situation   companies  is  that  the
anticipated  development  thought to create the special  situation may not occur
and the  investments  therefore  may not  appreciate  in value or may decline in
value.

                                       20
<PAGE>

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

                             INVESTMENT RESTRICTIONS
 ------------------------------------------------------------------------------

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

The Fund may not,  on behalf  of any  Portfolio,  except  the  Global  Discovery
Portfolio:

      (1)with  respect to 75% of the value of the total  assets of a  Portfolio,
         invest more than 5% of the value of the Portfolio's total assets in the
         securities of any one issuer,  except U.S.  Government  securities and,
         with  respect to 100% of the value of the total  assets of a Portfolio,
         the Fund may not invest  more than 25% of the value of the  Portfolio's
         total assets in the securities of any one issuer, except U.S.
         Government securities;

      (2)pledge,  mortgage or  hypothecate  its assets,  except that,  to secure
         borrowings  permitted by the investment  restriction  (8) below, it may
         pledge  securities  having a market  value  at the time of  pledge  not
         exceeding 15% of the value of a Portfolio's  total assets and except in
         connection  with the writing of covered  call  options and the purchase
         and sale of futures contracts and options on futures contracts;

      (3)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 and the entry
         into repurchase agreements may be deemed to be loans;

      (4)enter into  repurchase  agreements or purchase any  securities if, as a
         result thereof, more than 10% of the total assets of a Portfolio (taken
         at market  value)  would be, in the  aggregate,  subject to  repurchase
         agreements  maturing in more than seven days and invested in restricted
         securities or securities which are not readily marketable;

      (5)purchase the securities of any issuer if such purchase would cause more
         than  10% of the  voting  securities  of  such  issuer  to be held by a
         Portfolio;

      (6)purchase  securities if such purchase  would cause more than 25% in the
         aggregate of the market value of the total assets of a Portfolio at the
         time of such  purchase to be invested in the  securities of one or more
         issuers  having  their  principal  business   activities  in  the  same
         industry,   provided   that  there  is  no  limitation  in  respect  to
         investments in obligations issued or guaranteed by the U.S.  Government
         or  its  agencies  or  instrumentalities  (for  the  purposes  of  this
         restriction,  telephone  companies  are  considered  to  be a  separate
         industry  from gas and  electric  public  utilities,  and  wholly-owned
         finance companies are considered to be in the industry of their parents
         if their  activities are primarily  related to financing the activities
         of the parents).

      (7)purchase or sell any put or call  options or any  combination  thereof,
         except that the Fund may purchase and sell options on futures contracts
         on debt securities,  options on securities indexes and securities index
         futures contracts and write covered call option contracts on securities
         owned  by a  Portfolio,  and may also  purchase  call  options  for the
         purpose of  terminating  its  outstanding  obligations  with respect to
         securities  upon which covered call option  contracts have been written
         (i.e.,   "closing   purchase   transactions"),   and  except  that  the
         International  Portfolio  may also purchase and sell options on foreign
         currency and on foreign currency futures contracts.

      (8)borrow money except from banks as a temporary measure for extraordinary
         or emergency  purposes  (each  Portfolio is required to maintain  asset
         coverage  (including  borrowings)  of 300% for all  borrowings)  and no
         purchases of securities for a Portfolio  will be made while  borrowings
         of that Portfolio  exceed 5% of the Portfolio's  assets (the payment of
         interest  on  borrowings  by a Portfolio  will reduce that  Portfolio's
         income).  In  addition,  the  Board of  Trustees  has  adopted a policy
         whereby  each  Portfolio  of the Fund may borrow up to 10% of its total
         assets; provided,  however, that each Portfolio may borrow up to 25% of
         its total assets for extraordinary or emergency purposes, including the
         facilitation of redemptions.

                                       21
<PAGE>

In addition, the Fund may not, on behalf of the Global Discovery Portfolio:

      (1)borrow  money  except  as a  temporary  measure  for  extraordinary  or
         emergency  purposes or except in  connection  with  reverse  repurchase
         agreements provided that the Portfolio maintains asset coverage of 300%
         for all borrowings;

      (2)purchase or sell real estate  (except that the  Portfolio may invest in
         (i) securities of companies which deal in real estate or mortgages, and
         (ii) securities secured by real estate or interests  therein,  and that
         the  Portfolio  reserves  freedom  of  action  to hold and to sell real
         estate   acquired  as  a  result  of  the   Portfolio's   ownership  of
         securities);  or purchase or sell  physical  commodities  or  contracts
         relating to physical commodities;

      (3)act as an  underwriter  of securities  issued by others,  except to the
         extent  that it may be deemed an  underwriter  in  connection  with the
         disposition of portfolio securities of the Portfolio;

      (4)issue   senior   securities,   except  as   appropriate   to   evidence
         indebtedness  which it is permitted to incur,  and except for shares of
         the separate  classes or series of the Fund;  provided that  collateral
         arrangements  with  respect  to  currency-related  contracts,   futures
         contracts,  options or other permitted investments,  including deposits
         of initial and variation margin,  are not considered to be the issuance
         of senior securities for purposes of this restriction;

      (5)purchase any  securities  which would cause more than 25% of the market
         value of its total  assets at the time of such  purchase to be invested
         in the  securities  of one  or  more  issuers  having  their  principal
         business  activities  in the same  industry,  provided that there is no
         limitation  with  respect  to  investments  in  obligations  issued  or
         guaranteed by the U.S.  Government,  its agencies or  instrumentalities
         (for  the  purposes  of  this  restriction,   telephone  companies  are
         considered to be in a separate  industry  from gas and electric  public
         utilities,  wholly-owned  finance companies are considered to be in the
         same  industry  of their  parents  if their  activities  are  primarily
         related to financing  the  activities of their parents and each foreign
         government,  its agencies or instrumentalities as well as supranational
         organizations  as a  group,  are  each  considered  to  be  a  separate
         industry);

      (6)with respect to 75% of its total assets taken at market value  purchase
         more than 10% of the voting  securities  of any one  issuer,  or invest
         more than 5% of the value of its total assets in the  securities of any
         one  issuer,  except  obligations  issued  or  guaranteed  by the  U.S.
         Government,  its agencies or instrumentalities and except securities of
         closed end investment companies;

      (7)make loans to other persons,  except (a) loans of portfolio securities,
         provided  collateral  is maintained at not less than 100% by marking to
         market  daily,  and  (b)  to  the  extent  the  entry  into  repurchase
         agreements and the purchase of debt  securities in accordance  with its
         investment objective and investment policies may be deemed to be loans;

"Value" for the  purposes of all  investment  restrictions  shall mean the value
used in determining a Portfolio's net asset value (see "NET ASSET VALUE").

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

                               INVESTMENT ADVISER
 ------------------------------------------------------------------------------

The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a  Delaware   corporation,   Two  International  Place,  Boston,   Massachusetts
02110-4103,  to manage each  Portfolio's  daily  investment and business affairs
subject to the policies  established by the Trustees.  The Trustees have overall
responsibility  for the  management  of the Fund under  Massachusetts  law.  The
Adviser is one of the most  experienced  investment  counsel firms in the United
States.  It was  established  in 1919 and  pioneered  the  practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's  income is  professional  fees received from providing  continuing
investment advice,  and the firm derives no income from brokerage,  insurance or
underwriting  of  securities.  Today,  it provides  investment  counsel for many
individuals  and  institutions,   including   insurance   companies,   colleges,
industrial  corporations,  and financial and banking organizations.  Directly or
through  affiliates,  the Adviser provides  investment  advice to over 50 mutual
fund portfolios.

                                       22
<PAGE>
For its advisory services to the Portfolios,  the Adviser receives  compensation
monthly at the following annual rates for each Portfolio:

                                            Percent of the average
                                            daily net asset values
Portfolio                                      of each Portfolio
---------                                      -----------------

Money Market Portfolio                               .370%
Bond Portfolio                                       .475%
Balanced Portfolio                                   .475%
Growth and Income Portfolio                          .475%
Capital Growth Portfolio                             .475%
Global Discovery Portfolio                           .975%
   
International Portfolio                              .875%*
    

   
*  For any  calendar  month  during  which  the  average  daily  net  assets  of
   International Portfolio exceed $500,000,000,  the fee payable for that month,
   with respect to the excess over $500,000,000, is calculated at an annual rate
   of .775%. As a result, the Adviser received compensation at an annual rate of
   .863% for the fiscal year ended December 31, 1996.
    

The  investment  advisory  fees  for  the  Global  Discovery  and  International
Portfolios  are higher than those  charged many funds which invest  primarily in
U.S. securities, but are not necessarily higher than those charged to funds with
investment objectives similar to the investment objectives of these Portfolios.

Under the  investment  advisory  agreements  between the Fund, on behalf of each
Portfolio,  and the Adviser, the Fund is responsible for all its other expenses,
including  clerical  salaries;  fees and expenses  incurred in  connection  with
membership in investment company  organizations;  brokers'  commissions;  legal,
auditing and accounting  expenses;  taxes and governmental  fees; the charges of
custodians,  transfer  agents and other agents;  any other  expenses,  including
clerical expenses,  of issue, sale,  underwriting,  distribution,  redemption or
repurchase  of shares;  the expenses of and fees for  registering  or qualifying
securities  for sale;  the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser;  the cost of preparing and distributing reports
and  notices to  shareholders.  The Fund is also  responsible  for its  expenses
incurred in connection  with  litigation,  proceedings  and claims and the legal
obligation  it may have to indemnify  its  officers  and  Trustees  with respect
thereto. The Adviser,  through Scudder Investor Services,  Inc., a subsidiary of
the Adviser,  places portfolio  transactions on behalf of the Fund's Portfolios.
In so doing, the Adviser seeks to obtain the most favorable net results. Subject
to the  foregoing,  the  Adviser  may  consider  sales of VA  contracts  and VLI
policies  for  which  the  Fund is an  investment  option,  as a  factor  in the
selection of firms to execute portfolio transactions.

In  addition  to  payments  for  investment  advisory  services  provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting  agreement,  have approved  payments to the Adviser and Scudder
Fund Accounting Corporation for clerical,  accounting and certain other services
they may provide the Fund.

   
Until  April 30,  1998,  the Adviser has agreed to waive part or all of its fees
for the Global Discovery  Portfolio to the extent that the Portfolio's  expenses
will be maintained at 1.50% of average net assets.
    

PORTFOLIO MANAGEMENT

Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's  management process. Team members work
together  to  develop  investment  strategies  and  select  securities  for  the
Portfolios. They are supported by Scudder's large staff of economists,  research
analysts,  traders,  and  other  investment  specialists  who work in  Scudder's
offices across the United States and abroad.  Scudder believes its team approach
benefits Fund  investors by bringing  together many  disciplines  and leveraging
Scudder's extensive resources. 

MONEY MARKET PORTFOLIO

   
Lead  Portfolio  Manager  Stephen  L.  Akers  has led Money  Market  Portfolio's
day-to-day  management  since 1995.  Mr.  Akers  joined the team in 1995 and has
managed several  fixed-income  portfolios  since joining Scudder in 1984.  David
Wines,  Portfolio Manager,  joined Scudder and the team in 1996. Mr. Wines helps
set the Portfolio's  overall strategy and has eight years of investment industry
experience.  Nicca Alcantara,  Portfolio  Manager,  has  responsibility  for the
Portfolio's day-to-day investments.  Ms. Alcantara, who came to Scudder in 1984,
has worked as a portfolio  manager since 1989 and joined the team in 1990. Debra
A. Hanson,  Portfolio Manager,  joined the team in 1996. Ms. Hanson assists with
the development  and execution of investment  strategy and has been with Scudder
since 1983.
    

                                       23
<PAGE>

BOND PORTFOLIO

Lead  Portfolio  Manager  William  M.  Hutchinson  has  had  responsibility  for
overseeing the Portfolio's  day-to-day operations and has guided the Portfolio's
investment  strategy since 1996. Mr. Hutchinson,  who has 23 years of investment
experience,  came to Scudder in 1986 as a portfolio  manager and joined the team
in 1987. Ruth Heisler,  Portfolio Manager,  helps set the Portfolio's investment
strategy.  Ms.  Heisler,  who  has  over  40  years  of  fixed-income  investing
experience, joined the team in 1986.

BALANCED PORTFOLIO

   
Lead  Portfolio  Manager  Valerie  F.  Malter  joined  Scudder  in  1995  and is
responsible for the Portfolio's  investment  strategy and daily  operation.  Ms.
Malter  has 11  years of  experience  as an  analyst  covering  a wide  range of
industries,  and three years of portfolio management  experience focusing on the
stocks of companies with medium- to large-sized market capitalizations.  William
M.  Hutchinson,  Portfolio  Manager,  helps set Scudder's  overall  fixed-income
investment strategy. Mr. Hutchinson,  who has 23 years of investment experience,
came to Scudder in 1986 as a portfolio manager. Ruth Heisler, Portfolio Manager,
has had  responsibility for the Portfolio's  fixed-income  investments since she
joined the team in 1986.  Ms.  Heisler has been  involved with bond research and
investing at Scudder since 1953.
    

GROWTH AND INCOME PORTFOLIO

   
Lead Portfolio Manager Robert T. Hoffman has  responsibility  for setting Growth
and Income  Portfolio's  stock  investing  strategy and oversees the Portfolio's
day-to-day  operations.  Mr. Hoffman,  who joined Scudder in 1990 as a portfolio
manager,  has 13 years  of  experience  in the  investment  industry,  including
several  years of pension  fund  management  experience.  Kathleen  T.  Millard,
Portfolio  Manager,  has worked in the  investment  industry since 1983 and as a
portfolio  manager since 1986. Ms.  Millard,  who joined  Scudder in 1991,  also
focuses on stock investing strategy and stock selection.  Benjamin W. Thorndike,
Portfolio  Manager,   is  the  Portfolio's  chief  analyst  and  strategist  for
convertible  securities.   Mr.  Thorndike,   who  has  18  years  of  investment
experience,  joined  Scudder in 1983 as a portfolio  manager.  Lori J. Ensinger,
Portfolio  Manager,  joined the team in 1996. Ms. Ensinger,  who has 14 years of
investment  industry  experience,  focuses  on stock  selection  and  investment
strategy,  a role she has played since joining Scudder in 1993. Deborah Chaplin,
Portfolio  Manager,  joined  Scudder and the team in 1996.  Ms. Chaplin has five
years  of  investment  experience  as a  securities  analyst  and  institutional
portfolio manager.
    

CAPITAL GROWTH PORTFOLIO

   
Lead Portfolio  Manager  William F. Gadsden assumed  responsibility  for setting
Capital  Growth   Portfolio's  stock  investing   strategy  and  overseeing  the
Portfolio's  day-to-day  operations in 1995. Mr. Gadsden joined the team in 1989
and Scudder in 1983 and has 15 years of investment  experience.  Bruce F. Beaty,
Portfolio  Manager,  joined  the team in 1995 and has been a  portfolio  manager
since joining Scudder in 1991.
    

GLOBAL DISCOVERY PORTFOLIO

   
Lead Portfolio Manager Gerald J. Moran sets the Portfolio's  investment strategy
and oversees its daily operation. Mr. Moran joined Scudder's equity research and
management  area in 1968 as an analyst and has focused on small  company  stocks
since 1982 and has been a portfolio manager since 1985. Sewall Hodges, Portfolio
Manager,  joined Scudder in 1995. Mr. Hodges,  who has 11 years of experience in
global  analysis and  portfolio  management,  focuses on the  Portfolio's  stock
selection and research.
    

INTERNATIONAL PORTFOLIO

   
Lead  Portfolio  Manager  Carol  L.  Franklin  sets  International   Portfolio's
investment  strategy and has responsibility for the Portfolio's daily operation.
Ms.  Franklin,  who joined the team in 1989,  has worked on equity  investing at
Scudder as a portfolio manager since 1981.  Nicholas Bratt,  Portfolio  Manager,
has  been a  member  of the  Portfolio  team  since  1987  and has 23  years  of
experience  in  worldwide  investing,  including  21  years of  experience  as a
portfolio manager.  Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department.  Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992.
    

                                       24
<PAGE>

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

                                   DISTRIBUTOR
 ------------------------------------------------------------------------------

The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"),  a subsidiary of Scudder,  Stevens & Clark,  Inc. Located at Two
International  Place,  Boston,  Massachusetts  02110-4103,  the Distributor is a
Massachusetts  corporation  formed  in 1947.  Under the  principal  underwriting
agreement between the Fund and the Distributor,  the Fund is responsible for the
payment of all fees and expenses in connection  with the  preparation and filing
of any  registration  statement  and  prospectus  covering the issue and sale of
shares,  and the  registration  and  qualification  of shares  for sale with the
Securities  and  Exchange  Commission  and  in  the  various  states,  including
registering the Fund as a broker or dealer.  The Fund will also pay the fees and
expenses of preparing,  printing and mailing  prospectuses  annually to existing
shareholders  and any  notice,  proxy  statement,  report,  prospectus  or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free  telephone service for shareholders,  wiring funds for share purchases
and redemptions  (unless paid by the shareholder who initiates the transaction),
printing and postage of business  reply  envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.

The Distributor will pay for printing and  distributing  prospectuses or reports
prepared  for its  use in  connection  with  the  offering  of the  shares,  and
preparing,   printing  and  mailing  any  other  literature  or  advertising  in
connection  with the  offering  of the  shares  to the  Participating  Insurance
Companies. The Distributor will pay all fees and expenses in connection with its
qualification  and  registration  as a broker or dealer under  Federal and state
laws, a portion of the toll-free  telephone  service and of computer  terminals,
and of any activity which is primarily  intended to result in the sale of shares
issued by the Fund,  unless a Plan pursuant to Rule 12b-1 under the 1940 Act, as
amended,  is in effect  which  provides  that the Fund shall bear some or all of
such expenses.

As agent, the Distributor  currently offers shares of each Portfolio of the Fund
continuously to the separate  accounts of Participating  Insurance  Companies in
all states in which it is registered or where  permitted by applicable  law. The
underwriting  agreement provides that the Distributor  accepts orders for shares
at net asset value, as no sales  commission or load is charged.  The Distributor
has made no firm commitment to acquire shares of the Fund.

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

                            PURCHASES AND REDEMPTIONS
 ------------------------------------------------------------------------------

   
Except for the Money Market Portfolio,  which does not offer separate classes of
shares, the Fund offers two classes of shares on behalf of each Portfolio: Class
A shares are  offered  at net asset  value and are not  subject to fees  imposed
pursuant to a Distribution  Plan.  Class B shares are offered at net asset value
and are subject to fees imposed pursuant to a Distribution Plan.
    

The separate accounts of the Participating  Insurance  Companies place orders to
purchase and redeem shares of each Portfolio  based on, among other things,  the
amount of premium payments to be invested and surrender and transfer requests to
be  effected on that day  pursuant  to VA  contracts  and VLI  policies.  Orders
received  by the Fund or its  agent are  effected  on days on which the New York
Stock Exchange (the "Exchange") is open for trading.  For orders received before
the close of regular  trading on the Exchange  (normally 4 p.m.,  eastern time),
such  purchases and  redemptions of the shares of each Portfolio are effected at
the respective net asset values per share  determined as of the close of regular
trading on the Exchange on that same day except  that,  in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after  federal  funds have been made  available to the Fund (see
"NET ASSET VALUE").  Payment for  redemptions  will be made by State Street Bank
and Trust Company or Brown Brothers Harriman & Co. on behalf of the Fund and the
relevant  Portfolios  within  seven  days  thereafter.  No  fee is  charged  the
shareholders when they redeem Portfolio shares.

The Fund may suspend the right of  redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the Exchange is closed,  other
than  customary  weekend and holiday  closings  or during  which  trading on the
Exchange  is  restricted;  (ii)  when the  Securities  and  Exchange  Commission
determines  that a state of emergency  exists which may make payment or transfer
not reasonably practicable;  (iii) as the Securities and Exchange Commission may
by order permit for the protection of the security  holders of the Fund; or (iv)


                                       25
<PAGE>

at any time when the Fund may, under  applicable laws and  regulations,  suspend
payment on the redemption of its shares.

Should any conflict between VA contract and VLI policy holders arise which would
require that a substantial
amount of net assets be withdrawn from the Fund,  orderly  portfolio  management
could be  disrupted  to the  potential  detriment  of such  contract  and policy
holders.
 ------------------------------------------------------------------------------

                                 NET ASSET VALUE
 ------------------------------------------------------------------------------

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, determines net
asset  value per  share as of the  close of  regular  trading  on the  Exchange,
normally 4 p.m., eastern time, on each day the Exchange is open for trading. Net
asset value per share is  calculated  for  purchases  and  redemptions  for each
Portfolio by dividing the current market value (amortized cost value in the case
of the Money Market  Portfolio) of total  Portfolio  assets,  plus other assets,
less all liabilities, by the total number of shares outstanding.
 ------------------------------------------------------------------------------

                             PERFORMANCE INFORMATION
 ------------------------------------------------------------------------------

MONEY MARKET PORTFOLIO

From  time to time,  quotations  of the Money  Market  Portfolio's  "yield"  and
"effective yield" may be included in advertisements, sales literature or reports
to  shareholders or prospective  investors.  Both yield figures are based on the
historical   performance  of  the  Portfolio  and  show  the  performance  of  a
hypothetical investment and are not intended to indicate future performance. The
yield  of the  Money  Market  Portfolio  refers  to the  net  investment  income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated).  Included in "net investment  income" is the amortization
of market  premium or  accretion  of market and original  issue  discount.  This
income is then  "annualized."  That is,  the amount of income  generated  by the
Portfolio  during that week is assumed to be  generated  during each week over a
52-week  period and is shown as a percentage.  The effective  yield is expressed
similarly  but,  when  annualized,  the income  earned by an  investment  in the
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.  Yield and effective  yield for the Portfolio  will vary based on,
among other things,  changes in market  conditions,  the level of interest rates
and the level of the Portfolio's expenses. 

BOND PORTFOLIO

From time to time,  quotations of the Bond Portfolio's  yield may be included in
advertisements,  sales  literature  or reports to  shareholders  or  prospective
investors.  Yield  figures  are  based  on  historical  performance  of the Bond
Portfolio and show the  performance  of a  hypothetical  investment  and are not
intended to indicate future performance.  The yield of the Bond Portfolio refers
to net  investment  income  generated  by the Bond  Portfolio  over a  specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income  generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month  period and is shown as
a percentage of net asset value. 

ALL PORTFOLIOS

From time to time,  quotations of a Portfolio's  total return may be included in
advertisements,  sales  literature  or reports to  shareholders  or  prospective
investors.  Total  return  figures are based on  historical  performance  of the
Portfolio and show the  performance  of a  hypothetical  investment  and are not
intended to indicate future performance.  The total return of a Portfolio refers
to return  assuming an  investment  has been held in the Portfolio for one year,
five years and ten years or for the life of the  Portfolio  (the  ending date of
which will be stated).  The total return quotations may be expressed in terms of
average  annual or cumulative  rates of return for all periods  quoted.  Average
annual total return refers to the average  annual  compound rate of return of an
investment in a Portfolio.  Cumulative  total return  represents  the cumulative
change in value of an  investment  in a  Portfolio.  Both will  assume  that all
dividends and capital gains distributions were reinvested.

Yield and total return for a Portfolio  will vary based on, among other  things,
changes in market conditions and the level of the Portfolio's expenses.

                                       26
<PAGE>

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

                        VALUATION OF PORTFOLIO SECURITIES
 ------------------------------------------------------------------------------

MONEY MARKET PORTFOLIO

Pursuant to a Rule of the Securities and Exchange  Commission,  the Money Market
Portfolio will be valued at amortized  cost.  Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.

By using  amortized  cost  valuation,  the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money  Market  Portfolio,  despite  minor
shifts  in the  market  value  of  its  portfolio  securities.  The  yield  on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and  were  permitted  to  fluctuate  with  the  market  value  of the  portfolio
securities  of the Money  Market  Portfolio.  However,  as a result  of  certain
procedures  adopted  by the Fund,  the  Adviser  believes  any  difference  will
normally be minimal. 

OTHER PORTFOLIOS

An  exchange-traded  equity  security  (not subject to resale  restrictions)  is
valued at its most recent  sale price as of the close of regular  trading on the
Exchange on each day the  Exchange is open for trading.  Lacking any sales,  the
security is valued at the calculated  mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such  sales,  the  security  is valued  at the high or  "inside"  bid  quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method,  which the Trustees believe  approximates market value. Foreign currency
forward  contracts  are valued at the value of the  underlying  currency  at the
prevailing   currency  exchange  rate.   Securities  for  which  current  market
quotations  are not readily  available 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.  Please refer to the
section  entitled  "NET  ASSET  VALUE" in the  Fund's  Statement  of  Additional
Information for more information concerning valuation of portfolio securities.

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

                     TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
 ------------------------------------------------------------------------------

The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated  investment company under
Subchapter M of the Code.

Each  Portfolio  of  the  Fund  intends  to  comply  with  the   diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating  Insurance Companies,  rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio  shares.  For  further  information   concerning  federal  income  tax
consequences for the holders of the VA contracts and VLI policies,  such holders
should  consult the  prospectus  used in  connection  with the issuance of their
particular contracts or policies.

As a regulated investment company,  each Portfolio generally will not be subject
to tax on its ordinary income and net realized  capital gains to the extent such
income and gains are  distributed  in conformity  with  applicable  distribution
requirements  under  the  Code to the  separate  accounts  of the  Participating
Insurance  Companies  which  hold its  shares.  Distributions  of income and the
excess of net  short-term  capital gain over net long-term  capital loss will be
treated as  ordinary  income and  distributions  of the excess of net  long-term
capital  gain over net  short-term  capital  loss will be treated  as  long-term
capital gain by the Participating  Insurance Companies.  Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are  subject  to  federal  income  tax if they are  retained  as part of  policy
reserves.

The Money Market Portfolio will declare a dividend of its net investment  income
daily and distribute such dividend monthly.  Distributions  will be made shortly
after  the  first  business  day of  each  month  following  declaration  of the
dividend.  The Bond,  Balanced,  Growth and Income and Capital Growth Portfolios
will declare and distribute  dividends from their net investment income, if any,


                                       27
<PAGE>

quarterly,  in  January,  April,  July and  October.  The Global  Discovery  and
International  Portfolios each intend to distribute their net investment  income
annually  within  three  months of the Fund's  fiscal  year-end of December  31,
although  an  additional  distribution  may  be  made  if  necessary.   For  all
portfolios,  distributions  of capital  gains,  if any,  will  generally be made
within three months of December 31, although an additional  distribution  may be
made if necessary.  Dividends  declared in October,  November or December with a
record date in such a month will be deemed to have been received by shareholders
on December 31 if paid during January of the following  year. All  distributions
will be  reinvested in shares of such  Portfolios  unless an election is made on
behalf of a separate  account to receive  distributions  in cash.  Participating
Insurance  Companies  will  be  informed  about  the  amount  and  character  of
distributions from the relevant Portfolio for federal income tax purposes.

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

                           SHAREHOLDER COMMUNICATIONS
 ------------------------------------------------------------------------------

Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more  Portfolios are the investment  vehicle will receive
from the  Participating  Insurance  Companies  unaudited  semi-annual  financial
statements and audited  year-end  financial  statements  certified by the Fund's
independent public  accountants.  Each report will show the investments owned by
the Fund and the market  values  thereof as  determined by the Trustees and will
provide other information about the Fund and its operations.

Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter,  Scudder Investor Services,  Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103.

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

                             ADDITIONAL INFORMATION
 ------------------------------------------------------------------------------

FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION

The Fund was organized in the  Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial  interest are
presently  divided into seven separate series.  Additional series and classes of
shares may be created from time to time. The Fund has adopted a plan pursuant to
Rule 18f-3 under the 1940 Act to permit the Fund to  establish a multiple  class
distribution  system for all of its Portfolios,  except Money Market  Portfolio.
The plan was  approved by the Fund's  Board of Trustees at a special  meeting on
October 5, 1995.

Under the  Fund's  multi-class  system,  shares of each  class of a  multi-class
Portfolio represent an equal pro rata interest in that Portfolio and, generally,
shall  have  identical  voting,   dividend,   liquidation,   and  other  rights,
preferences,  powers,  restrictions,  limitations,  qualifications and terms and
conditions,  except that: (1) each class shall have a different designation; (2)
each class of shares shall bear its "class  expenses;" (3) each class shall have
exclusive  voting rights on any matter  submitted to  shareholders  that relates
solely to its  distribution  arrangement;  (4) each class  shall  have  separate
voting rights on any matter  submitted to shareholders in which the interests of
one class differ from the interests of any other class;  (5) each class may have
separate exchange  privileges;  and (6) each class may have different conversion
features, although a conversion feature is not currently contemplated.  Expenses
currently  designated as "Class  Expenses" by the Fund's Board of Trustees under
the  plan  pursuant  to  Rule  18f-3  include,  for  example,  payments  to  the
Distributor  pursuant to the  distribution  plan for that class,  Fund  transfer
agent fees attributable to a specific class, and certain securities registration
fees.

Each  Portfolio  (except  Money  Market  Portfolio)  has two  classes of shares,
designated as Class A shares and Class B shares, each of which is offered at net
asset value. Class A shares, which are not sold subject to a Rule 12b-1 fee, are
offered pursuant to this prospectus. Class B shares, which are sold subject to a
Rule  12b-1  fee,  are  offered to  certain  Participating  Insurance  Companies
pursuant  to a  separate  prospectus.  Participating  Insurance  Companies  with
inquiries  regarding Class B shares may call or write to the Fund's underwriter,
Scudder Investor Services, Inc., at the number and address listed above.

   
Under  Massachusetts  law,  shareholders of a Massachusetts  business trust may,
under  certain  circumstances,  be held  personally  liable as partners  for the
obligations  of  the  trust.  The  Declaration  of  Trust  contains  an  express
    


                                       28
<PAGE>

disclaimer of shareholder  liability in connection with the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for  indemnification out of the Fund property of any shareholder 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
incurring  financial  loss on account  of  shareholder  liability  is limited to
circumstances  in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal  liability
of shareholders is remote. 

OTHER INFORMATION

The activities of the Fund are supervised by the Trustees.

Although the Fund does not intend to hold annual  meetings,  shareholders of the
Fund have certain rights,  as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders  for the purpose of voting
on the  removal  of one or more  Trustees.  Shareholders  have one vote for each
share held. Fractional shares have fractional votes.

   
As of December 31, 1996,  Aetna Life Insurance and Annuity Company owned 22.31%,
Banner Life  Insurance  Company owned 1.87%,  Charter  National  Life  Insurance
Company owned 26.09%,  Companion Life Insurance Company of New York owned 0.01%,
Fortis Benefits Life Insurance  Company owned 0.19%,  Intramerica Life Insurance
Company owned 3.24%,  Lincoln Benefit Life Insurance Company owned 0.57%, Mutual
of America Life Insurance  Company owned 29.05%,  Paragon Life Insurance Company
owned 0.14%,  Providentmutual  Life and Annuity  Company of America owned 1.12%,
Safeco Life  Insurance  Companies  owned 3.11%,  Security  First Life  Insurance
Company owned 0.14%,  Southwestern Life Insurance Company owned 0.43%, The Union
Central Life  Insurance  Company owned 8.23%,  United  Companies  Life Insurance
Company owned 0.25%,  United of Omaha owned 1.02%,  USAA Life Insurance  Company
owned 0.66% and Washington  National Life  Insurance  Company owned 2.24% of the
Fund's outstanding shares.
    

Each Portfolio of the Fund has a December 31 fiscal year end.

   
Portfolio securities of the Money Market, Bond, Balanced, Growth and Income, and
Capital  Growth  Portfolios  are  held  separately,   pursuant  to  a  custodian
agreement,  by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian.  Portfolio securities of the Global Discovery
and  International  Portfolios  are held  separately,  pursuant  to a  custodian
agreement,   by  Brown  Brothers  Harriman  &  Co.,  40  Water  Street,  Boston,
Massachusetts 02109, as custodian.
    

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, is
the transfer and dividend paying agent for the Fund.

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for  determining the daily net asset value per share and maintaining the general
accounting records of each Portfolio.

The firm of Dechert Price & Rhoads,  Boston,  Massachusetts,  is counsel for the
Fund.

The Fund's Statement of Additional  Information and this prospectus omit certain
information  contained in the  Registration  Statement  which the Fund has filed
with the  Securities and Exchange  Commission  under the Securities Act of 1933,
and reference is hereby made to the  Registration  Statement and its amendments,
for further  information  with  respect to the Fund and the  securities  offered
hereby.  The  Registration  Statement  and its  amendments,  are  available  for
inspection  by  the  public  at  the  Securities  and  Exchange   Commission  in
Washington, D.C.



                                       29
<PAGE>

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

                              TRUSTEES AND OFFICERS
 ------------------------------------------------------------------------------

David B. Watts*
President and Trustee

Daniel Pierce*
Vice President and Trustee

Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus of Insurance, Georgia State University

Dr. Rosita P. Chang
Trustee; Professor of Finance, University of Rhode Island

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business
Administration, Pennsylvania State University

   
Stephen L. Akers*
Vice President
    

Thomas S. Crain*
Vice President

   
Carol Franklin*
Vice President

William F. Gadsden*
Vice President
    

Jerard K. Hartman*
Vice President

   
Robert T. Hoffman*
Vice President

William M. Hutchinson*
Vice President
    

Richard A. Holt*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

   
Valerie F. Malter*
Vice President
    

Steven M. Meltzer*
Vice President

   
Gerald J. Moran*
Vice President
    

Randall K. Zeller*
Vice President

Thomas F. McDonough*
Vice President and Secretary

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Kathryn L. Quirk*
Vice President and Assistant Secretary

*Scudder, Stevens & Clark, Inc.

                                       30
<PAGE>

   
                                    APPENDIX

The  following  is a  description  of the  ratings  given by S&P and  Moody's to
corporate and municipal bonds.

S&P:

Debt rated AAA has the highest rating assigned by S&P.  Capacity to pay interest
and  repay  principal  is  extremely  strong.  Debt  rated AA has a very  strong
capacity to pay interest and repay  principal and differs from the highest rated
issues only in small degree.  Debt rated A has a strong capacity to pay interest
and repay  principal  although it is somewhat  more  susceptible  to the adverse
effects of changes in circumstances and economic  conditions than debt in higher
rated  categories.  Debt rated BBB is regarded as having an adequate capacity to
pay  interest  and  repay  principal.  Whereas  it  normally  exhibits  adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened  capacity to pay interest and repay  principal
for debt in this category than in higher rated categories.

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

Debt rated BB has less near-term vulnerability to default than other speculative
issues.  However,  it faces major ongoing  uncertainties  or exposure to adverse
business,  financial,  or economic  conditions  which  could lead to  inadequate
capacity to meet timely interest and principal payments.  The BB rating category
is also used for debt  subordinated to senior debt that is assigned an actual or
implied BBB-  rating.  Debt rated B has a greater  vulnerability  to default but
currently has the capacity to meet interest  payments and principal  repayments.
Adverse business,  financial, or economic conditions will likely impair capacity
or willingness  to pay interest and repay  principal.  The B rating  category is
also used for debt  subordinated  to senior  debt that is  assigned an actual or
implied BB or BB- rating.

Debt rated CCC has a currently  identifiable  vulnerability  to default,  and is
dependent upon favorable  business,  financial,  and economic conditions to meet
timely  payment of interest and repayment of principal.  In the event of adverse
business,  financial,  or  economic  conditions,  it is not  likely  to have the
capacity to pay interest and repay  principal.  The CCC rating  category is also
used for debt  subordinated to senior debt that is assigned an actual or implied
B or B- rating.  The rating CC  typically  is  applied to debt  subordinated  to
senior  debt that is  assigned  an actual or implied  CCC  rating.  The rating C
typically  is applied to debt  subordinated  to senior debt which is assigned an
actual  or  implied  CCC-  debt  rating.  The C  rating  may be used to  cover a
situation where a bankruptcy  petition has been filed, but debt service payments
are  continued.  The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest  payments or principal  payments are not made on the date due even
if the  applicable  grace period had not expired,  unless S&P believes that such
payments will be made during such grace  period.  The D rating also will be used
upon  the  filing  of  a  bankruptcy  petition  if  debt  service  payments  are
jeopardized.

Moody's:

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

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
    

                                       31
<PAGE>

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

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




                                       32
<PAGE>
                                                                         SCUDDER


                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                             Two International Place
                        Boston, Massachusetts 02110-4103

                                 (A Mutual Fund)


Scudder  Variable Life  Investment  Fund (the "Fund") is an open-end  management
investment  company  which  offers  shares  of  beneficial   interest  of  seven
diversified Portfolios:

o   Money Market  Portfolio  seeks stability and current income from a portfolio
    of money market  instruments.  The Money Market  Portfolio  will  maintain a
    dollar-weighted  average  of 90  days or less in an  effort  to  maintain  a
    constant net asset value of $1.00 per share.

o   Bond Portfolio seeks high income from a high quality portfolio of bonds.

o   Balanced  Portfolio  seeks  a  balance  of  growth  and  income,  as well as
    long-term  preservation of capital,  from a diversified  portfolio of equity
    and fixed-income securities.

o   Growth and Income  Portfolio  seeks  long-term  growth of  capital,  current
    income and growth of income from a portfolio  consisting primarily of common
    stocks and securities convertible into common stocks.

o   Capital Growth Portfolio seeks to maximize  long-term  capital growth from a
    portfolio consisting primarily of equity securities.

o   Global Discovery Portfolio seeks above-average capital appreciation over the
    long term by investing primarily in the equity securities of small companies
    located throughout the world.

o   International Portfolio seeks long-term growth of capital principally from a
    diversified portfolio of foreign equity securities.

   
This  prospectus  sets forth  concisely  the  information  about the Fund that a
prospective  investor should know before applying for certain  variable  annuity
contracts ("VA contracts") and variable life insurance policies ("VLI policies")
offered in the separate accounts of certain insurance companies  ("Participating
Insurance  Companies").  Please  read it  carefully  and  retain  it for  future
reference.  The prospectus should be read in conjunction with the VA contract or
VLI  policy  prospectus  which  accompanies  it.  Shares  of  the  Money  Market
Portfolio,  and Class B shares of all other  Portfolios,  are offered herein. If
you require more detailed  information,  a Statement of  Additional  Information
dated May 1, 1997, as supplemented  from time to time, is available upon request
without charge and may be obtained by calling a Participating  Insurance Company
or by writing to broker/dealers  offering the VA contracts and VLI policies,  or
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103.  The Statement of Additional  Information,  which is incorporated by
reference into this prospectus,  has been filed with the Securities and Exchange
Commission and is available along with other related materials on the Securities
and Exchange Commission's Internet Web site (http://www.sec.gov).
    

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

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

SHARES OF THE FUND ARE AVAILABLE AND ARE BEING MARKETED  EXCLUSIVELY AS A POOLED
FUNDING VEHICLE FOR LIFE INSURANCE  COMPANIES WRITING ALL TYPES OF VARIABLE LIFE
INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS.

   
                                   PROSPECTUS
                                   May 1, 1997
    

                      CLASS B SHARES OF BENEFICIAL INTEREST
<PAGE>


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

                                TABLE OF CONTENTS
 -------------------------------------------------------------------------------

                                                                            Page

INVESTMENT CONCEPT OF THE FUND                                                 1
FINANCIAL HIGHLIGHTS                                                           2
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS                           3
     Money Market Portfolio                                                    3
     Bond Portfolio                                                            3
     Balanced Portfolio                                                        4
     Growth and Income Portfolio                                               5
     Capital Growth Portfolio                                                  6
     Global Discovery Portfolio                                                7
     International Portfolio                                                   8
POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS                           9
     Repurchase Agreements                                                     9
     Debt Securities                                                           9
     Illiquid or Restricted Investments                                        9
     Convertible Securities                                                    9
     Mortgage and Other Asset-Backed Securities                               10
     Foreign Securities                                                       10
     When-Issued Securities                                                   11
     Indexed Securities                                                       11
     Loans of Portfolio Securities                                            11
     Zero Coupon Securities                                                   11
     Real Estate Investment Trusts                                            11
     Derivatives                                                              12
     Options                                                                  12
     Options on Securities Indexes                                            12
     Futures Contracts                                                        12
     Forward Foreign Currency Exchange Contracts, Foreign Currency Futures    
       Contracts and Foreign Currency Options                                 13
     Strategic Transactions and Derivatives Applicable to Global Discovery 
       Portfolio                                                              13
     Special Situation Securities                                             14
INVESTMENT RESTRICTIONS                                                       14
INVESTMENT ADVISER                                                            16
     Portfolio Management                                                     17
     Money Market Portfolio                                                   17
     Bond Portfolio                                                           17
     Balanced Portfolio                                                       17
     Growth and Income Portfolio                                              18
     Capital Growth Portfolio                                                 18
     Global Discovery Portfolio                                               18
     International Portfolio                                                  18
DISTRIBUTOR                                                                   18
PURCHASES AND REDEMPTIONS                                                     19
NET ASSET VALUE                                                               20
PERFORMANCE INFORMATION                                                       20
     Money Market Portfolio                                                   20
     Bond Portfolio                                                           20
     All Portfolios                                                           21
VALUATION OF PORTFOLIO SECURITIES                                             21
     Money Market Portfolio                                                   21
     Other Portfolios                                                         21
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS                                       21
SHAREHOLDER COMMUNICATIONS                                                    22
ADDITIONAL INFORMATION                                                        22
     Fund Organization and Shareholder Indemnification                        22
     Other Information                                                        23
TRUSTEES AND OFFICERS                                                         24
   
APPENDIX                                                                      25
    

<PAGE>


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

                         INVESTMENT CONCEPT OF THE FUND
--------------------------------------------------------------------------------

Scudder  Variable Life Investment  Fund (the "Fund") is an open-end,  registered
management investment company comprised of the following diversified series: the
Money Market Portfolio,  Bond Portfolio,  Balanced Portfolio,  Growth and Income
Portfolio,   Capital  Growth   Portfolio,   Global  Discovery   Portfolio,   and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the  "Portfolios").  Additional  Portfolios may be created from
time to time.  The Fund is intended to be the funding  vehicle for VA  contracts
and VLI policies to be offered by the separate accounts of certain Participating
Insurance Companies.

Class B shares are offered at net asset value and are subject to a  Distribution
Plan.  Except for the Money  Market  Portfolio,  which  does not offer  separate
classes of shares,  this prospectus  pertains to Class B shares ("Shares") only.
Class A shares are  offered by a separate  prospectus.  Participating  Insurance
Companies  with  inquiries   regarding  Class  A  shares  may  call  the  Fund's
underwriter,  Scudder Investor  Services,  Inc., at  1-617-295-2000  or write to
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103.

The Fund  currently  does not  foresee  any  disadvantages  to the holders of VA
contracts  and VLI  policies  arising  from the fact that the  interests  of the
holders of such  contracts  and  policies may differ.  Nevertheless,  the Fund's
Trustees   intend  to  monitor   events  in  order  to  identify   any  material
irreconcilable  conflicts which may possibly arise and to determine what action,
if any,  should  be taken in  response  thereto.  The VA  contracts  and the VLI
policies are described in the separate  prospectuses issued by the Participating
Insurance Companies. The Fund assumes no responsibility for such prospectuses.

Individual VA contract holders and VLI policyholders are not the  "shareholders"
of the Fund.  Rather, the Participating  Insurance  Companies and their separate
accounts are the shareholders or investors (the  "Shareholders"),  although such
companies  may  pass  through  voting  rights  to  their  VA  contract  and  VLI
policyholders.


                                       1
<PAGE>

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

                              FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

   
As of  December  31,  1996,  each of the  Portfolios  (except  the Money  Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.

Money Market Portfolio

The following table includes  selected data for a share  outstanding  throughout
each period and other performance information derived from the audited financial
statements.

If  you  would  like  more  detailed  information   concerning  the  Portfolio's
performance,  a complete portfolio listing and audited financial  statements are
available  in the  Fund's  Annual  Report  dated  December  31,  1996 and may be
obtained  without  charge by  calling a  Participating  Insurance  Company or by
writing to  broker/dealers  offering the previously  mentioned  variable annuity
contracts and variable life insurance  policies,  or Scudder Investor  Services,
Inc.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                               ------------------------------------------------------------------------------------------------
                                1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of period ......   $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from investment
    operations:
  Net investment
    income .................     .050      .055      .037      .025      .033      .057      .076      .088      .068      .060
Less distributions from
  net investment income ....    (.050)    (.055)    (.037)    (.025)    (.033)    (.057)    (.076)    (.088)    (.068)    (.060)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
end of period ..............   $ 1.00    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ...........     5.09      5.65      3.72      2.54      3.33      5.81      7.83      8.84      7.08      5.95
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ......       98        80        90        49        34        28        32        15        11         8
Ratio of operating
  expenses, net to
  average daily net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .72       .75       .75
Ratio of operating expenses
  before expense reductions,
  to average daliy net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .81      1.04      1.12
Ratio of net
  investment income
  to average daily
  net assets (%) ...........     4.98      5.51      3.80      2.55      3.26      5.67      7.57      8.53      6.99      6.06
</TABLE>
    
                                       2
<PAGE>

--------------------------------------------------------------------------------
                            INVESTMENT OBJECTIVES AND
                           POLICIES OF THE PORTFOLIOS
--------------------------------------------------------------------------------

   
Each Portfolio has a different  investment  objective  which it pursues  through
separate investment policies,  as described below. The differences in objectives
and policies among the Portfolios can be expected to affect the degree of market
and  financial  risk to which each  Portfolio  is subject and the return of each
Portfolio.  The investment objectives and policies of each Portfolio may, unless
otherwise  specifically stated, be changed by the Trustees of the Fund without a
vote of the  Shareholders.  There is no  assurance  that the  objectives  of any
Portfolio will be achieved. 
    

MONEY MARKET PORTFOLIO

The Money  Market  Portfolio  seeks to maintain  the  stability  of capital and,
consistent  therewith,  to  maintain  the  liquidity  of capital  and to provide
current  income.  The Portfolio  seeks to maintain a constant net asset value of
$1.00 per share,  although there can be no assurance that this will be achieved.
The Portfolio uses the amortized cost method of securities valuation.

The Money  Market  Portfolio  purchases  money  market  securities  such as U.S.
Treasury, agency and instrumentality obligations,  finance company and corporate
commercial paper,  bankers'  acceptances and certificates of deposit of domestic
and foreign  banks  (i.e.,  banks which at the time of their most recent  annual
financial  statements  show  total  assets in excess of $1  billion),  including
foreign  branches of domestic  banks,  which involve  different risks than those
associated with  investments in  certificates of deposit of domestic banks,  and
corporate obligations. The Money Market Portfolio may also enter into repurchase
agreements.  The Money  Market  Portfolio  may also  invest in  certificates  of
deposit issued by banks and savings and loan institutions  which had at the time
of their most recent annual  financial  statements  total assets of less than $1
billion, provided that (i) the principal amounts of such certificates of deposit
are  insured  by an  agency  of the U.S.  Government,  (ii) at no time  will the
Portfolio hold more than $100,000 principal amount of certificates of deposit of
any one such bank, and (iii) at the time of acquisition, no more than 10% of the
Portfolio's  assets  (taken at current  value) are invested in  certificates  of
deposit of such banks having total assets not in excess of $1 billion.

   
Investments are limited to those that are  dollar-denominated and at the time of
purchase are rated, or judged by the Fund's investment adviser, Scudder, Stevens
& Clark, Inc. (the "Adviser"), subject to the supervision of the Trustees, to be
equivalent to those rated high quality (i.e.,  rated in the two highest  quality
rating  categories)  by any two  nationally-recognized  rating  services such as
Moody's Investors Service,  Inc.  ("Moody's") and Standard & Poor's ("S&P").  In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality  instruments  presenting  minimal credit risks. The portfolio is
subject to certain additional quality and diversification restrictions which are
set forth in the Fund's Statement of Additional Information.
    

The remaining  maturity of each investment in the Money Market  Portfolio is 397
calendar days or less. The  dollar-weighted  average maturity of the Portfolio's
investments varies with money market conditions,  but is always 90 days or less.
As a money  market  fund with a  short-term  maturity,  the  Portfolio's  income
fluctuates  with  changes  in  interest  rates,  but its price to the  public or
"offering price," is expected to remain fixed at $1.00 per share. 

BOND PORTFOLIO

The Bond  Portfolio  pursues a policy of  investing  for a high  level of income
consistent  with a high  quality  portfolio  of debt  securities.  Under  normal
circumstances,  the  Portfolio  invests  at least  65% of its  assets  in bonds,
including  those  of  the  U.S.  Government  and  its  agencies,  and  those  of
corporations  and other notes and bonds  paying  high  current  income.  It will
attempt to moderate the effect of market price fluctuation relative to that of a
long-term  bond by  investing  in  securities  with  varying  maturities  and by
entering  into futures  contracts  on debt  securities  and related  options for
hedging purposes.

The Portfolio is actively managed.  The Portfolio may invest in a broad range of
short-,  intermediate-,  and long-term securities.  Proportions among maturities
and  types of  securities  may vary  depending  upon the  prospects  for  income
relative to the outlook for the economy and the securities markets,  the quality
of available  investments,  the level of interest rates, and other factors.  The
Portfolio may also invest in preferred  stocks  consistent  with the Portfolio's
objectives.

The Bond  Portfolio  may purchase  corporate  notes and bonds  including  issues
convertible into common stock and obligations of municipalities. It may purchase
U.S.  Government  securities and  obligations  of federal  agencies that are not

                                       3
<PAGE>

   
backed by the full faith and credit of the U.S. Government,  such as obligations
of Federal Home Loan Banks, Farm Credit Banks and the Federal Home Loan Mortgage
Corporation.  In addition, it may purchase obligations of international agencies
such as the  International  Bank for  Reconstruction  and  Development,  and the
Inter-American  Development  Bank.  Other eligible  investments  include foreign
securities, such as non-U.S. dollar-denominated foreign debt securities and U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces) including, without limitation, Eurodollar Bonds and
Yankee  Bonds,  mortgage  and other  asset-backed  securities,  and money market
instruments such as commercial paper, and bankers'  acceptances and certificates
of deposit issued by domestic and foreign  branches of U.S. banks. The Portfolio
may also  enter into  repurchase  agreements  and may invest in trust  preferred
securities and zero coupon securities.

The Bond Portfolio  invests primarily in high quality  securities.  Under normal
market  conditions,  the  Portfolio  will  invest at least 65% of its  assets in
securities  rated within the three highest quality rating  categories of Moody's
(Aaa,  Aa and A) or S&P (AAA,  AA and A), or if unrated,  in bonds judged by the
Fund's  Adviser,  to be of  comparable  quality  at the  time of  purchase.  The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated,  of equivalent  quality as determined by the Adviser,
but will not  purchase  bonds  rated  below B3 by  Moody's or B- by S&P or their
equivalent.

The Portfolio may, for hedging  purposes,  enter into forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.
    

Except for limitations imposed by the Bond Portfolio's  investment  restrictions
(see "INVESTMENT RESTRICTIONS"),  there is no limit as to the proportions of the
Portfolio which may be invested in any of the eligible investments;  however, it
is a policy  of the  Portfolio  that its  non-governmental  investments  will be
spread  among a  variety  of  companies  and  will  not be  concentrated  in any
industry.

   
The Bond  Portfolio  cannot  guarantee a gain or eliminate the risk of loss. The
net asset value of the  Portfolio's  shares will  fluctuate  with changes in the
market price of the Portfolio's  investments,  which tend to vary inversely with
changes in prevailing interest rates and, to a lesser extent, changes in foreign
currency exchange rates. 
    

BALANCED PORTFOLIO

The Balanced  Portfolio  seeks a balance of growth and income from a diversified
portfolio  of equity  and fixed  income  securities.  The  Portfolio  also seeks
long-term preservation of capital through a quality-oriented investment approach
that is designed to reduce risk.

In  seeking  its  objectives  of a balance  of  growth  and  income,  as well as
long-term  preservation  of  capital,  the  Portfolio  invests in a  diversified
portfolio of equity and fixed income securities.  The Portfolio  invests,  under
normal  circumstances,  at least 50%, but no more than 75%, of its net assets in
common stocks and other equity  investments.  The Portfolio's equity investments
consist of common stocks,  preferred stocks, warrants and securities convertible
into common  stocks,  of  companies  that,  in the  Adviser's  judgment,  are of
above-average  financial quality and offer the prospect for above-average growth
in earnings,  cash flow, or assets  relative to the overall market as defined by
the  Standard  and Poor's 500  Composite  Stock  Price Index  ("S&P  500").  The
Portfolio will invest  primarily in securities  issued by medium- to large-sized
domestic  companies with annual  revenues or market  capitalization  of at least
$600  million,  and which,  in the opinion of the Adviser,  offer  above-average
potential for price  appreciation.  The  Portfolio  seeks to invest in companies
that have relatively  consistent and  above-average  rates of growth;  companies
that  are  in a  strong  financial  position  with  high  credit  standings  and
profitability;  firms with important business franchises,  leading products,  or
dominant marketing and distribution systems; companies guided by experienced and
motivated  managements;  and companies selling at attractive market  valuations.
The Adviser believes that companies with these  characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.

At least 65% of the value of the  Portfolio's  common  stocks will be of issuers
which  qualify,  at the time of purchase,  for one of the three  highest  equity
earnings  and  dividends  ranking  categories  (A+,  A, or A-) of S&P, or if not
ranked by S&P,  are  judged to be of  comparable  quality  by the  Adviser.  S&P
assigns  earnings and dividends  rankings to  corporations  based on a number of
factors,  including stability and growth of earnings and dividends.  Rankings by
S&P are not an appraisal of a company's  creditworthiness,  as is true for S&P's
debt security  ratings,  nor are these rankings intended as a forecast of future
stock  market  performance.  In addition to using S&P  rankings of earnings  and

                                       4
<PAGE>

dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.

   
To enhance income and stability,  the Portfolio's remaining assets are allocated
to bonds and  other  fixed  income  securities,  including  cash  reserves.  The
Portfolio  will  normally  invest 25% to 50% of its net  assets in fixed  income
securities.  However,  at least 25% of the Portfolio's net assets will always be
invested in fixed income  securities.  The Portfolio can invest in a broad range
of corporate bonds and notes,  convertible  bonds, and preferred and convertible
preferred  securities.  It may also  purchase  U.S.  Government  securities  and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home  Loan  Banks,  Farm  Credit  Banks,  and the  Federal  Home  Loan  Mortgage
Corporation.  The  Portfolio  may also invest in  obligations  of  international
agencies,  foreign debt securities (both U.S. and non-U.S.  dollar-denominated),
mortgage-backed and other asset-backed securities,  municipal obligations, trust
preferred  securities,  restricted  securities issued in private  placements and
zero coupon securities.
    

For liquidity and defensive purposes,  the Portfolio may invest without limit in
cash  and  in  money  market  securities  such  as  commercial  paper,  bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S.  banks.  The Portfolio may also enter into  repurchase  agreements  with
respect to U.S. Government securities.

   
Not less than 50% of the  Portfolio's  debt  securities will be invested in debt
obligations,  including  money  market  instruments,  that  (a)  are  issued  or
guaranteed by the U.S. Government,  (b) are rated at the time of purchase within
the two highest ratings categories by any  nationally-recognized  rating service
or (c) if not rated, are judged by the Adviser to be of a quality  comparable to
obligations  rated as  described  in (b)  above.  Not less  than 80% of the debt
obligations  in which the Portfolio  invests  will, at the time of purchase,  be
rated within the three highest ratings categories of any such service or, if not
rated, will be judged to be of comparable  quality by the Adviser.  Up to 20% of
the  Portfolio's  debt  securities may be invested in bonds rated below A but no
lower than B by Moody's or S&P, or unrated  securities  judged by the Adviser to
be of comparable quality.
    

The Portfolio  will,  on occasion,  adjust its mix of  investments  among equity
securities,  bonds, and cash reserves. In reallocating investments,  the Adviser
weighs the  relative  values of different  asset  classes and  expectations  for
future returns. In doing so, the Adviser analyzes,  on a global basis, the level
and  direction  of  interest  rates,  capital  flows,  inflation   expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market."  Shifts  between stocks and
fixed income  investments  are expected to occur in generally  small  increments
within the guidelines adopted in this prospectus. The Portfolio is designed as a
conservative long-term investment program.

While the Portfolio emphasizes U.S. equity and debt securities,  it may invest a
portion of its assets in foreign securities,  including depositary receipts. The
Portfolio's  foreign holdings will meet the criteria  applicable to its domestic
investments.  The international  component of the Portfolio's investment program
is intended to increase diversification, thus reducing risk, while providing the
opportunity for higher returns.

In addition,  the Portfolio may invest in securities on a when-issued or forward
delivery  basis.  The  Portfolio  may, for hedging  purposes,  purchase  forward
foreign currency exchange  contracts and foreign  currencies in the form of bank
deposits.   The  Portfolio   may  also  purchase   other  foreign  money  market
instruments,  including, but not limited to, bankers' acceptances,  certificates
of deposit,  commercial paper,  short-term government obligations and repurchase
agreements.

The Balanced  Portfolio  cannot  guarantee a gain or eliminate the risk of loss.
The net asset  value of the shares of the  Portfolio  will  increase or decrease
with changes in the market price of the Portfolio's investments and, to a lesser
extent, changes in foreign currency exchange rates. 

GROWTH AND INCOME PORTFOLIO

The Growth and Income  Portfolio  seeks  long-term  growth of  capital,  current
income and growth of income. In pursuing these three  objectives,  the Portfolio
invests primarily in common stocks, preferred stocks, and securities convertible
into common stocks of companies  which offer the prospect for growth of earnings
while paying higher than average current dividends.  Over time, continued growth
of earnings tends to lead to higher  dividends and enhancement of capital value.
The  Portfolio   allocates  its  investments  among  different   industries  and
companies,  and changes its portfolio  securities for investment  considerations
and not for trading purposes.

The  Portfolio  attempts  to achieve  its  investment  objectives  by  investing
primarily in dividend  paying common  stocks,  preferred  stocks and  securities
convertible into common stocks.  The Portfolio may also purchase such securities

                                       5
<PAGE>

   
which do not pay  current  dividends  but which  offer  prospects  for growth of
capital and future income.  Convertible  securities (which may be current coupon
or zero coupon securities) are bonds,  notes,  debentures,  preferred stocks and
other securities which may be converted or exchanged at a stated or determinable
exchange ratio into  underlying  shares of common stock.  The Portfolio may also
invest  in  nonconvertible  preferred  stocks  consistent  with the  Portfolio's
objectives.  From  time to time,  when the  Adviser  feels  such a  position  is
advisable in light of economic or market  conditions,  the  Portfolio may invest
without  limitation  in cash and cash  equivalents.  The Portfolio may invest in
foreign securities and in repurchase agreements.
    

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.

The Growth and Income Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset value of the  Portfolio's  shares will increase or decrease
with  changes in the market  prices of the  Portfolio's  investments  and,  to a
lesser extent, changes in foreign currency exchange rates.

CAPITAL GROWTH PORTFOLIO

The Capital Growth Portfolio seeks to maximize  long-term capital growth through
a broad and flexible  investment  program.  The Portfolio  invests in marketable
securities,  principally  common  stocks and,  consistent  with its objective of
long-term capital growth, preferred stocks. However, in order to reduce risk, as
market or economic  conditions  periodically  warrant,  the  Portfolio  may also
invest up to 25% of its assets in short-term debt instruments.

In its examination of potential investments,  the Adviser considers, among other
things, the issuer's financial strength,  management  reputation,  absolute size
and overall industry position.

Equity investments can have diverse financial characteristics,  and the Trustees
believe that the  opportunity  for capital growth may be found in many different
sectors of the market at any  particular  time.  In contrast to the  specialized
investment  policies  of some  capital  appreciation  funds,  the  Portfolio  is
therefore free to invest in a wide range of marketable  securities  offering the
potential for growth.  This enables the Portfolio to pursue investment values in
various sectors of the stock market including:

     1.   Companies  that generate or apply new  technologies,  new and improved
          distribution  techniques,  or  new  services,  such  as  those  in the
          business equipment,  electronics,  specialty merchandising, and health
          service industries.

     2.   Companies  that  own or  develop  natural  resources,  such as  energy
          exploration or precious metals companies.

     3.   Companies  that  may  benefit  from  changing   consumer  demands  and
          lifestyles,    such   as   financial    service    organizations   and
          telecommunications companies.

     4.   Foreign companies.

While emphasizing  investments in companies with above-average growth prospects,
the Portfolio may also purchase and hold equity securities of companies that may
have only average growth prospects,  but seem undervalued due to factors thought
to be of a temporary  nature which may cause their securities to be out of favor
and to trade at a price below their potential value.

   
The Portfolio, as a matter of nonfundamental policy, may invest up to 20% of its
net  assets in  intermediate  to longer  term debt  securities  when  management
anticipates  that the  total  return  on debt  securities  is likely to equal or
exceed the total  return on common  stocks over a selected  period of time.  The
Portfolio may purchase  investment-grade debt securities,  which are those rated
Aaa, Aa, A or Baa by Moody's,  or AAA,  AA, A or BBB by S&P, or, if unrated,  of
equivalent quality as determined by the Adviser. The Portfolio's intermediate to
longer  term debt  securities  may also  include  those  which  are rated  below
investment  grade,  as long as no more than 5% of its net assets are invested in
such securities.
    

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts  and foreign  currencies in the form of bank  deposits.  The
Portfolio may also purchase other foreign money market  instruments,  including,
but not limited to, bankers'  acceptances,  certificates of deposit,  commercial
paper, short-term government obligations and repurchase agreements.

The Capital Growth  Portfolio  cannot  guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.

                                       6
<PAGE>

GLOBAL DISCOVERY PORTFOLIO

The Global Discovery Portfolio seeks above-average capital appreciation over the
long term by investing  primarily in the equity  securities  of small  companies
located  throughout the world.  The Portfolio is designed for investors  looking
for  above-average  appreciation  potential  (when  compared  with  the  overall
domestic  stock  market as reflected  by Standard & Poor's 500  Composite  Price
Index) and the  benefits of  investing  globally,  but who are willing to accept
above-average  stock market risk, the impact of currency  fluctuation and little
or no current income.

In pursuit of its objective,  the Portfolio generally invests in small,  rapidly
growing companies that offer the potential for above-average returns relative to
larger  companies,  yet are frequently  overlooked  and thus  undervalued by the
market.  The Portfolio has the flexibility to invest in any region of the world.
It can invest in companies based in emerging markets, typically in the Far East,
Latin  America and lesser  developed  countries  in Europe,  as well as in firms
operating in developed economies,  such as those of the United States, Japan and
Western  Europe.  The Portfolio will limit  investments in securities of issuers
located in Eastern Europe to 5% of its total assets.

The Adviser  invests  the  Portfolio's  assets in  companies  it believes  offer
above-average  earnings, cash flow or asset growth potential. It also invests in
companies  that may receive  greater market  recognition  over time. The Adviser
believes  these  factors offer  significant  opportunity  for long-term  capital
appreciation.  The Adviser  evaluates  investments for the Portfolio from both a
macroeconomic  and  microeconomic   perspective,   using  fundamental  analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible  investments.  When  evaluating  an  individual  company,  the
Adviser  takes into  consideration  numerous  factors,  including  the depth and
quality  of  management;   a  company's  product  line,  business  strategy  and
competitive  position;  research and development  efforts;  financial  strength,
including  degree of  leverage;  cost  structure;  revenue and  earnings  growth
potential;   price-earnings   ratios  and  other   stock   valuation   measures.
Secondarily,  the Adviser weighs the attractiveness of the country and region in
which a company is located.

Under  normal  circumstances,  the  Portfolio  invests at least 65% of its total
assets in the equity  securities of small companies.  While the Adviser believes
that smaller,  lesser-known  companies can offer greater  growth  potential than
larger,  more established  firms, the former also involve greater risk and price
volatility.  To help reduce  risk,  the  Portfolio  expects,  under usual market
conditions,  to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate  investments among at least three countries at
all times, including the United States.

   
The Portfolio  may invest up to 35% of its total assets in equity  securities of
larger  companies  throughout  the world and in debt  securities  if the Adviser
determines that the capital  appreciation of debt securities is likely to exceed
the capital  appreciation  of equity  securities.  The  Portfolio  may  purchase
investment-grade  bonds,  those rated Aaa, Aa, A or Baa by Moody's or AAA, AA, A
or BBB by S&P or,  if  unrated,  of  equivalent  quality  as  determined  by the
Adviser.  The  Portfolio  may also  invest  up to 5% of its net  assets  in debt
securities rated below investment-grade.  The Portfolio may invest in securities
rated D by S&P at the time of purchase,  which may be in default with respect to
payment of principal or interest.
    

The Portfolio  invests  primarily in companies  whose  individual  equity market
capitalizations  would  place  them in the  same  size  range  as  companies  in
approximately  the lowest 20% of world market  capitalization  as represented by
the Salomon Brothers Broad Market Index, an index comprised of equity securities
of more than 6,500 small,  medium and large-sized  companies based in 22 markets
around the globe.  Based on this policy,  the  companies  held by the  Portfolio
typically  will  have  individual  equity  market   capitalizations  of  between
approximately $50 million and $2 billion (although the Portfolio will be free to
invest in smaller  capitalization  issues  that  satisfy  the  Portfolio's  size
standard).  Furthermore,  the median market capitalization of the Portfolio will
not exceed $750 million.

The  equity  securities  in which the  Portfolio  may  invest  consist of common
stocks,  preferred  stocks (either  convertible or  nonconvertible),  rights and
warrants.  These  securities  may be listed on the U.S.  or  foreign  securities
exchanges or traded  over-the-counter.  For capital appreciation  purposes,  the
Portfolio may purchase notes, bonds, debentures,  government securities and zero
coupon bonds (any of which may be convertible or nonconvertible).  The Portfolio
may invest in foreign securities and American  Depositary  Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities,  and engage in strategic transactions.  In
addition,  the Portfolio may invest in illiquid or  restricted  securities.  For
temporary  defensive  purposes,  the  Portfolio  may,  during  periods  in which
conditions in securities markets warrant,  invest without limit in cash and cash
equivalents.

                                       7
<PAGE>

The Global Discovery  Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease  with changes in the market price of the  Portfolio's  investments  and
changes in foreign currency exchange rates.

SPECIAL RISK CONSIDERATIONS FOR GLOBAL DISCOVERY PORTFOLIO

The Portfolio is designed for long-term  investors who can accept  international
investment  risk.  Since the  Portfolio  normally  will invest in both U.S.  and
foreign  securities  markets,  changes in the Portfolio's share price may have a
low  correlation  with  movements  in  the  U.S.  markets,  which  enhances  the
Portfolio's  appeal as a diversification  tool. The Portfolio's share price will
reflect the movements of the different stock markets in which it is invested and
the different currencies in which the investments are denominated.  The strength
or weakness of the U.S. dollar against  foreign  currencies is likely to account
for  part  of the  Portfolio's  investment  performance,  although  the  Adviser
believes that,  over the long term, the impact of currency  changes on Portfolio
performance will not be as significant as changes in the underlying investments.
As with any long-term investment, the value of shares when sold may be higher or
lower than when purchased.

Global investing  involves economic and political  considerations  not typically
found in U.S. markets. These considerations,  which may favorably or unfavorably
affect  the  Portfolio's  performance,  include  changes in  exchange  rates and
exchange rate controls (which may include  suspension of the ability to transfer
currency  from  a  given  country),   costs  incurred  in  conversions   between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility,  the difficulty of enforcing
obligations  in other  countries,  less  securities  regulation,  different  tax
provisions  (including  withholding  on  interest  and  dividends  paid  to  the
Portfolio), war, expropriation, political and social instability, and diplomatic
developments.

Further, the settlement period of securities transactions in foreign markets may
be longer than in domestic markets. These considerations generally are more of a
concern in  developing  countries.  For example,  the  possibility  of political
upheaval and the  dependence on foreign  economic  assistance  may be greater in
these countries than in developed  countries.  The Adviser seeks to mitigate the
risks associated with these  considerations  through  diversification and active
professional management.

There is typically less publicly  available  information  concerning foreign and
smaller companies than for domestic and larger, more established companies. Some
small companies have limited product lines,  distribution channels and financial
and managerial  resources.  Also,  because smaller companies normally have fewer
shares  outstanding than larger  companies and trade less frequently,  it may be
more  difficult  for the Portfolio to buy and sell  significant  amounts of such
shares without an unfavorable  impact on prevailing  market prices.  Some of the
companies  in which the  Portfolio  may invest may  distribute,  sell or produce
products  which have recently been brought to market and may be dependent on key
personnel with varying degrees of experience.

INTERNATIONAL PORTFOLIO

   
The International  Portfolio seeks long-term growth of capital primarily through
diversified  holdings of marketable  foreign equity  investments.  The Portfolio
invests in companies,  wherever  organized,  which do business primarily outside
the United States. The Portfolio intends to diversify  investments among several
countries and to have  represented  in its holdings  business  activities in not
less than three different countries, excluding the United States.
    

The Portfolio invests  primarily in equity securities of established  companies,
listed  on  foreign  exchanges,   which  the  Adviser  believes  have  favorable
characteristics.  It may also  invest  in fixed  income  securities  of  foreign
governments and companies.  However,  management intends to maintain a portfolio
consisting  primarily of equity securities.  Investing in foreign securities may
involve a greater  degree of risk than  investing in domestic  securities due to
the  possibility  of exchange  rate  fluctuations  and exchange  controls,  less
publicly  available   information,   more  volatile  markets,   less  securities
regulation,  less favorable tax provisions, war and expropriation (see "POLICIES
AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS--Foreign Securities").

The Portfolio has no present  intention of altering its general  policy of being
primarily invested under normal conditions in foreign  securities.  However,  in
the event of exceptional conditions abroad, the Portfolio may temporarily invest
all or a portion of its assets in Canadian  or U.S.  Government  obligations  or
currencies,  or  securities  of  companies  incorporated  in  and  having  their
principal activities in Canada or the United States.

The Portfolio  may, for hedging  purposes,  purchase  forward  foreign  currency
exchange  contracts,  foreign currency options and futures contracts and foreign
currencies in the form of bank  deposits.  The Portfolio may also purchase other


                                       8
<PAGE>

foreign  money  market  instruments,  including,  but not limited  to,  bankers'
acceptances,  certificates of deposit,  commercial paper,  short-term government
and corporate obligations and repurchase agreements.

The  International  Portfolio  cannot  guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease  with changes in the market price of the  Portfolio's  investments  and
changes in foreign currency exchange rates.

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

                             POLICIES AND TECHNIQUES
                          APPLICABLE TO THE PORTFOLIOS
--------------------------------------------------------------------------------

Except as  otherwise  noted  below,  the  following  description  of  additional
investment policies and techniques is applicable to all of the Portfolios.

   
REPURCHASE AGREEMENTS

As a means of earning  income for periods as short as  overnight,  the Fund,  on
behalf of a  Portfolio,  may enter  into  repurchase  agreements  with U.S.  and
foreign  banks,  and  any  broker-dealer  which  is  recognized  as a  reporting
government   securities  dealer,  if  the   creditworthiness   of  the  bank  or
broker-dealer  has been  determined by the Adviser to be of a sufficiently  high
quality. Under a repurchase agreement, a Portfolio acquires securities,  subject
to the seller's agreement to repurchase those securities at a specified time and
price.  Securities  subject to a repurchase  agreement  are held in a segregated
account and the seller agrees to maintain the market value of such securities at
least equal to 100.5% of the  repurchase  price on a daily basis.  If the seller
under a repurchase  agreement becomes insolvent,  the Fund's right to dispose of
the securities may be restricted. In the event of the commencement of bankruptcy
or insolvency  proceedings of the seller of the securities  before repurchase of
the securities  under a repurchase  agreement,  the Fund may encounter delay and
incur costs,  including a decline in value of the securities,  before being able
to sell the securities.

DEBT SECURITIES

The Bond,  Balanced,  Capital  Growth and Global  Discovery  Portfolios may each
invest in debt securities rated below investment-grade (those rated below Baa or
BBB). These  securities are commonly  referred to as "junk bonds" and can entail
greater price volatility and involve a higher degree of speculation with respect
to the  payment of  principal  and  interest  than higher  quality  fixed-income
securities.  The market prices of such lower rated debt  securities  may decline
significantly in periods of general economic difficulty.  The trading market for
these securities is generally less liquid than for higher rated securities,  and
a Portfolio  may have  difficulty  disposing of these  securities at the time it
wishes to do so. The lack of a liquid  secondary  market for certain  securities
may also  make it more  difficult  for a  Portfolio  to obtain  accurate  market
quotations for purposes of valuing its portfolio and  calculating  its net asset
value.  The lower the ratings of such debt  securities,  the greater their risks
render them like equity  securities.  In addition,  as interest  rates fall, the
prices of debt securities tend to rise and vice versa.  Should the rating of any
security  held by a Portfolio  be  downgraded  after the time of  purchase,  the
Adviser will  determine  whether it is in the best  interest of the Portfolio to
retain or dispose of the security. 

ILLIQUID OR RESTRICTED INVESTMENTS

The Portfolios may each invest in illiquid or restricted securities. The absence
of a trading  market  can make it  difficult  to  ascertain  a market  value for
illiquid  or  restricted  investments.   Disposing  of  illiquid  or  restricted
investments may involve  time-consuming  negotiation and legal expenses,  and it
may be  difficult  or  impossible  for a Portfolio  to sell them  promptly at an
acceptable price.
    

CONVERTIBLE SECURITIES

The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios  may each  invest in  convertible  securities  (bonds,
notes, debentures, preferred stocks and other securities convertible into common
stocks) which may offer higher income than the common stocks into which they are
convertible.  The  convertible  securities  in which each  Portfolio  may invest
include fixed income or zero coupon debt  securities,  which may be converted or
exchanged at a stated or determinable  exchange ratio into underlying  shares of
common  stock.  Prior  to  their  conversion,  convertible  securities  may have
characteristics similar to non-convertible securities.

                                       9
<PAGE>

While convertible  securities  generally offer lower yields than non-convertible
debt  securities  of similar  quality,  their prices may reflect  changes in the
value of the underlying common stock. Although to a lesser extent than with debt
securities  generally,  the  market  value of  convertible  securities  tends to
decline as  interest  rates  increase  and,  conversely,  tends to  increase  as
interest rates decline.  Convertible securities entail less credit risk than the
issuer's common stock.  The ratings of the  convertible  securities in which the
Portfolios  invest will be  comparable to the ratings of the  Portfolios'  fixed
income securities.

MORTGAGE AND OTHER ASSET-BACKED SECURITIES

The Bond Portfolio and the Balanced Portfolio may each invest in mortgage-backed
securities,  which are  securities  representing  interests in pools of mortgage
loans.  These securities provide  shareholders with payments  consisting of both
interest and principal as the  mortgages in the  underlying  mortgage  pools are
paid off.

The timely  payment of  principal  and  interest on  mortgage-backed  securities
issued or guaranteed by the Government National Mortgage Association ("GNMA") is
backed by GNMA and the full  faith  and  credit  of the U.S.  Government.  These
guarantees,   however,   do  not  apply  to  the   market   value  or  yield  of
mortgage-backed  securities or to the value of Portfolio shares.  Also, GNMA and
other mortgage-backed securities may be purchased at a premium over the maturity
value of the  underlying  mortgages.  This premium is not guaranteed and will be
lost  if  prepayment  occurs.  In  addition,  either  Portfolio  may  invest  in
mortgage-backed securities issued by other issuers, such as the Federal National
Mortgage Association, ("FNMA"), which are not guaranteed by the U.S. Government.
Moreover,  the Portfolios may invest in debt  securities  which are secured with
collateral  consisting of  mortgage-backed  securities,  such as  collateralized
mortgage   obligations   ("CMOs"),   and  in  other  types  of  mortgage-related
securities.

Unscheduled  or early  payments  on the  underlying  mortgages  may  shorten the
securities'  effective  maturities  and lessen  their growth  potential.  Either
Portfolio  may agree to  purchase  or sell these  securities  with  payment  and
delivery  taking place at a future date. A decline in interest rates may lead to
a faster rate of repayment of the underlying mortgages, and expose the Portfolio
to  a  lower  rate  of  return  upon  reinvestment.  To  the  extent  that  such
mortgage-backed  securities are held by the Portfolio,  the prepayment  right of
mortgagors  may limit the increase in net asset value of the  Portfolio  because
the  value  of the  mortgage-backed  securities  held by the  Portfolio  may not
appreciate as rapidly as the price of non-callable debt securities.

The Portfolios may also invest in securities  representing interests in pools of
certain  other  consumer  loans,   such  as  automobile  loans  or  credit  card
receivables.  In some cases,  principal  and  interest  payments  are  partially
guaranteed  by a letter of credit  from a  financial  institution.  Asset-backed
securities  are  subject  to the  risk of  prepayment  and  the  risk  that  the
underlying loans will not be repaid. 

   
FOREIGN SECURITIES

The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios  may  each  invest  without  limit,  except  as may be
applicable to debt securities generally, in U.S. dollar-denominated foreign debt
securities  (including  those issued by the Dominion of Canada and its provinces
and other debt  securities  which meet the criteria  applicable to a Portfolio's
domestic  investments),  and in  certificates of deposit issued by foreign banks
and foreign branches of United States banks, to any extent deemed appropriate by
the Adviser.  The Bond  Portfolio may invest up to 20% of its assets in non-U.S.
dollar-denominated foreign debt securities. The Balanced Portfolio may invest up
to 20% of its  debt  securities  in  non-U.S.  dollar-denominated  foreign  debt
securities,  and may  invest  up to 25% of its  equity  securities  in  non-U.S.
dollar-denominated  foreign equity  securities.  The Growth and Income Portfolio
may invest up to 25% of its assets in non-U.S.  dollar-denominated securities of
foreign  issuers.  The  Capital  Growth  Portfolio  may  invest up to 25% of its
assets,  and the Global Discovery and  International  Portfolios may each invest
without  limit,  in non-U.S.  dollar-denominated  equity  securities  of foreign
issuers.  Global investing  involves economic and political  considerations  not
typically found in U.S. markets.  These  considerations,  which may favorably or
unfavorably affect the Fund's performance, include changes in exchange rates and
exchange rate controls (which may include  suspension of the ability to transfer
currency  from  a  given  country),   costs  incurred  in  conversions   between
currencies, nonnegotiable brokerage commissions, different accounting standards,
lower trading volume and greater market volatility,  the difficulty of enforcing
obligations  in other  countries,  less  securities  regulation,  different  tax
provisions  (including  withholding on interest and dividends paid to the Fund),
war,   expropriation,   political  and  social   instability,   and   diplomatic
developments.  Further,  the  settlement  period of securities  transactions  in
foreign  markets may be longer than in domestic  markets.  These  considerations
generally  are more of a concern  in  developing  countries.  For  example,  the
possibility  of  political  upheaval  and the  dependence  on  foreign  economic
    

                                       10
<PAGE>

   
assistance may be greater in these  countries than in developed  countries.  The
Adviser seeks to mitigate the risks associated with these considerations through
diversification and active professional management. 
    

WHEN-ISSUED SECURITIES

   
A Portfolio may from time to time  purchase  securities  on a  "when-issued"  or
"forward  delivery"  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 such
securities  take place at a later date.  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;
however,  it is the Fund's  intention that each Portfolio will be fully invested
to the extent  practicable  and  subject to the  policies  stated  above.  While
when-issued or forward  delivery  securities may be sold prior to the settlement
date,  the  Portfolio  intends to purchase such  securities  with the purpose of
actually acquiring them unless a sale appears desirable for investment  reasons.
At the time a  Portfolio  makes the  commitment  to  purchase  a  security  on a
when-issued  or forward  delivery  basis,  it will  record the  transaction  and
reflect  the amount due and the value of the  security  in  determining  the net
asset  value of a  Portfolio.  The market  value of the  when-issued  or forward
delivery  securities  may be more or less than the purchase price payable at the
settlement date. The Fund does not believe that a Portfolio's net asset value or
income will be adversely affected by the purchase of securities on a when-issued
or forward  delivery basis.  Each Portfolio will establish a segregated  account
with its custodian in which it will maintain cash,  U.S.  Government  securities
and other liquid assets at least equal in value to commitments  for  when-issued
or forward delivery  securities.  Such segregated  securities either will mature
or, if necessary, be sold on or before the settlement date. 
    

INDEXED SECURITIES

The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in  indexed
securities,  the  value  of which  is  linked  to  currencies,  interest  rates,
commodities,  indices or other financial indicators  ("reference  instruments").
The interest rate or (unlike most fixed-income  securities) the principal amount
payable at  maturity  of an indexed  security  may be  increased  or  decreased,
depending  on  changes  in  the  value  of  the  reference  instrument.  Indexed
securities may be positively or negatively  indexed, so that appreciation of the
reference  instrument may produce an increase or a decrease in the interest rate
or value at maturity of the  security.  In addition,  the change in the interest
rate or value at maturity of the security may be some  multiple of the change in
the value of the reference  instrument.  Thus, in addition to the credit risk of
the  security's  issuer,  the Fund will bear the  market  risk of the  reference
instrument. 

LOANS OF PORTFOLIO SECURITIES

   
The Fund may lend the  portfolio  securities  of any  Portfolio  (other than the
Money  Market  Portfolio)  provided:  (1) the loan is  secured  continuously  by
collateral consisting of U.S. Government securities, or cash or cash equivalents
adjusted daily to have a market value at least equal to the current market value
of the securities  loaned; (2) the Fund may at any time call the loan and regain
the securities  loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities;  and (4) the value of such securities loaned will
not at any time  exceed 10% of the value of the  Portfolio's  total  assets.  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 a  Portfolio  enters  into a loan,  the  Adviser
considers all relevant facts and circumstances including the creditworthiness of
the borrower. 
    

ZERO COUPON SECURITIES

   
The Bond,  Balanced,  Growth and Income,  Capital Growth,  Global  Discovery and
International  Portfolios may each invest in zero coupon  securities,  including
U.S.  Government  securities and privately  stripped coupons on and receipts for
U.S. Government  securities.  These securities pay no cash income but are issued
at substantial  discounts  from their value at maturity.  When held to maturity,
their entire return, which consists of the accretion of discount, comes from the
difference  between their issue price and their maturity value.  Because they do
not pay interest until  maturity,  zero coupon  securities tend to be subject to
greater  interim  fluctuation of market value in response to changes in interest
rates than interest-paying securities of similar maturities.

REAL ESTATE INVESTMENT TRUSTS

The Bond  Portfolio  and the  Growth  and  Income  Portfolio  each may  purchase
instruments such as real estate  investment  trusts,  commercial and residential
mortgage-backed  securities,  and real estate  financings.  Real  estate-related
    

                                       11
<PAGE>

   
instruments  are  sensitive to factors such as changes in real estate values and
property  taxes,  interest  rates,  cash flow of underlying  real estate assets,
supply and demand, and the management skill and  creditworthiness of the issuer.
Real  estate-related  instruments  may also be  affected  by tax and  regulatory
requirements. 
    

DERIVATIVES

The following  descriptions of Options,  Options on Securities Indexes,  Futures
Contracts,  and Forward Foreign Currency  Exchange  Contracts,  Foreign Currency
Futures  Contracts and Foreign  Currency Options discuss types of derivatives in
which certain of the Portfolios may invest. 

OPTIONS

The Fund may write covered call options on  securities  of any Portfolio  (other
than the Money Market  Portfolio)  in an attempt to earn income.  The  Balanced,
Growth and Income,  Capital  Growth and  International  Portfolios may each also
write put options to a limited extent in an attempt to earn additional income on
their  portfolios,  consistent with their  investment  objectives,  and they may
purchase  call and put options  for  hedging  purposes.  Risks  associated  with
writing  put  options   include  the  possible   inability  to  effect   closing
transactions  at  favorable  prices.  In  addition,   the  Fund  may  engage  in
over-the-counter  options  transactions with  broker-dealers who make markets in
these  options.  Over-the-counter  options  purchased by the Fund and  portfolio
securities  "covering"  the Fund's  obligation  pursuant to an  over-the-counter
option  may be deemed to be  illiquid  and may not be  readily  marketable.  The
Adviser will monitor the  creditworthiness  of dealers with whom the Fund enters
into such  options  transactions  under the  general  supervision  of the Fund's
Trustees.  The Fund may forego the benefit of  appreciation in its Portfolios on
securities sold pursuant to call options. 

OPTIONS ON SECURITIES INDEXES

   
The  Bond,  Balanced,  Growth  and  Income,  Capital  Growth  and  International
Portfolios may each purchase put and call options on securities indexes to hedge
against the risk of unfavorable price movements adversely affecting the value of
a Portfolio's  securities.  Options on securities indexes are similar to options
on securities except that settlement is made in cash.
    

Unlike a securities option, which gives the holder the right to purchase or sell
a specified security at a specified price, an option on a securities index gives
the holder the right to receive a cash "exercise settlement amount" equal to (i)
the  difference  between the  exercise  price of the option and the value of the
underlying  stock index on the exercise date,  multiplied by (ii) a fixed "index
multiplier."  In  exchange  for  undertaking  the  obligation  to make such cash
payment, the writer of the securities index option receives a premium.

Gains or losses on a Portfolio's transactions in securities index options depend
on price movements in the stock market generally (or, for narrow market indexes,
in a  particular  industry  or  segment  of the  market)  rather  than the price
movements of  individual  securities  held by a Portfolio  of the Fund.  In this
respect,  purchasing  a stock index put option is analogous to the purchase of a
put on a securities index futures contract.

A Portfolio  may sell  securities  index options prior to expiration in order to
close out its positions in securities  index options which it has  purchased.  A
Portfolio may also allow options to expire unexercised.

FUTURES CONTRACTS

To protect against the effects of adverse  changes in interest rates  (sometimes
known as "hedging"),  the Bond, Balanced and International  Portfolios may each,
to a limited  extent,  enter into  futures  contracts on debt  securities.  Such
futures  contracts  obligate the Fund, at maturity,  to purchase or sell certain
debt  securities.  The Bond,  Balanced,  Growth and Income,  Capital  Growth and
International  Portfolios may each enter into securities index futures contracts
to protect  against  changes in  securities  market  prices.  Each of these five
Portfolios  may purchase and write put and call options on futures  contracts of
the type  which such  Portfolio  is  authorized  to enter into and may engage in
related  closing  transactions.  This type of option must be traded on a U.S. or
foreign exchange or board of trade.

When interest rates are rising or stock or security prices are falling,  futures
contracts can offset a decline in the value of a Portfolio's  current  portfolio
securities. When rates are falling or stock or security prices are rising, these
contracts can secure better rates or prices for a Portfolio  than might later be
available in the market when it makes anticipated purchases.

The Fund will engage in  transactions  in futures  contracts and options thereon
only in an effort to protect a  Portfolio  against a decline in the value of the
Portfolio's  securities  or an  increase  in the  price of  securities  that the


                                       12
<PAGE>

   
Portfolio  intends to acquire.  Also,  the initial  margin  deposits for futures
contracts  and  premiums  paid for related  options may not be more than 5% of a
Portfolio's total assets. These transactions involve brokerage costs and require
the Fund to segregate assets, such as cash, U.S. Government securities and other
liquid  assets,  of a Portfolio  to cover  contracts  which would  require it to
purchase  securities.   A  Portfolio  may  lose  the  expected  benefit  of  the
transactions if interest rates or stock prices move in an unanticipated  manner.
Such unanticipated  changes in interest rates or stock prices may also result in
poorer overall  performance in a Portfolio than if the Fund had not entered into
any futures  transactions  for that Portfolio.  A Portfolio would be required to
make and maintain  "margin"  deposits in connection with transactions in futures
contracts. 
    

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS, FOREIGN CURRENCY 
FUTURES CONTRACTS AND FOREIGN CURRENCY OPTIONS

The  Bond,  Balanced,  Growth  and  Income,  Capital  Growth  and  International
Portfolios  may each enter into  forward  foreign  currency  exchange  contracts
("forward  contracts")  to the  extent of 15% of the  value of their  respective
total  assets,   for  hedging  purposes.   A  forward  contract  is  a  contract
individually  negotiated  and  privately  traded by  currency  traders and their
customers.  A forward  contract  involves  an  obligation  to purchase or sell a
specific  currency for an agreed price at a future date,  which may be any fixed
number of days from the date of the  contract.  The agreed price may be fixed or
with a specified range of prices.

The  International  Portfolio  may also  enter  into  foreign  currency  futures
contracts and foreign  currency options to the extent of 15% of the value of its
total assets,  for hedging  purposes.  Foreign  currency  futures  contracts are
standardized   contracts  traded  on  commodities  exchanges  which  involve  an
obligation  to  purchase  or  sell  a  predetermined  amount  of  currency  at a
predetermined  date at a specified  price.  The  purpose of entering  into these
contracts is to minimize the risk to the Portfolio  from adverse  changes in the
relationship  between the U.S. dollar and foreign currencies.  At the same time,
such  contracts  may  limit  potential  gain  from  a  positive  change  in  the
relationship  between the U.S. dollar and foreign currencies.  The Portfolio may
purchase and sell options on foreign currencies for hedging purposes in a manner
similar to that of transactions in forward contracts.  Unanticipated  changes in
currency prices may result in poorer overall  performance for the Portfolio than
if it had not engaged in forward  contracts,  foreign currency futures contracts
and foreign currency options.

STRATEGIC TRANSACTIONS AND DERIVATIVES APPLICABLE TO GLOBAL
DISCOVERY PORTFOLIO

   
The Global  Discovery  Portfolio  may, but is not required to,  utilize  various
other  investment  strategies as described  below to hedge various  market risks
(such as interest rates,  currency  exchange rates, and broad or specific equity
or fixed-income market movements),  to manage the effective maturity or duration
of fixed-income  securities in the Portfolio or to enhance potential gain. These
strategies  may be  executed  through  the  use of  derivative  contracts.  Such
strategies are generally  accepted as a part of modern portfolio  management and
are regularly utilized by many mutual funds and other  institutional  investors.
Techniques  and  instruments  may  change  over  time  as  new  instruments  and
strategies are developed or regulatory changes occur.
    

In the  course of  pursuing  these  investment  strategies,  the  Portfolio  may
purchase and sell  exchange-listed and  over-the-counter put and call options on
securities,  equity and  fixed-income  indices 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 without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased by
the  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  fixed-income
securities  in the  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 enhance  potential
gain  although no more than 5% of the  Portfolio's  assets will be  committed to
Strategic  Transactions  entered into for  non-hedging  purposes.  Any or all of
these investment techniques may be used at any time and in any combination,  and
there is no particular  strategy  that dictates the use of one technique  rather
than  another,  as use of any  Strategic  Transaction  is a function of numerous
variables  including market conditions.  The ability of the Portfolio to utilize
these Strategic  Transactions  successfully will depend on the Adviser's ability
to predict  pertinent market movements,  which cannot be assured.  The Portfolio


                                       13
<PAGE>

will comply with applicable  regulatory  requirements  when  implementing  these
strategies,   techniques  and  instruments.   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 and
not for speculative purposes.

Strategic  Transactions,  including derivative contracts,  have risks associated
with them  including  possible  default by the other  party to the  transaction,
illiquidity and, to the extent the Adviser's view as to certain market movements
is incorrect,  the risk that the use of such Strategic Transactions could result
in losses  greater  than if they had not been used.  Use of put and call options
may result in losses to the  Portfolio,  force the sale or purchase of portfolio
securities  at  inopportune  times or for prices higher than (in the case of put
options)  or lower than (in the case of call  options)  current  market  values,
limit the amount of appreciation the Portfolio can realize on its investments or
cause the  Portfolio  to hold a security  it might  otherwise  sell.  The use of
currency  transactions can result in the Portfolio  incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements or the inability to deliver or receive a specified currency.  The
use of  options  and  futures  transactions  entails  certain  other  risks.  In
particular,  the  variable  degree of  correlation  between  price  movements of
futures contracts and price movements in the related  portfolio  position of the
Portfolio  creates the possibility that losses on the hedging  instrument may be
greater  than  gains in the  value of the  Portfolio's  position.  In  addition,
futures and options markets may not be liquid in all  circumstances  and certain
over-the-counter  options may have no markets.  As a result, in certain markets,
the  Portfolio  might not be able to close out a transaction  without  incurring
substantial losses, if at all. Although the use of futures contracts and options
transactions  for  hedging  should  tend to  minimize  the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any  potential  gain  which  might  result  from an  increase  in  value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential  financial risk than would purchases of
options,  where the  exposure  is  limited to the cost of the  initial  premium.
Losses resulting from the use of Strategic  Transactions  would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions  had  not  been  utilized.  The  Strategic  Transactions  that  the
Portfolio may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.

SPECIAL SITUATION SECURITIES

From time to time, the Global  Discovery  Portfolio may invest in equity or debt
securities  issued by companies  that are  determined  by the Adviser to possess
"special situation" characteristics.  In general, a special situation company is
a company whose securities are expected to increase in value solely by reason of
a development  particularly or uniquely applicable to the company.  Developments
that may  create  special  situations  include,  among  others,  a  liquidation,
reorganization,  recapitalization or merger, material litigation,  technological
breakthrough  and new  management or  management  policies.  The principal  risk
associated  with  investments  in  special  situation   companies  is  that  the
anticipated  development  thought to create the special  situation may not occur
and the  investments  therefore  may not  appreciate  in value or may decline in
value.

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

                             INVESTMENT RESTRICTIONS
--------------------------------------------------------------------------------

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

                                       14
<PAGE>


The Fund may not,  on behalf  of any  Portfolio,  except  the  Global  Discovery
Portfolio:

      (1)with  respect to 75% of the value of the total  assets of a  Portfolio,
         invest more than 5% of the value of the Portfolio's total assets in the
         securities of any one issuer,  except U.S.  Government  securities and,
         with  respect to 100% of the value of the total  assets of a Portfolio,
         the Fund may not invest  more than 25% of the value of the  Portfolio's
         total assets in the securities of any one issuer, except U.S.
         Government securities;

      (2)pledge,  mortgage or  hypothecate  its assets,  except that,  to secure
         borrowings  permitted by the investment  restriction  (8) below, it may
         pledge  securities  having a market  value  at the time of  pledge  not
         exceeding 15% of the value of a Portfolio's  total assets and except in
         connection  with the writing of covered  call  options and the purchase
         and sale of futures contracts and options on futures contracts;

      (3)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 and the entry
         into repurchase agreements may be deemed to be loans;

      (4)enter into  repurchase  agreements or purchase any  securities if, as a
         result thereof, more than 10% of the total assets of a Portfolio (taken
         at market  value)  would be, in the  aggregate,  subject to  repurchase
         agreements  maturing in more than seven days and invested in restricted
         securities or securities which are not readily marketable;

      (5)purchase the securities of any issuer if such purchase would cause more
         than  10% of the  voting  securities  of  such  issuer  to be held by a
         Portfolio;

      (6)purchase  securities if such purchase  would cause more than 25% in the
         aggregate of the market value of the total assets of a Portfolio at the
         time of such  purchase to be invested in the  securities of one or more
         issuers  having  their  principal  business   activities  in  the  same
         industry,   provided   that  there  is  no  limitation  in  respect  to
         investments in obligations issued or guaranteed by the U.S.  Government
         or  its  agencies  or  instrumentalities  (for  the  purposes  of  this
         restriction,  telephone  companies  are  considered  to  be a  separate
         industry  from gas and  electric  public  utilities,  and  wholly-owned
         finance companies are considered to be in the industry of their parents
         if their  activities are primarily  related to financing the activities
         of the parents).

      (7)purchase or sell any put or call  options or any  combination  thereof,
         except that the Fund may purchase and sell options on futures contracts
         on debt securities,  options on securities indexes and securities index
         futures contracts and write covered call option contracts on securities
         owned  by a  Portfolio,  and may also  purchase  call  options  for the
         purpose of  terminating  its  outstanding  obligations  with respect to
         securities  upon which covered call option  contracts have been written
         (i.e.,   "closing   purchase   transactions"),   and  except  that  the
         International  Portfolio  may also purchase and sell options on foreign
         currency and on foreign currency futures contracts.

      (8)borrow money except from banks as a temporary measure for extraordinary
         or emergency  purposes  (each  Portfolio is required to maintain  asset
         coverage  (including  borrowings)  of 300% for all  borrowings)  and no
         purchases of securities for a Portfolio  will be made while  borrowings
         of that Portfolio  exceed 5% of the Portfolio's  assets (the payment of
         interest  on  borrowings  by a Portfolio  will reduce that  Portfolio's
         income).  In  addition,  the  Board of  Trustees  has  adopted a policy
         whereby  each  Portfolio  of the Fund may borrow up to 10% of its total
         assets; provided,  however, that each Portfolio may borrow up to 25% of
         its total assets for extraordinary or emergency purposes, including the
         facilitation of redemptions.

In addition, the Fund may not, on behalf of the Global Discovery Portfolio:

    (1) borrow  money  except  as  a  temporary  measure  for  extraordinary  or
        emergency  purposes  or except in  connection  with  reverse  repurchase
        agreements  provided that the Portfolio maintains asset coverage of 300%
        for all borrowings;

    (2) purchase or sell real estate  (except that the  Portfolio  may invest in
        (i) securities of companies which deal in real estate or mortgages,  and
        (ii) securities  secured by real estate or interests  therein,  and that
        the Portfolio reserves freedom of action to hold and to sell real estate
        acquired as a result of the  Portfolio's  ownership of  securities);  or
        purchase or sell physical  commodities or contracts relating to physical
        commodities;

    (3) act as an  underwriter  of  securities  issued by others,  except to the
        extent  that it may be  deemed an  underwriter  in  connection  with the
        disposition of portfolio securities of the Portfolio;

    (4) issue senior securities,  except as appropriate to evidence indebtedness
        which it is  permitted  to incur,  and except for shares of the separate
        classes or series of the Fund;  provided  that  collateral  arrangements
        with respect to currency-related contracts,  futures contracts,  options
        or other  permitted  investments,  including  deposits  of  initial  and


                                       15
<PAGE>

        variation  margin,  are not  considered  to be the  issuance  of  senior
        securities for purposes of this restriction;

    (5) purchase  any  securities  which would cause more than 25% of the market
        value of its total assets at the time of such purchase to be invested in
        the  securities of one or more issuers having their  principal  business
        activities  in the same  industry,  provided that there is no limitation
        with respect to investments  in obligations  issued or guaranteed by the
        U.S. Government,  its agencies or instrumentalities (for the purposes of
        this restriction, telephone companies are considered to be in a separate
        industry from gas and electric public  utilities,  wholly-owned  finance
        companies are  considered to be in the same industry of their parents if
        their  activities  are primarily  related to financing the activities of
        their   parents   and  each   foreign   government,   its   agencies  or
        instrumentalities as well as supranational organizations as a group, are
        each considered to be a separate industry);

    (6) with respect to 75% of its total  assets taken at market value  purchase
        more than 10% of the voting securities of any one issuer, or invest more
        than 5% of the value of its total  assets in the  securities  of any one
        issuer,  except obligations issued or guaranteed by the U.S. Government,
        its agencies or  instrumentalities  and except  securities of closed end
        investment companies;

    (7) make loans to other persons,  except (a) loans of portfolio  securities,
        provided  collateral  is  maintained at not less than 100% by marking to
        market daily, and (b) to the extent the entry into repurchase agreements
        and the purchase of debt  securities in accordance  with its  investment
        objective and investment policies may be deemed to be loans;

"Value" for the  purposes of all  investment  restrictions  shall mean the value
used in determining a Portfolio's net asset value (see "NET ASSET VALUE").
--------------------------------------------------------------------------------

                               INVESTMENT ADVISER
--------------------------------------------------------------------------------

The Fund retains the investment advisory firm of Scudder, Stevens & Clark, Inc.,
a  Delaware   corporation,   Two  International  Place,  Boston,   Massachusetts
02110-4103,  to manage each  Portfolio's  daily  investment and business affairs
subject to the policies  established by the Trustees.  The Trustees have overall
responsibility  for the  management  of the Fund under  Massachusetts  law.  The
Adviser is one of the most  experienced  investment  counsel firms in the United
States.  It was  established  in 1919 and  pioneered  the  practice of providing
investment counsel to individual clients on a fee basis. The principal source of
the Adviser's  income is  professional  fees received from providing  continuing
investment advice,  and the firm derives no income from brokerage,  insurance or
underwriting  of  securities.  Today,  it provides  investment  counsel for many
individuals  and  institutions,   including   insurance   companies,   colleges,
industrial  corporations,  and financial and banking organizations.  Directly or
through  affiliates,  the Adviser provides  investment  advice to over 50 mutual
fund portfolios.

For its advisory services to the Portfolios,  the Adviser receives  compensation
monthly at the following annual rates for each Portfolio:

                                                       Percent of the average
                                                       daily net asset values
                     Portfolio                           of each Portfolio
                     ---------                           -----------------

            Money Market Portfolio                             .370%

            Bond Portfolio                                     .475%

            Balanced Portfolio                                 .475%

            Growth and Income Portfolio                        .475%

            Capital Growth Portfolio                           .475%

            Global Discovery Portfolio                         .975%

   
            International Portfolio                            .875%*
    


   
*  For any  calendar  month  during  which  the  average  daily  net  assets  of
   International Portfolio exceed $500,000,000,  the fee payable for that month,
   with respect to the excess over $500,000,000, is calculated at an annual rate
   of .775%. As a result, the Adviser received compensation at an annual rate of
   .863% for the fiscal year ended December 31, 1996.
    

                                       16
<PAGE>


The  investment  advisory  fees  for  the  Global  Discovery  Portfolio  and the
International  Portfolio  are higher than those  charged many funds which invest
primarily in U.S. securities,  but are not necessarily higher than those charged
to funds with  investment  objectives  similar to the  investment  objectives of
these Portfolios.

   
Under the  investment  advisory  agreements  between the Fund, on behalf of each
Portfolio,  and the Adviser, the Fund is responsible for all its other expenses,
including  clerical  salaries;  fees and expenses  incurred in  connection  with
membership in investment company  organizations;  brokers'  commissions;  legal,
auditing and accounting  expenses;  taxes and governmental  fees; the charges of
custodians,  transfer  agents and other agents;  any other  expenses,  including
clerical expenses,  of issue, sale,  underwriting,  distribution,  redemption or
repurchase  of shares;  the expenses of and fees for  registering  or qualifying
securities  for sale;  the fees and expenses of the Trustees of the Fund who are
not affiliated with the Adviser;  the cost of preparing and distributing reports
and  notices to  shareholders.  The Fund is also  responsible  for its  expenses
incurred in connection  with  litigation,  proceedings  and claims and the legal
obligation  it may have to indemnify  its  officers  and  Trustees  with respect
thereto. The Adviser,  through Scudder Investor Services,  Inc., a subsidiary of
the Adviser,  places portfolio  transactions on behalf of the Fund's Portfolios.
In so doing, the Adviser seeks to obtain the most favorable net results. Subject
to the  foregoing,  the  Adviser  may  consider  sales of VA  contracts  and VLI
policies  for  which  the  Fund is an  investment  option,  as a  factor  in the
selection of firms to execute portfolio transactions.
    

In  addition  to  payments  for  investment  advisory  services  provided by the
Adviser, the Trustees, consistent with the Fund's investment advisory agreements
and underwriting  agreement,  have approved  payments to the Adviser and Scudder
Fund Accounting Corporation for clerical,  accounting and certain other services
they may provide the Fund.

   
Until  April 30,  1998,  the Adviser has agreed to waive part or all of its fees
for the Global Discovery Portfolio to the extent that the Portfolio's  expenses,
excluding Rule 12b-1 fees, will be maintained at 1.50% of average net assets.
    

PORTFOLIO MANAGEMENT

Each Portfolio is managed by a team of Scudder investment professionals who each
play an important role in the Portfolio's  management process. Team members work
together  to  develop  investment  strategies  and  select  securities  for  the
Portfolios. They are supported by Scudder's large staff of economists,  research
analysts,  traders,  and  other  investment  specialists  who work in  Scudder's
offices across the United States and abroad.  Scudder believes its team approach
benefits Fund  investors by bringing  together many  disciplines  and leveraging
Scudder's extensive resources. 

MONEY MARKET PORTFOLIO

   
Lead  Portfolio  Manager  Stephen  L.  Akers  has led Money  Market  Portfolio's
day-to-day  management  since 1995.  Mr.  Akers  joined the team in 1995 and has
managed several  fixed-income  portfolios  since joining Scudder in 1984.  David
Wines,  Portfolio Manager,  joined Scudder and the team in 1996. Mr. Wines helps
set the Portfolio's  overall strategy and has eight years of investment industry
experience.  Nicca Alcantara,  Portfolio  Manager,  has  responsibility  for the
Portfolio's day-to-day investments.  Ms. Alcantara, who came to Scudder in 1984,
has worked as a portfolio  manager since 1989 and joined the team in 1990. Debra
A. Hanson,  Portfolio Manager,  joined the team in 1996. Ms. Hanson assists with
the development  and execution of investment  strategy and has been with Scudder
since 1983.
    

BOND PORTFOLIO

Lead  Portfolio  Manager  William  M.  Hutchinson  has  had  responsibility  for
overseeing the Portfolio's  day-to-day operations and has guided the Portfolio's
investment  strategy since 1996. Mr. Hutchinson,  who has 23 years of investment
experience,  came to Scudder in 1986 as a portfolio  manager and joined the team
in 1987. Ruth Heisler,  Portfolio Manager,  helps set the Portfolio's investment
strategy.  Ms.  Heisler,  who  has  over  40  years  of  fixed-income  investing
experience, joined the team in 1986.

BALANCED PORTFOLIO

   
Lead  Portfolio  Manager  Valerie  F.  Malter  joined  Scudder  in  1995  and is
responsible for the Portfolio's  investment  strategy and daily  operation.  Ms.
Malter  has 11  years of  experience  as an  analyst  covering  a wide  range of
industries,  and three years of portfolio management  experience focusing on the
stocks of companies with medium- to large-sized market capitalizations.  William
M.  Hutchinson,  Portfolio  Manager,  helps set Scudder's  overall  fixed-income
investment strategy. Mr. Hutchinson,  who has 23 years of investment experience,
came to Scudder in 1986 as a portfolio manager. Ruth Heisler, Portfolio Manager,
    


                                       17
<PAGE>

has had  responsibility for the Portfolio's  fixed-income  investments since she
joined the team in 1986.  Ms.  Heisler has been  involved with bond research and
investing at Scudder since 1953.

GROWTH AND INCOME PORTFOLIO

   
Lead Portfolio Manager Robert T. Hoffman has  responsibility  for setting Growth
and Income  Portfolio's  stock  investing  strategy and oversees the Portfolio's
day-to-day  operations.  Mr. Hoffman,  who joined Scudder in 1990 as a portfolio
manager,  has 13 years  of  experience  in the  investment  industry,  including
several  years of pension  fund  management  experience.  Kathleen  T.  Millard,
Portfolio  Manager,  has worked in the  investment  industry since 1983 and as a
portfolio  manager since 1986. Ms.  Millard,  who joined  Scudder in 1991,  also
focuses on stock investing strategy and stock selection.  Benjamin W. Thorndike,
Portfolio  Manager,   is  the  Portfolio's  chief  analyst  and  strategist  for
convertible  securities.   Mr.  Thorndike,   who  has  18  years  of  investment
experience,  joined  Scudder in 1983 as a portfolio  manager.  Lori J. Ensinger,
Portfolio  Manager,  joined the team in 1996. Ms. Ensinger,  who has 14 years of
investment  industry  experience,  focuses  on stock  selection  and  investment
strategy,  a role she has played since joining Scudder in 1993. Deborah Chaplin,
Portfolio  Manager,  joined  Scudder and the team in 1996.  Ms. Chaplin has five
years  of  investment  experience  as a  securities  analyst  and  institutional
portfolio manager.
    

CAPITAL GROWTH PORTFOLIO

   
Lead Portfolio  Manager  William F. Gadsden assumed  responsibility  for setting
Capital  Growth   Portfolio's  stock  investing   strategy  and  overseeing  the
Portfolio's  day-to-day  operations in 1995. Mr. Gadsden joined the team in 1989
and Scudder in 1983 and has 15 years of investment  experience.  Bruce F. Beaty,
Portfolio  Manager,  joined  the team in 1995 and has been a  portfolio  manager
since joining Scudder in 1991.
    

GLOBAL DISCOVERY PORTFOLIO

   
Lead Portfolio Manager Gerald J. Moran sets the Portfolio's  investment strategy
and oversees its daily operation. Mr. Moran joined Scudder's equity research and
management  area in 1968 as an analyst and has focused on small  company  stocks
since 1982 and has been a portfolio manager since 1985. Sewall Hodges, Portfolio
Manager,  joined Scudder in 1995. Mr. Hodges,  who has 11 years of experience in
global  analysis and  portfolio  management,  focuses on the  Portfolio's  stock
selection and research.
    

INTERNATIONAL PORTFOLIO

   
Lead  Portfolio  Manager  Carol  L.  Franklin  sets  International   Portfolio's
investment  strategy and has responsibility for the Portfolio's daily operation.
Ms.  Franklin,  who joined the team in 1989,  has worked on equity  investing at
Scudder as a portfolio manager since 1981.  Nicholas Bratt,  Portfolio  Manager,
has  been a  member  of the  Portfolio  team  since  1987  and has 23  years  of
experience  in  worldwide  investing,  including  21  years of  experience  as a
portfolio manager.  Mr. Bratt, who has worked at Scudder since 1976, is the head
of Scudder's Global Equity Department.  Joan Gregory, Portfolio Manager, focuses
on stock selection, a role she has played since joining Scudder in 1992.
    
--------------------------------------------------------------------------------

                                   DISTRIBUTOR
--------------------------------------------------------------------------------

The Fund has an underwriting agreement with Scudder Investor Services, Inc. (the
"Distributor"),  a subsidiary of Scudder,  Stevens & Clark,  Inc. Located at Two
International  Place,  Boston,  Massachusetts  02110-4103,  the Distributor is a
Massachusetts corporation formed in 1947.

Under the principal underwriting agreement between the Fund and the Distributor,
the Fund is  responsible  for the payment of all fees and expenses in connection
with the  preparation  and filing of any  registration  statement and prospectus
covering the issue and sale of Shares, and the registration and qualification of
Shares for sale with the Securities  and Exchange  Commission and in the various
states, including registering the Fund as a broker or dealer. The Fund will also
pay the fees and  expenses  of  preparing,  printing  and  mailing  prospectuses
annually to existing  Class B  shareholders  and any  notice,  proxy  statement,
report,  prospectus or other  communication to Class B shareholders of the Fund,
printing and mailing  confirmations of purchases of the Shares,  any issue taxes
or any initial  transfer  taxes,  a portion of toll-free  telephone  service for
Class B shareholders,  wiring funds for Share purchases and redemptions  (unless
paid by the shareholder who initiates the transaction),  printing and postage of


                                       18
<PAGE>

business  reply  envelopes and a portion of the computer  terminals used by both
the Fund and the Distributor.

Subject to the Fund's  reimbursing the Distributor for such fees and expenses as
may be paid by the Fund pursuant to the Rule 12b-1 plan in effect for the Shares
of the Fund (as  discussed  below),  the  Distributor  will pay for printing and
distributing prospectuses or reports prepared for its use in connection with the
offering of the Shares, and preparing, printing and mailing any other literature
or  advertising   in  connection   with  the  offering  of  the  Shares  to  the
Participating  Insurance  Companies.  The  Distributor  will  pay all  fees  and
expenses in connection with its  qualification  and  registration as a broker or
dealer  under  Federal  and state  laws,  a portion of the  toll-free  telephone
service  and of  computer  terminals,  and of any  activity  which is  primarily
intended to result in the sale of Shares issued by the Fund.

The Fund has  adopted a plan  pursuant  to Rule 12b-1 under the 1940 Act for the
Class B shares of the Fund (the "Plan").  Pursuant to the Plan,  each  Portfolio
participating  in  the  Plan  may  pay  the  Distributor  (for  remittance  to a
Participating  Insurance  Company)  for various  costs  incurred or paid by such
company  in  connection  with the  distribution  of  Shares  of that  Portfolio.
Depending on the  Participating  Insurance  Company's  corporate  structure  and
applicable  state law, the Distributor  may remit payments to the  Participating
Insurance Company's affiliated  broker-dealer or other affiliated company rather
than the Participating Insurance Company itself.

The Plan  provides  that the Fund,  on behalf of each  Portfolio,  shall pay the
Distributor in its capacity as principal  underwriter of the Shares, a fee of up
to 0.25% of the  average  daily net assets of a  Portfolio  attributable  to its
Shares.  Under the terms of the Plan,  the Fund is  authorized  to make payments
quarterly  to  the  Distributor  for  remittance  to a  Participating  Insurance
Company,  in order to pay or reimburse such Participating  Insurance Company for
distribution and shareholder servicing-related expenses incurred or paid by such
Participating  Insurance Company. The Plan also provides,  however, that no such
payment  shall be made  with  respect  to any  quarterly  period in excess of an
amount  determined  for such a period at the annual rate of 0.25% of the average
daily net assets of Shares of the Portfolios  attributable to that Participating
Insurance Company's VA contracts and VLI policies during that quarterly period.

Expenses  payable  pursuant  to the Plan may  include,  but are not  necessarily
limited to: (a) the printing  and mailing of Fund  prospectuses,  statements  of
additional  information,  any supplements  thereto and  shareholder  reports for
existing and  prospective VA contract and VLI policy owners;  (b) those relating
to the development,  preparation,  printing and mailing of Fund  advertisements,
sales literature and other promotional  materials  describing and/or relating to
the Fund and  including  materials  intended  for use within  the  Participating
Insurance  Company,  or for  broker-dealer  only use or retail use;  (c) holding
seminars and sales meetings designed to promote the distribution of Fund Shares;
(d)  obtaining  information  and providing  explanations  to VA contract and VLI
policy  owners  regarding  Fund  investment  objectives  and  policies and other
information about the Fund and its Portfolios,  including the performance of the
Portfolios;  (e) training sales personnel  regarding the Fund; (f)  compensating
sales personnel in connection with the allocation of cash values and premiums of
the VA contracts  and VLI  policies to the Fund;  (g)  personal  service  and/or
maintenance  of VA contract and VLI policy owner  accounts  with respect to Fund
Shares attributable to such accounts;  and (h) financing any other activity that
the Fund's Board of Trustees  determines is primarily  intended to result in the
sale of Shares.

As agent, the Distributor currently offers shares of the Portfolio  continuously
to the separate accounts of Participating  Insurance  Companies in all states in
which it is registered or where  permitted by applicable  law. The  underwriting
agreements  provide that the Distributor  accepts orders for shares at net asset
value.  The  Distributor  has made no firm  commitment to acquire  shares of the
Fund.

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

                            PURCHASES AND REDEMPTIONS
--------------------------------------------------------------------------------

   
Except for the Money Market Portfolio,  which does not offer separate classes of
shares, the Fund offers two classes of shares on behalf of each Portfolio: Class
A shares are  offered  at net asset  value and are not  subject to fees  imposed
pursuant to a Distribution  Plan.  Class B shares are offered at net asset value
and are subject to fees imposed pursuant to a Distribution Plan.
    

The separate accounts of the Participating  Insurance  Companies place orders to
purchase and redeem shares of each Portfolio  based on, among other things,  the
amount of premium payments to be invested and surrender and transfer requests to
be  effected on that day  pursuant  to VA  contracts  and VLI  policies.  Orders
received  by the Fund or its  agent are  effected  on days on which the New York
Stock Exchange (the "Exchange") is open for trading.  For orders received before


                                       19
<PAGE>

   
the close of regular  trading on the Exchange  (normally 4 p.m.,  eastern time),
such  purchases and  redemptions of the shares of each Portfolio are effected at
the respective net asset values per share  determined as of the close of regular
trading on the Exchange on that same day except  that,  in the case of the Money
Market Portfolio, purchases will not be effected until the next determination of
net asset value after  federal  funds have been made  available to the Fund (see
"NET ASSET VALUE").  Payment for  redemptions  will be made by State Street Bank
and Trust Company or Brown Brothers Harriman & Co. on behalf of the Fund and the
relevant  Portfolios  within  seven  days  thereafter.  No  fee is  charged  the
shareholders when they redeem Portfolio shares.
    

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

Should any conflict between VA contract and VLI policy holders arise which would
require  that a  substantial  amount of net assets be  withdrawn  from the Fund,
orderly  portfolio  management could be disrupted to the potential  detriment of
such contract and policy holders.
--------------------------------------------------------------------------------

                                 NET ASSET VALUE
--------------------------------------------------------------------------------

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, determines net
asset  value per  share as of the  close of  regular  trading  on the  Exchange,
normally 4 p.m., eastern time, on each day the Exchange is open for trading. Net
asset value per share is  calculated  for  purchases  and  redemptions  for each
Portfolio by dividing the current market value (amortized cost value in the case
of the Money Market  Portfolio) of total  Portfolio  assets,  plus other assets,
less all liabilities, by the total number of shares outstanding.
--------------------------------------------------------------------------------

                             PERFORMANCE INFORMATION
--------------------------------------------------------------------------------

MONEY MARKET PORTFOLIO

From  time to time,  quotations  of the Money  Market  Portfolio's  "yield"  and
"effective yield" may be included in advertisements, sales literature or reports
to  shareholders or prospective  investors.  Both yield figures are based on the
historical   performance  of  the  Portfolio  and  show  the  performance  of  a
hypothetical investment and are not intended to indicate future performance. The
yield  of the  Money  Market  Portfolio  refers  to the  net  investment  income
generated by the Portfolio over a specified seven-day period (the ending date of
which will be stated).  Included in "net investment  income" is the amortization
of market  premium or  accretion  of market and original  issue  discount.  This
income is then  "annualized."  That is,  the amount of income  generated  by the
Portfolio  during that week is assumed to be  generated  during each week over a
52-week  period and is shown as a percentage.  The effective  yield is expressed
similarly  but,  when  annualized,  the income  earned by an  investment  in the
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.  Yield and effective  yield for the Portfolio  will vary based on,
among other things,  changes in market  conditions,  the level of interest rates
and the level of the Portfolio's expenses. 

BOND PORTFOLIO

From time to time,  quotations of the Bond Portfolio's  yield may be included in
advertisements,  sales  literature  or reports to  shareholders  or  prospective
investors.  Yield  figures  are  based  on  historical  performance  of the Bond
Portfolio and show the  performance  of a  hypothetical  investment  and are not
intended to indicate future performance.  The yield of the Bond Portfolio refers
to net  investment  income  generated  by the Bond  Portfolio  over a  specified
thirty-day (or one month) period. This income is then "annualized." That is, the
amount of income  generated by the Bond Portfolio during that thirty-day (or one
month) period is assumed to be generated over a 12-month  period and is shown as
a percentage of net asset value. 

                                       20
<PAGE>

ALL PORTFOLIOS

From time to time,  quotations of a Portfolio's  total return may be included in
advertisements,  sales  literature  or reports to  shareholders  or  prospective
investors.  Total  return  figures are based on  historical  performance  of the
Portfolio and show the  performance  of a  hypothetical  investment  and are not
intended to indicate future performance.  The total return of a Portfolio refers
to return  assuming an  investment  has been held in the Portfolio for one year,
five years and ten years or for the life of the  Portfolio  (the  ending date of
which will be stated).  The total return quotations may be expressed in terms of
average  annual or cumulative  rates of return for all periods  quoted.  Average
annual total return refers to the average  annual  compound rate of return of an
investment in a Portfolio.  Cumulative  total return  represents  the cumulative
change in value of an  investment  in a  Portfolio.  Both will  assume  that all
dividends and capital gains distributions were reinvested.

Yield and total return for a Portfolio  will vary based on, among other  things,
changes in market conditions and the level of the Portfolio's expenses.
--------------------------------------------------------------------------------

                        VALUATION OF PORTFOLIO SECURITIES
--------------------------------------------------------------------------------

MONEY MARKET PORTFOLIO

Pursuant to a Rule of the Securities and Exchange  Commission,  the Money Market
Portfolio will be valued at amortized  cost.  Under the amortized cost method of
valuation, securities are valued at cost plus constant accretion/amortization to
maturity of any discount/premium every day.

By using  amortized  cost  valuation,  the Fund seeks to maintain a constant net
asset value of $1.00 per share for the Money  Market  Portfolio,  despite  minor
shifts  in the  market  value  of  its  portfolio  securities.  The  yield  on a
shareholder's investment may be more or less than that which would be recognized
if the net asset value per share of the Money Market Portfolio were not constant
and  were  permitted  to  fluctuate  with  the  market  value  of the  portfolio
securities  of the Money  Market  Portfolio.  However,  as a result  of  certain
procedures  adopted  by the Fund,  the  Adviser  believes  any  difference  will
normally be minimal. 

OTHER PORTFOLIOS

An  exchange-traded  equity  security  (not subject to resale  restrictions)  is
valued at its most recent  sale price as of the close of regular  trading on the
Exchange on each day the  Exchange is open for trading.  Lacking any sales,  the
security is valued at the calculated  mean between the most recent bid quotation
and the most recent asked quotation. An unlisted equity security which is traded
on the NASDAQ system is valued at the most recent sale price or, if there are no
such  sales,  the  security  is valued  at the high or  "inside"  bid  quotation
supplied through such system. Debt securities, other than short-term securities,
are valued at prices supplied by the Fund's pricing agent. Short-term securities
with remaining maturities of sixty days or less are valued by the amortized cost
method,  which the Trustees believe  approximates market value. Foreign currency
forward  contracts  are valued at the value of the  underlying  currency  at the
prevailing   currency  exchange  rate.   Securities  for  which  current  market
quotations  are not readily  available 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.  Please refer to the
section  entitled  "NET  ASSET  VALUE" in the  Fund's  Statement  of  Additional
Information for more information concerning valuation of portfolio securities.
--------------------------------------------------------------------------------

                     TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------------------------------------------

The Internal Revenue Code of 1986 (the "Code") provides that each portfolio of a
series fund is to be treated as a separate taxpayer. Accordingly, each Portfolio
of the Fund intends to qualify as a separate regulated  investment company under
Subchapter M of the Code.

Each  Portfolio  of  the  Fund  intends  to  comply  with  the   diversification
requirements of Code Section 817(h). By meeting this and other requirements, the
Participating  Insurance Companies,  rather than the holders of VA contracts and
VLI policies, should be subject to tax on distributions received with respect to
Portfolio  shares.  For  further  information   concerning  federal  income  tax
consequences for the holders of the VA contracts and VLI policies,  such holders
should  consult the  prospectus  used in  connection  with the issuance of their
particular contracts or policies.

                                       21
<PAGE>

As a regulated investment company,  each Portfolio generally will not be subject
to tax on its ordinary income and net realized  capital gains to the extent such
income and gains are  distributed  in conformity  with  applicable  distribution
requirements  under  the  Code to the  separate  accounts  of the  Participating
Insurance  Companies  which  hold its  shares.  Distributions  of income and the
excess of net  short-term  capital gain over net long-term  capital loss will be
treated as  ordinary  income and  distributions  of the excess of net  long-term
capital  gain over net  short-term  capital  loss will be treated  as  long-term
capital gain by the Participating  Insurance Companies.  Participating Insurance
Companies should consult their own tax advisers as to whether such distributions
are  subject  to  federal  income  tax if they are  retained  as part of  policy
reserves.

   
The Money Market Portfolio will declare a dividend of its net investment  income
daily and distribute such dividend monthly.  Distributions  will be made shortly
after  the  first  business  day of  each  month  following  declaration  of the
dividend.  The Bond,  Balanced,  Growth and Income and Capital Growth Portfolios
will declare and distribute  dividends from their net investment income, if any,
quarterly,  in  January,  April,  July and  October.  The Global  Discovery  and
International  Portfolios each intend to distribute their net investment  income
annually  within  three  months of the Fund's  fiscal  year-end of December  31,
although an  additional  distribution  may be made if  necessary.  Each of these
Portfolios will distribute its capital gains, if any, within three months of the
fiscal year-end. For all Portfolios,  dividends declared in October, November or
December with a record date in such a month will be deemed to have been received
by shareholders on December 31 if paid during January of the following year. All
distributions will be reinvested in shares of such Portfolios unless an election
is made on  behalf of a  separate  account  to  receive  distributions  in cash.
Participating  Insurance  Companies  will  be  informed  about  the  amount  and
character of  distributions  from the relevant  Portfolio for federal income tax
purposes.  Distributions  paid by the Fund with  respect to Class A shares  will
generally  be greater  than those  paid with  respect to Class B shares  because
expenses attributable to Class B shares will generally be higher.
    
--------------------------------------------------------------------------------

                           SHAREHOLDER COMMUNICATIONS
--------------------------------------------------------------------------------

Owners of policies and contracts issued by Participating Insurance Companies for
which shares of one or more  Portfolios are the investment  vehicle will receive
from the  Participating  Insurance  Companies  unaudited  semi-annual  financial
statements and audited  year-end  financial  statements  certified by the Fund's
independent public  accountants.  Each report will show the investments owned by
the Fund and the market  values  thereof as  determined by the Trustees and will
provide other information about the Fund and its operations.

Participating Insurance Companies with inquiries regarding the Fund may call the
Fund's underwriter,  Scudder Investor Services,  Inc. at 1-617-295-1000 or write
Scudder Investor Services, Inc., Two International Place, Boston,  Massachusetts
02110-4103.
--------------------------------------------------------------------------------

                             ADDITIONAL INFORMATION
--------------------------------------------------------------------------------

FUND ORGANIZATION AND SHAREHOLDER INDEMNIFICATION

The Fund was organized in the  Commonwealth of Massachusetts as a "Massachusetts
business trust" on March 15, 1985. The Fund's shares of beneficial  interest are
presently  divided into seven separate series.  Additional series and classes of
shares may be created from time to time. The Fund has adopted a plan pursuant to
Rule 18f-3 under the 1940 Act to permit the Fund to  establish a multiple  class
distribution  system for all of its Portfolios,  except Money Market  Portfolio.
The plan was  approved by the Fund's  Board of Trustees at a special  meeting on
October 5, 1995.

Under the  Fund's  multi-class  system,  shares of each  class of a  multi-class
Portfolio represent an equal pro rata interest in that Portfolio and, generally,
shall  have  identical  voting,   dividend,   liquidation,   and  other  rights,
preferences,  powers,  restrictions,  limitations,  qualifications and terms and
conditions,  except that: (1) each class shall have a different designation; (2)
each class of shares shall bear its "class  expenses;" (3) each class shall have
exclusive  voting rights on any matter  submitted to  shareholders  that relates
solely to its  distribution  arrangement;  (4) each class  shall  have  separate
voting rights on any matter  submitted to shareholders in which the interests of
one class differ from the interests of any other class;  (5) each class may have
separate exchange  privileges;  and (6) each class may have different conversion
features, although a conversion feature is not currently contemplated.  Expenses
currently  designated as "Class  Expenses" by the Fund's Board of Trustees under


                                       22
<PAGE>

the  plan  pursuant  to  Rule  18f-3  include,  for  example,  payments  to  the
Distributor  pursuant to the  distribution  plan for that class,  Fund  transfer
agent fees attributable to a specific class, and certain securities registration
fees.

   
Each  Portfolio  (except  Money  Market  Portfolio)  has two  classes of shares,
designated as Class A Shares and Class B Shares, each of which is offered at net
asset  value.  Class B Shares,  which are sold  subject to a Rule 12b-1 fee, are
offered pursuant to this prospectus.  Class A Shares, which are not sold subject
to a Rule 12b-1 fee, are offered to certain  Participating  Insurance  Companies
pursuant  to a  separate  prospectus.  Participating  Insurance  Companies  with
inquiries  regarding Class A Shares may call or write to the Fund's underwriter,
Scudder, Stevens & Clark, Inc. at the number and address listed above.

Under  Massachusetts  law,  shareholders of a Massachusetts  business 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 the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for  indemnification out of the Fund property of any shareholder 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
incurring  financial  loss on account  of  shareholder  liability  is limited to
circumstances  in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal  liability
of shareholders is remote. 
    

OTHER INFORMATION

The activities of the Fund are supervised by the Trustees.

Although the Fund does not intend to hold annual  meetings,  shareholders of the
Fund have certain rights,  as set forth in the Declaration of Trust of the Fund,
including the right to call a meeting of shareholders  for the purpose of voting
on the  removal  of one or more  Trustees.  Shareholders  have one vote for each
share held. Fractional shares have fractional votes.

   
As of December 31, 1996,  Aetna Life Insurance and Annuity Company owned 22.31%,
Banner Life  Insurance  Company owned 1.87%,  Charter  National  Life  Insurance
Company owned 26.09%,  Companion Life Insurance Company of New York owned 0.01%,
Fortis Benefits Life Insurance  Company owned 0.19%,  Intramerica Life Insurance
Company owned 3.24%,  Lincoln Benefit Life Insurance Company owned 0.57%, Mutual
of America Life Insurance  Company owned 29.05%,  Paragon Life Insurance Company
owned 0.14%,  Providentmutual  Life and Annuity  Company of America owned 1.12%,
Safeco Life  Insurance  Companies  owned 3.11%,  Security  First Life  Insurance
Company owned 0.14%,  Southwestern Life Insurance Company owned 0.43%, The Union
Central Life  Insurance  Company owned 8.23%,  United  Companies  Life Insurance
Company owned 0.25%,  United of Omaha owned 1.02%,  USAA Life Insurance  Company
owned 0.66% and Washington  National Life  Insurance  Company owned 2.24% of the
Fund's outstanding shares.
    

Each Portfolio of the Fund has a December 31 fiscal year end.

Portfolio securities of the Money Market, Bond, Balanced, Growth and Income, and
Capital  Growth  Portfolios  are  held  separately,   pursuant  to  a  custodian
agreement,  by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, as custodian.  Portfolio securities of Global Discovery and
International Portfolios are held separately, pursuant to a custodian agreement,
by Brown Brothers Harriman & Co., 40 Water Street, Boston,  Massachusetts 02109,
as custodian.

Scudder Service Corporation, P.O. Box 2291, Boston, Massachusetts 02107-2291, is
the transfer and dividend paying agent for the Fund.

Scudder Fund Accounting Corporation, a subsidiary of the Adviser, is responsible
for  determining the daily net asset value per share and maintaining the general
accounting records of each Portfolio.

The firm of Dechert Price & Rhoads,  Boston,  Massachusetts,  is counsel for the
Fund.

The Fund's Statement of Additional  Information and this prospectus omit certain
information  contained in the  Registration  Statement  which the Fund has filed
with the  Securities and Exchange  Commission  under the Securities Act of 1933,
and reference is hereby made to the  Registration  Statement and its amendments,
for further  information  with  respect to the Fund and the  securities  offered
hereby.  The  Registration  Statement  and its  amendments,  are  available  for
inspection  by  the  public  at  the  Securities  and  Exchange   Commission  in
Washington, D.C.

                                       23
<PAGE>

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

                              TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------

David B. Watts*
President and Trustee

Daniel Pierce*
Vice President and Trustee

Dr. Kenneth Black, Jr.
Trustee; Regents' Professor Emeritus of Insurance, Georgia State University

Dr. Rosita P. Chang
Trustee; Professor of Finance,
University of Rhode Island

Peter B. Freeman
Trustee; Corporate Director and Trustee

Dr. J. D. Hammond
Trustee; Dean, Smeal College of Business Administration, 
Pennsylvania State University

   
Stephen L. Akers*
Vice President
    

Thomas S. Crain*
Vice President

   
Carol Franklin*
Vice President

William F. Gadsden*
Vice President
    

Jerard K. Hartman*
Vice President

   
Robert T. Hoffman*
Vice President

William M. Hutchinson*
Vice President
    

Richard A. Holt*
Vice President

Thomas W. Joseph*
Vice President

David S. Lee*
Vice President

   
Valerie F. Malter*
Vice President
    

Steven M. Meltzer*
Vice President

   
Gerald J. Moran*
Vice President
    

Randall K. Zeller*
Vice President

Thomas F. McDonough*
Vice President and Secretary

Pamela A. McGrath*
Vice President and Treasurer

Edward J. O'Connell*
Vice President and Assistant Treasurer

Kathryn L. Quirk*
Vice President and Assistant Secretary

*Scudder, Stevens & Clark, Inc.


                                       24
<PAGE>

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

                                    APPENDIX
--------------------------------------------------------------------------------

The  following  is a  description  of the  ratings  given by S&P and  Moody's to
corporate and municipal bonds.

S&P:

Debt rated AAA has the highest rating assigned by S&P.  Capacity to pay interest
and  repay  principal  is  extremely  strong.  Debt  rated AA has a very  strong
capacity to pay interest and repay  principal and differs from the highest rated
issues only in small degree.  Debt rated A has a strong capacity to pay interest
and repay  principal  although it is somewhat  more  susceptible  to the adverse
effects of changes in circumstances and economic  conditions than debt in higher
rated  categories.  Debt rated BBB is regarded as having an adequate capacity to
pay  interest  and  repay  principal.  Whereas  it  normally  exhibits  adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened  capacity to pay interest and repay  principal
for debt in this category than in higher rated categories.

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

Debt rated BB has less near-term vulnerability to default than other speculative
issues.  However,  it faces major ongoing  uncertainties  or exposure to adverse
business,  financial,  or economic  conditions  which  could lead to  inadequate
capacity to meet timely interest and principal payments.  The BB rating category
is also used for debt  subordinated to senior debt that is assigned an actual or
implied BBB-  rating.  Debt rated B has a greater  vulnerability  to default but
currently has the capacity to meet interest  payments and principal  repayments.
Adverse business,  financial, or economic conditions will likely impair capacity
or willingness  to pay interest and repay  principal.  The B rating  category is
also used for debt  subordinated  to senior  debt that is  assigned an actual or
implied BB or BB- rating.

Debt rated CCC has a currently  identifiable  vulnerability  to default,  and is
dependent upon favorable  business,  financial,  and economic conditions to meet
timely  payment of interest and repayment of principal.  In the event of adverse
business,  financial,  or  economic  conditions,  it is not  likely  to have the
capacity to pay interest and repay  principal.  The CCC rating  category is also
used for debt  subordinated to senior debt that is assigned an actual or implied
B or B- rating.  The rating CC  typically  is  applied to debt  subordinated  to
senior  debt that is  assigned  an actual or implied  CCC  rating.  The rating C
typically  is applied to debt  subordinated  to senior debt which is assigned an
actual  or  implied  CCC-  debt  rating.  The C  rating  may be used to  cover a
situation where a bankruptcy  petition has been filed, but debt service payments
are  continued.  The rating C1 is reserved for income bonds on which no interest
is being paid. Debt rated D is in payment default. The D rating category is used
when interest  payments or principal  payments are not made on the date due even
if the  applicable  grace period had not expired,  unless S&P believes that such
payments will be made during such grace  period.  The D rating also will be used
upon  the  filing  of  a  bankruptcy  petition  if  debt  service  payments  are
jeopardized.

Moody's:

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

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
    

                                       25
<PAGE>

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

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



                                       26

<PAGE>






                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                             Two International Place

                        Boston, Massachusetts 02110-4103


        An open-end management investment company which currently offers
    shares of beneficial interest of seven diversified Portfolios which seek,
         respectively, (i) stability and current income from a portfolio
            of money market instruments, (ii) high income from a high
            quality portfolio of bonds, (iii) a balance of growth and
              income, as well as long-term preservation of capital,
                from a diversified portfolio of equity and fixed
              income securities, (iv) long-term growth of capital,
              current income and growth of income from a portfolio
              consisting primarily of common stocks and securities
              convertible into common stocks, (v) long-term capital
            growth from a a portfolio consisting primarily of equity
                         securities, (vi) above-average
              capital appreciation over the long term by investing
              primarily in the equity securities of small companies
                        located throughout the world, and
              (vii) long-term growth of capital principally from a
               diversified portfolio of foreign equity securities

                                 (A Mutual Fund)





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



                       STATEMENT OF ADDITIONAL INFORMATION
   
                                   May 1, 1997

                      CLASS A SHARES OF BENEFICIAL INTEREST

    


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


   
         This Statement of Additional Information is not a prospectus and should
be read in conjunction  with the prospectus of Scudder  Variable Life Investment
Fund dated May 1, 1997, as may be amended from time to time, a copy of which may
be obtained  without charge by calling a Participating  Insurance  Company or by
writing to  broker/dealers  offering  certain  variable  annuity  contracts  and
variable life  insurance  policies,  or Scudder  Investor  Services,  Inc.,  Two
International Place, Boston, Massachusetts 02110-4103.
    




<PAGE>

<TABLE>
<CAPTION>

                                                   TABLE OF CONTENTS
                                                                                                                   Page
<S>                                                                                                                 <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
         Money Market Portfolio.......................................................................................1
         Bond Portfolio...............................................................................................2
         Balanced Portfolio...........................................................................................3
         Growth and Income Portfolio..................................................................................5
         Capital Growth Portfolio.....................................................................................5
         Global Discovery Portfolio...................................................................................6
         Risk Factors Regarding Global Discovery Portfolio............................................................7
         International Portfolio.....................................................................................13

POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................14
         Repurchase Agreements.......................................................................................14
         Debt Securities.............................................................................................15
         Illiquid or Restricted Securities...........................................................................15
         Trust Preferred Securities..................................................................................16
         Zero Coupon Securities......................................................................................16
         Real Estate Investment Trusts...............................................................................17
         Mortgage-Backed Securities and Mortgage Pass-Through Securities.............................................17
         Collateralized Mortgage Obligations ("CMOs")................................................................18
         FHLMC Collateralized Mortgage Obligations...................................................................19
         Other Mortgage-Backed Securities............................................................................19
         Other Asset-Backed Securities...............................................................................19
         Municipal Obligations.......................................................................................21
         Convertible Securities......................................................................................21
         Depositary Receipts.........................................................................................22
         Foreign Securities..........................................................................................22
         Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and Income
              and International Portfolios...........................................................................23
         Indexed Securities..........................................................................................23
         When-Issued Securities......................................................................................24
         Loans of Portfolio Securities...............................................................................24
         Borrowing...................................................................................................24
         Options for the Bond, Balanced, Growth and Income and International Portfolios..............................25
         Securities Index Options....................................................................................26
         Futures Contracts...........................................................................................27
         Futures on Debt Securities..................................................................................27
         Limitations on the Use of Futures Contracts and Options on Futures..........................................29
         Foreign Currency Transactions...............................................................................30
         Strategic Transactions and Derivatives Applicable to the Global Discovery Portfolio.........................32
         Debt Securities.............................................................................................39
         High Yield, High Risk Securities............................................................................39
         Combined Transactions.......................................................................................40
         Risks of Specialized Investment Techniques Abroad...........................................................40

INVESTMENT RESTRICTIONS..............................................................................................40

PURCHASES AND REDEMPTIONS............................................................................................42

INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................43
         Investment Adviser..........................................................................................43
         Personal Investments by Employees of the Adviser............................................................46
         Distributor.................................................................................................46

MANAGEMENT OF THE FUND...............................................................................................48
         Trustees and Officers.......................................................................................48



                                        i
<PAGE>

                                             TABLE OF CONTENTS (continued)
                                                                                                                   Page

REMUNERATION.........................................................................................................50
         Responsibilities of the Board--Board and Committee Meetings.................................................50
         Compensation of Officers and Trustees.......................................................................50

NET ASSET VALUE......................................................................................................51

TAX STATUS...........................................................................................................52

DIVIDENDS AND DISTRIBUTIONS..........................................................................................56
         Money Market Portfolio......................................................................................56
         Global Discovery Portfolio and International Portfolio......................................................57
         Other Portfolios............................................................................................57

PERFORMANCE INFORMATION..............................................................................................57
         Money Market Portfolio......................................................................................57
         Bond Portfolio..............................................................................................58
         All Portfolios..............................................................................................58
         Comparison of Portfolio Performance.........................................................................60

SHAREHOLDER COMMUNICATIONS...........................................................................................64

ORGANIZATION AND CAPITALIZATION......................................................................................65
         General.....................................................................................................65
         Shareholder and Trustee Liability...........................................................................66

ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................66

PORTFOLIO TURNOVER...................................................................................................68

EXPERTS..............................................................................................................68

COUNSEL..............................................................................................................68

ADDITIONAL INFORMATION...............................................................................................68

FINANCIAL STATEMENTS.................................................................................................69

APPENDIX
         Description of Bond Ratings
         Description of Commercial Paper Ratings
</TABLE>


                                       ii
<PAGE>


                       INVESTMENT OBJECTIVES AND POLICIES

                    (See "INVESTMENT CONCEPT OF THE FUND" and
             "INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
                           in the Fund's prospectus.)

         Scudder  Variable  Life  Investment  Fund (the  "Fund") is an open-end,
diversified   registered   management   investment  company   established  as  a
Massachusetts  business trust. The Fund is a series fund consisting of the Money
Market  Portfolio,  Bond  Portfolio,   Balanced  Portfolio,  Growth  and  Income
Portfolio,   Capital  Growth   Portfolio,   Global  Discovery   Portfolio,   and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the  "Portfolios").  Additional  portfolios may be created from
time to time.  The Fund is  intended  to be the  funding  vehicle  for  variable
annuity  contracts ("VA  contracts") and variable life insurance  policies ("VLI
policies")  to be offered to the  separate  accounts of certain  life  insurance
companies ("Participating Insurance Companies").

         Each Portfolio has a different  investment  objective  which it pursues
through  separate  investment  policies,  as described below. The differences in
objectives  and  policies  among the  Portfolios  can be  expected to affect the
degree of market and financial  risk to which each  Portfolio is subject and the
return  of each  Portfolio.  The  investment  objectives  and  policies  of each
Portfolio may, unless otherwise  specifically stated, be changed by the Trustees
of the Fund without a vote of the  shareholders.  There is no assurance that the
objectives of any Portfolio will be achieved.

Money Market Portfolio

         The Money Market  Portfolio  seeks to maintain the stability of capital
and, consistent  therewith,  to maintain the liquidity of capital and to provide
current  income.  The Portfolio  seeks to maintain a constant net asset value of
$1.00 per share,  although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.

         The Money Market  Portfolio  purchases U.S.  Treasury bills,  notes and
bonds;  obligations of agencies and  instrumentalities  of the U.S.  Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase  agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of  purchase  are rated,  or judged by the Fund's  investment  adviser,
Scudder,  Stevens & Clark,  Inc. (the "Adviser"),  subject to the supervision of
the Trustees,  to be equivalent to those rated high quality (i.e.,  rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service,  Inc.  ("Moody's") and Standard & Poor's ("S&P").  In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for  investment  by the Money  Market  Portfolio  which are rated in the highest
category by at least two rating services (or by one rating service,  if no other
rating  service has issued a rating with respect to that  security) are known as
"first tier  securities."  Securities  rated in the top two categories which are
not first tier securities are known as "second tier securities."  Investments in
commercial paper and finance company paper will be limited to securities  which,
at the time of  purchase,  will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the  equivalent  by any  nationally-recognized  rating  service or
judged  to be  equivalent  by the  Adviser.  Obligations  which are  subject  to
repurchase agreements will be limited to those of the type and quality described
above.  The Money Market  Portfolio may also hold cash.  Shares of the Portfolio
are not insured by an agency of the U.S. Government.  Securities and instruments
in which the  Portfolio  may  invest may be issued by the U.S.  Government,  its
agencies and instrumentalities,  corporations,  trusts, banks, finance companies
and other business entities.

         The Money Market  Portfolio may invest in  certificates  of deposit and
bankers'  acceptances of large domestic banks (i.e.,  banks which at the time of
their most recent annual financial  statements show total assets in excess of $1
billion)  including  foreign  branches of such  domestic  banks,  which  involve
different  risks than those  associated  with  investments  in  certificates  of
deposit  of  domestic  banks,  and of  smaller  banks as  described  below.  The
Portfolio  will invest in U.S.  dollar-denominated  certificates  of deposit and
bankers'   acceptances   of  foreign   banks  if  such  banks  meet  the  stated
qualifications.  Although the  Portfolio  recognizes  that the size of a bank is
important,   this   fact   alone   is   not   necessarily   indicative   of  its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued  by  foreign  banks and  foreign  branches  of  domestic  banks  involves
investment  risks that are different in some respects from those associated with


                                       
<PAGE>

investments  in  certificates  of deposit  and  bankers'  acceptances  issued by
domestic  banks.  (See  "Foreign  Securities"  in this  Statement of  Additional
Information for further risks of foreign investment.)

         The Money Market  Portfolio may also invest in  certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual  financial  statements  total assets of less than $1 billion,
provided  that (i) the  principal  amounts of such  certificates  of deposit are
insured by an agency of the U.S. Government,  (ii) at no time will the Portfolio
hold more than $100,000  principal  amount of certificates of deposit of any one
such  bank,  and  (iii)  at the  time of  acquisition,  no more  than 10% of the
Portfolio's  assets  (taken at current  value) are invested in  certificates  of
deposit of such banks having total assets not in excess of $1 billion.

         The assets of the Money Market Portfolio consist entirely of cash items
and  investments  having a remaining  maturity date of 397 calendar days or less
from  date of  purchase.  The  Portfolio  will be  managed  so that the  average
maturity of all instruments in the portfolio (on a  dollar-weighted  basis) will
be 90 days or less. The average maturity of the Portfolio's  investments  varies
according to the Adviser's appraisal of money market conditions.

         To ensure  diversity  of the  Portfolio's  investments,  as a matter of
non-fundamental  policy the Portfolio  will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio  may,  however,  invest more than 5% of its total  assets in the first
tier  securities  of a single  issuer for a period of up to three  business days
after  purchase,  although  the  Portfolio  may not  make  more  than  one  such
investment  at any time.  The Portfolio may not invest more than 5% of its total
assets in  securities  which were second tier  securities  when  acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets,  or (2) one million dollars,  in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.

         The net investment income of the Portfolio is declared as a dividend to
shareholders  daily and distributed  monthly in cash or reinvested in additional
shares.

Bond Portfolio

         The Bond  Portfolio  pursues a policy of investing  for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances  the  Portfolio  invests  at  least  65% of its  assets  in  bonds
including  those  of  the  U.S.   Government  and  its  agencies  and  those  of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's  objectives.
It will attempt to moderate the effect of market price  fluctuation  relative to
that of a long-term bond by investing in securities with varying  maturities and
making use of futures  contracts  on debt  securities  and  related  options for
hedging purposes.

   
         The Bond  Portfolio may purchase  corporate  notes and bonds  including
issues  convertible  into common stock and  obligations of  municipalities.  The
Portfolio may purchase securities of real estate investment trusts ("REITs") and
certain mortgage-backed  securities.  It may purchase U.S. Government securities
and  obligations  of federal  agencies that are not backed by the full faith and
credit of the U.S.  Government,  such as obligations of Federal Home Loan Banks,
Farm Credit Banks and the Federal Home Loan Mortgage Corporation.  The Portfolio
may  also  purchase   obligations   of   international   agencies  such  as  the
International  Bank for  Reconstruction  and Development and the  Inter-American
Development  Bank.  Other  eligible   investments  include  foreign  securities,
including   non-U.S.   dollar-denominated   foreign  debt  securities  and  U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation, Eurodollar Bonds and
Yankee  Bonds,  mortgage  and other  asset-backed  securities  and money  market
instruments such as commercial  paper and bankers'  acceptances and certificates
of deposit issued by domestic and foreign  branches of U.S. banks. The Portfolio
may  also  enter  into  repurchase  agreements  and may  invest  in zero  coupon
securities. The Portfolio invests in a broad range of short-, intermediate-, and
long-term  securities.  Proportions among maturities and types of securities may
vary  depending  upon the prospects  for income  relative to the outlook for the
economy and the securities markets,  the quality of available  investments,  the
level of interest rates, and other factors.

         The Bond Portfolio invests primarily in high quality securities.  Under
normal market  conditions,  the Portfolio will invest at least 65% of its assets
in  securities  rated within the three  highest  quality  rating  categories  of
Moody's (Aaa,  Aa and A) or S&P (AAA, AA and A), or if unrated,  in bonds judged
by the Fund's Adviser, to be of comparable quality at the time of purchase.  The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
    


                                       2
<PAGE>

   
Baa or BBB or, if unrated,  of equivalent  quality as determined by the Adviser,
but will not  purchase  bonds  rated  below B3 by  Moody's or B- by S&P or their
equivalent.
    

         See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings  organizations and their
respective characteristics.

         Except  for  limitations  imposed  by the Bond  Portfolio's  investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible  investments;  however, it is a policy of the
Portfolio that its  non-governmental  investments will be spread among a variety
of companies and will not be concentrated in any industry.

         The Bond Portfolio may invest in securities of the Government  National
Mortgage Agency, a Government  corporation within the U.S. Department of Housing
and  Urban  Development   ("GNMAs").   GNMAs  are  mortgaged-backed   securities
representing part ownership of a pool of mortgage loans.  These loans, which are
issued by lenders  such as mortgage  bankers,  commercial  banks and savings and
loan  associations,  are either  insured by the Federal  Housing  Administration
(FHA) or guaranteed by the Veterans  Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.

   
         The Bond  Portfolio  cannot  guarantee a gain or eliminate  the risk of
loss. The net asset value of the Portfolio's  shares will fluctuate with changes
in the  market  prices  of the  Portfolio's  investments,  which  tend  to  vary
inversely  with changes in prevailing  interest  rates and, to a lesser  extent,
changes in foreign currency exchange rates.
    

Balanced Portfolio

         The  Balanced  Portfolio  seeks a balance of growth  and income  from a
diversified portfolio of equity and fixed income securities.  The Portfolio also
seeks long-term  preservation of capital through a  quality-oriented  investment
approach that is designed to reduce risk.

         In seeking its objectives of a balance of growth and income, as well as
long-term  preservation  of  capital,  the  Portfolio  invests in a  diversified
portfolio of equity and fixed income securities.  The Portfolio  invests,  under
normal  circumstances,  at least 50%, but no more than 75%, of its net assets in
common stocks and other equity  investments.  The Portfolio's equity investments
consist of common stocks,  preferred stocks, warrants and securities convertible
into common  stocks,  of  companies  that,  in the  Adviser's  judgment,  are of
above-average  financial quality and offer the prospect for above-average growth
in earnings,  cash flow, or assets  relative to the overall market as defined by
the  Standard  and Poor's 500  Composite  Stock  Price Index  ("S&P  500").  The
Portfolio will invest primarily in securities  issued by  medium-to-large  sized
domestic  companies with annual  revenues or market  capitalization  of at least
$600  million,  and which,  in the opinion of the Adviser,  offer  above-average
potential for price  appreciation.  The  Portfolio  seeks to invest in companies
that have relatively  consistent and  above-average  rates of growth;  companies
that  are  in a  strong  financial  position  with  high  credit  standings  and
profitability;  firms with important business franchises,  leading products,  or
dominant marketing and distribution systems; companies guided by experienced and
motivated  managements;  and companies selling at attractive market  valuations.
The Adviser believes that companies with these  characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.

         At least 65% of the value of the  Portfolio's  common stocks will be of
issuers  which  qualify,  at the time of purchase,  for one of the three highest
equity  earnings and dividends  ranking  categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of  comparable  quality by the Adviser.  S&P
assigns  earnings and dividends  rankings to  corporations  based on a number of
factors,  including stability and growth of earnings and dividends.  Rankings by
S&P are not an appraisal of a company's  creditworthiness,  as is true for S&P's
debt security  ratings,  nor are these rankings intended as a forecast of future
stock  market  performance.  In addition to using S&P  rankings of earnings  and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.

                                       3
<PAGE>

   
         To enhance income and stability,  the Portfolio's  remaining assets are
allocated to bonds and other fixed income  securities,  including cash reserves.
The Portfolio will normally  invest 25% to 50% of its net assets in fixed income
securities.  However,  at least 25% of the Portfolio's net assets will always be
invested in fixed income  securities.  The Portfolio can invest in a broad range
of corporate bonds and notes,  convertible  bonds, and preferred and convertible
preferred  securities.  It may also  purchase  U.S.  Government  securities  and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home  Loan  Banks,  Farm  Credit  Banks,  and the  Federal  Home  Loan  Mortgage
Corporation.  The  Portfolio  may also invest in  obligations  of  international
agencies,  foreign debt securities (both U.S. and non-U.S.  dollar-denominated),
mortgage-backed  and  other  asset-backed  securities,   municipal  obligations,
restricted  securities issued in private  placements and zero coupon securities.
Zero coupon  securities  are subject to greater market value  fluctuations  from
changing interest rates than debt obligations of comparable maturities that make
current cash  distributions  of interest.  The  Portfolio  may invest in special
purpose trust securities ("Trust Preferred Securities").
    

         For liquidity and defensive purposes,  the Portfolio may invest without
limit in cash and in money market securities such as commercial paper,  bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S.  banks.  The Portfolio may also enter into  repurchase  agreements  with
respect to U.S. Government securities.

         Not less than 50% of the  Portfolio's  debt securities will be invested
in debt obligations,  including money market instruments, that (a) are issued or
guaranteed by the U.S. Government,  (b) are rated at the time of purchase within
the two highest ratings categories by any  nationally-recognized  rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality  comparable to obligations  rated as described in (b) above.  Not less
than 80% of the debt  obligations  in which the  Portfolio  invests will, at the
time of purchase,  be rated within the three highest  ratings  categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser.  Up to 20% of the Portfolio's  debt securities may be invested in bonds
rated  below A but no lower  than B by Moody's  or S&P,  or  unrated  securities
judged by the Adviser to be of comparable  quality.  Debt  securities  which are
rated below  investment-grade  (that is, rated below Baa by Moody's or below BBB
by S&P and  commonly  referred to as "junk  bonds") and  unrated  securities  of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such  securities),  generally involve
greater  volatility of price and risk of principal  and income,  and may be less
liquid than  securities  in the higher  rating  categories.  Securities  rated B
involve a high degree of  speculation  with  respect to the payment of principal
and  interest.  Should  the  rating of any  security  held by the  Portfolio  be
downgraded after the time of purchase,  the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.

         See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings  organizations and their
respective characteristics.

         The Portfolio  will, on occasion,  adjust its mix of investments  among
equity securities,  bonds, and cash reserves. In reallocating  investments,  the
Adviser weighs the relative values of different  asset classes and  expectations
for future returns.  In doing so, the Adviser  analyzes,  on a global basis, the
level and direction of interest rates,  capital flows,  inflation  expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market."  Shifts  between stocks and
fixed income  investments  are expected to occur in generally  small  increments
within the guidelines adopted in this Statement of Additional  Information.  The
Portfolio is designed as a conservative long-term investment program.

         While the Portfolio emphasizes U.S. equity and debt securities,  it may
invest a portion  of its  assets in  foreign  securities,  including  depositary
receipts.  The Portfolio's foreign holdings will meet the criteria applicable to
its  domestic  investments.  The  international  component  of  the  Portfolio's
investment program is intended to increase diversification,  thus reducing risk,
while providing the opportunity for higher returns.

         In addition, the Portfolio may invest in securities on a when-issued or
forward  delivery  basis.  The  Portfolio  may, for hedging  purposes,  purchase
forward foreign currency exchange  contracts and foreign  currencies in the form
of bank  deposits.  The Portfolio  may also purchase  other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of


                                       4
<PAGE>

deposit,  commercial  paper,  short-term  government  obligations and repurchase
agreements.

         The Balanced Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.

Growth and Income Portfolio

         The Growth and Income  Portfolio  seeks  long-term  growth of  capital,
current  income and growth of income.  In pursuing these three  objectives,  the
Portfolio invests primarily in common stocks,  preferred stocks,  and securities
convertible  into common stocks of companies which offer the prospect for growth
of earnings  while paying  higher than  average  current  dividends.  Over time,
continued  growth of earnings tends to lead to higher  dividends and enhancement
of capital  value.  The Portfolio  allocates  its  investments  among  different
industries  and companies,  and changes its portfolio  securities for investment
considerations  and  not for  trading  purposes.  The  Adviser  believes  that a
portfolio  investing  in these kinds of  securities  can perform  well whether a
growth or value investment  style is in favor and that the Portfolio's  dividend
strategy can improve its performance in down markets. The Adviser believes these
characteristics  can  help a  shareholder  feel  comfortable  holding  onto  the
Portfolio  for the  long  run,  despite  short-term  changes  in the  investment
climate.

   
         The  Portfolio  attempts  to  achieve  its  investment   objectives  by
investing  primarily in dividend  paying  common  stocks,  preferred  stocks and
securities  convertible into common stocks. The Portfolio may also purchase such
securities  which do not pay current  dividends  but which offer  prospects  for
growth of  capital  and  future  income.  Convertible  securities  (which may be
current  coupon  or  zero  coupon  securities)  are  bonds,  notes,  debentures,
preferred  stocks and other  securities which may be converted or exchanged at a
stated or determinable  exchange ratio into  underlying  shares of common stock.
The Portfolio may also invest in nonconvertible preferred stocks consistent with
the Portfolio's objectives. From time to time, for temporary defensive purposes,
when the  Adviser  feels such a position  is  advisable  in light of economic or
market conditions,  the Portfolio may invest a portion of its assets in cash and
cash  equivalents.  The  Portfolio  may  invest  in  foreign  securities  and in
repurchase  agreements.  The  Portfolio  may  purchase  securities  of REITs and
certain mortgage-backed securities.
    

         When  evaluating  a security  for  purchase  or sale,  the  Adviser may
consider a security's  dividend yield relative to the average  dividend yield of
the S&P 500.

         The  Portfolio  may, for hedging  purposes,  purchase  forward  foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The  Portfolio  may  also  purchase  other  foreign  money  market  instruments,
including,  but not limited to, bankers'  acceptances,  certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.

         The Growth and Income  Portfolio  cannot  guarantee a gain or eliminate
the risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's  investments  and,
to a lesser extent, changes in foreign currency exchange rates.

Capital Growth Portfolio

         The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and  flexible  investment  program.  The  Portfolio  invests  in
marketable  securities,  principally  common  stocks  and,  consistent  with its
objective of long-term capital growth,  preferred stocks.  However,  in order to
reduce  risk,  as  market  or  economic  conditions  periodically  warrant,  the
Portfolio  may  also  invest  up  to  25%  of  its  assets  in  short-term  debt
instruments.

         Important considerations to the Adviser in its examination of potential
investments  include  certain  qualitative  considerations  such as a  company's
financial strength,  management  reputation,  absolute size and overall industry
position.

                                       5
<PAGE>

         Equity investments can have diverse financial characteristics,  and the
Trustees  believe that the  opportunity  for capital growth may be found in many
different  sectors of the market at any  particular  time.  In  contrast  to the
specialized   investment  policies  of  some  capital  appreciation  funds,  the
Portfolio is therefore  free to invest in a wide range of marketable  securities
offering  the  potential  for  growth.  This  enables  the  Portfolio  to pursue
investment values in various sectors of the stock market, including:

         1.       Companies  that  generate or apply new  technologies,  new and
                  improved  distribution  techniques,  or new services,  such as
                  those  in  the  business  equipment,  electronics,   specialty
                  merchandising, and health service industries.

         2.       Companies  that  own or  develop  natural  resources,  such as
                  energy exploration or precious metals companies.

         3.       Companies that may benefit from changing  consumer demands and
                  lifestyles,   such  as  financial  service  organizations  and
                  telecommunications companies.

         4.       Foreign companies.

         While emphasizing  investments in companies with  above-average  growth
prospects,  the  Portfolio  may also  purchase  and hold  equity  securities  of
companies that may have only average growth prospects,  but seem undervalued due
to factors thought to be of a temporary  nature which may cause their securities
to be out of favor and to trade at a price below their potential value.

         The Portfolio,  as a matter of nonfundamental  policy, may invest up to
20% of its net  assets in  intermediate  to longer  term  debt  securities  when
management  anticipates  that the total return on debt  securities  is likely to
equal or exceed the total  return on common  stocks  over a  selected  period of
time. The Portfolio may purchase  investment-grade  debt  securities,  which are
those rated Aaa,  Aa, A or Baa by Moody's,  or AAA,  AA, A or BBB by S&P, or, if
unrated,  of equivalent  quality as  determined  by the Adviser.  Bonds that are
rated Baa by Moody's or BBB by S&P have some  speculative  characteristics.  The
Portfolio's  intermediate  to longer term debt securities may also include those
which are  rated  below  investment  grade as long as no more than 5% of its net
assets are  invested in such  securities.  As interest  rates fall the prices of
debt securities  tend to rise and vice versa.  Should the rating of any security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine  whether  it is in the best  interest  of the  Portfolio  to retain or
dispose of the security. (See "High Yield, High Risk Securities.")

         The Capital Growth  Portfolio  cannot guarantee a gain or eliminate the
risk of loss.  The net asset value of the shares of the Portfolio  will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.

Global Discovery Portfolio

         The Global Discovery Portfolio seeks above-average capital appreciation
over the long term by  investing  primarily  in the equity  securities  of small
companies located  throughout the world. The Portfolio is designed for investors
looking for above-average appreciation potential (when compared with the overall
domestic  stock  market as reflected  by Standard & Poor's 500  Composite  Price
Index) and the  benefits of  investing  globally,  but who are willing to accept
above-average  stock market risk, the impact of currency  fluctuation and little
or no current income.

         In pursuit of its objective,  the Portfolio generally invests in small,
rapidly  growing  companies that offer the potential for  above-average  returns
relative to larger companies, yet are frequently overlooked and thus undervalued
by the market.  The Portfolio has the flexibility to invest in any region of the
world.  It can invest in companies based in emerging  markets,  typically in the
Far East, Latin America and lesser developed  countries in Europe, as well as in
firms  operating in  developed  economies,  such as those of the United  States,
Japan and Western Europe.

         The Adviser  invests the  Portfolio's  assets in  companies it believes
offer  above-average  earnings,  cash flow or asset  growth  potential.  It also
invests in companies that may receive greater market  recognition over time. The
Adviser  believes  these factors  offer  significant  opportunity  for long-term
capital  appreciation.  The Adviser evaluates investments for the Portfolio from


                                       6
<PAGE>

both a macroeconomic and microeconomic perspective,  using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible  investments.  When  evaluating  an  individual  company,  the
Adviser  takes into  consideration  numerous  factors,  including  the depth and
quality  of  management;   a  company's  product  line,  business  strategy  and
competitive  position;  research and development  efforts;  financial  strength,
including  degree of  leverage;  cost  structure;  revenue and  earnings  growth
potential;   price-earnings   ratios  and  other   stock   valuation   measures.
Secondarily,  the Adviser weighs the attractiveness of the country and region in
which a company is located.

         Under normal  circumstances  the Portfolio  invests at least 65% of its
total  assets in the  equity  securities  of small  issuers.  While the  Adviser
believes that smaller, lesser-known companies can offer greater growth potential
than larger,  more  established  firms, the former also involve greater risk and
price volatility. To help reduce risk, the Portfolio expects, under usual market
conditions,  to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate  investments among at least three countries at
all times, including the United States.

         The  Portfolio  may  invest  up to 35% of its  total  assets  in equity
securities of larger  companies  throughout the world and in debt  securities if
the Adviser  determines  that the capital  appreciation  of debt  securities  is
likely to exceed the capital  appreciation of equity  securities.  The Portfolio
may purchase investment-grade bonds, those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated,  of equivalent quality as determined by
the Adviser.  The  Portfolio  may also invest up to 5% of its net assets in debt
securities  rated below  investment-grade.  Securities  rated below  Baa/BBB are
commonly  referred  to as "junk  bonds."  The  lower  the  ratings  of such debt
securities,  the greater  their risks  render them like equity  securities.  The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.

         The  Portfolio  selects  its  portfolio   investments   primarily  from
companies whose individual equity market capitalizations would place them in the
same  size  range  as  companies  in  approximately  the  lowest  20% of  market
capitalization  as  represented by the Salomon  Brothers Broad Market Index,  an
index  comprised of global equity  securities of companies with total  available
market  capitalization  greater than $100  million.  Based on this  policy,  the
companies  held by the Portfolio  typically will have  individual  equity market
capitalizations  of between  approximately  $50 million and $2 billion (although
the  Portfolio  will be free to invest in  smaller  capitalization  issues  that
satisfy  the  Portfolio's  size  standard).   Furthermore,   the  median  market
capitalization of the Portfolio will not exceed $750 million.

         Because the Portfolio applies a U.S. size standard on a global basis, a
small  company  investment  outside the U.S.  might rank above the lowest 20% by
market  capitalization  in local markets and, in fact,  might in some  countries
rank among the largest companies in terms of capitalization.

         The equity  securities  in which the  Portfolio  may invest  consist of
common stocks,  preferred stocks (either convertible or nonconvertible),  rights
and warrants.  These securities may be listed on the U.S. or foreign  securities
exchanges or traded  over-the-counter.  For capital appreciation  purposes,  the
Portfolio may purchase notes, bonds, debentures,  government securities and zero
coupon bonds (any of which may be convertible or nonconvertible).  The Portfolio
may invest in foreign securities and American  Depositary  Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities,  and engage in strategic transactions.  In
addition,  the Portfolio may invest in illiquid or  restricted  securities.  For
temporary  defensive  purposes,  the  Portfolio  may,  during  periods  in which
conditions in securities markets warrant,  invest without limit in cash and cash
equivalents.

         The Global Discovery Portfolio cannot guarantee a gain or eliminate the
risk of loss.  The net asset value of the shares of the Portfolio  will increase
or decrease with changes in the market price of the Portfolio's  investments and
changes in  foreign  currency  exchange  rates.  The  investment  objective  and
policies of the Portfolio may, unless otherwise  specifically stated, be changed
by the  Trustees  of the Fund  without a vote of the  Shareholders.  There is no
assurance that the objective of the Portfolio will be achieved.

Risk Factors Regarding Global Discovery Portfolio

Small Company Risk. The Adviser  believes that small  companies often have sales
and earnings growth rates which exceed those of larger companies,  and that such
growth  rates may in turn be  reflected  in more rapid share price  appreciation


                                       7
<PAGE>

over time.  However,  investing in smaller company stocks involves  greater risk
than is  customarily  associated  with  investing  in larger,  more  established
companies.  For  example,  smaller  companies  can have limited  product  lines,
markets,  or financial and managerial  resources.  Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy.  Also,  the  securities of smaller  companies may be thinly
traded (and  therefore  have to be sold at a discount from current market prices
or sold in small lots over an  extended  period of time).  Transaction  costs in
smaller company stocks may be higher than those of larger companies.

Foreign  Securities.  The  Portfolio  is intended to provide  investors  with an
opportunity  to invest a portion of their assets in a  diversified  portfolio of
securities of U.S. and foreign  companies  located worldwide and is designed for
long-term investors who can accept international  investment risk. The Portfolio
is  designed  for  investors  who  can  accept   currency  and  other  forms  of
international  investment  risk.  The Adviser  believes  that  allocation of the
Portfolio's assets on a global basis decreases the degree to which events in any
one country,  including the U.S.,  will affect an investor's  entire  investment
holdings.  In the period since World War II, many leading foreign economies have
grown more rapidly than the U.S. economy and from time to time have had interest
rate  levels  that  had  a  higher  real  return  than  the  U.S.  bond  market.
Consequently, the securities of foreign issuers have provided attractive returns
relative to the returns  provided by the  securities of U.S.  issuers,  although
there can be no assurance that this will be true in the future.

         Investors  should  recognize  that  investing  in  foreign   securities
involves certain special considerations,  including those set forth below, which
are not typically  associated  with  investing in U.S.  securities and which may
affect  the  Portfolio's  performance  favorably  or  unfavorably.   As  foreign
companies  are  not  generally  subject  to  uniform  accounting,  auditing  and
financial reporting  standards,  practices and requirements  comparable to those
applicable  to  domestic  companies,   there  may  be  less  publicly  available
information about a foreign company than about a domestic company.  Many foreign
stock markets,  while growing in volume of trading activity,  have substantially
less volume than that of the New York Stock  Exchange,  and  securities  of some
foreign  issuers are less liquid and more volatile  than  securities of domestic
issuers.  Similarly,  volume and  liquidity in most foreign bond markets is less
than that in the U.S.  market and at times,  volatility  of price can be greater
than  in  the  U.S.  Further,  foreign  markets  have  different  clearance  and
settlement  procedures  and in  certain  markets  there  have  been  times  when
settlements  have  been  unable  to keep  pace  with the  volume  of  securities
transactions,  making it  difficult  to  conduct  such  transactions.  Delays in
settlement  could result in temporary  periods when assets of the  Portfolio are
uninvested  and no return is earned  thereon.  The inability of the Portfolio to
make intended  security  purchases due to  settlement  problems  could cause the
Portfolio to miss attractive investment  opportunities.  Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolio due to subsequent  declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security,  could result
in possible  liability  to the  purchaser.  Fixed  commissions  on some  foreign
securities  exchanges are generally  higher than negotiated  commissions on U.S.
exchanges,  although the Adviser will endeavor to achieve the most favorable net
results on the Portfolio's  portfolio  transactions.  Further, the Portfolio may
encounter difficulties or be unable to pursue legal remedies and obtain judgment
in foreign courts. There is generally less government supervision and regulation
of business and industry  practices,  securities  exchanges,  brokers and listed
companies than in the U.S. It may be more difficult for the  Portfolio's  agents
to keep currently  informed about  corporate  actions such as stock dividends or
other   matters   which  may  affect  the   prices  of   portfolio   securities.
Communications  between the U.S. and foreign countries may be less reliable than
within the U.S.,  thus  increasing the risk of delayed  settlements of portfolio
transactions or loss of certificates for portfolio securities. In addition, with
respect  to   certain   foreign   countries,   there  is  the   possibility   of
nationalization,  expropriation,  the imposition of  confiscatory or withholding
taxation,  political, social or economic instability, or diplomatic developments
which could affect U.S.  investments in those countries.  Investments in foreign
securities may also entail certain risks, such as possible currency blockages or
transfer  restrictions,   and  the  difficulty  of  enforcing  rights  in  other
countries.  Moreover,  individual  foreign  economies  may differ  favorably  or
unfavorably  from the U.S.  economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment,  resource self-sufficiency and
balance of payments  position.  The Adviser  seeks to mitigate  the risks to the
Portfolio  associated  with  the  foregoing  considerations  through  investment
variation and continuous professional management.

Limitations on Holdings of Foreign Securities.  The Portfolio shall invest in no
less than five  foreign  countries;  provided  that,  (i) if foreign  securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries;  (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall  invest  in no  less  than  three  foreign  countries;  (iii)  if  foreign
securities  comprise less than 40% of the value of the  Portfolio's  net assets,


                                       8
<PAGE>

the Portfolio  shall invest in no less than two foreign  countries;  and (iv) if
foreign  securities  comprise less than 20% of the value of the  Portfolio's net
assets the Portfolio may invest in a single foreign country.

         The  Portfolio  shall  invest  no more than 20% of the value of its net
assets in  securities  of issuers  located in any one country;  provided that an
additional  15% of the value of the  Portfolio's  net assets may be  invested in
securities of issuers located in any one of the following countries:  Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of the Portfolio's  assets may be invested in securities of issuers located
in the United States.

Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These  risks  include  (i)  potentially  less  social,  political  and  economic
stability;  (ii) the small current size of the markets for such  securities  and
the low volume of trading,  which result in less  liquidity and in greater price
volatility;  (iii) certain national  policies which may restrict the Portfolio's
investment  opportunities,  including  restrictions  on investment in issuers or
industries deemed sensitive to national  interests;  (iv) foreign taxation;  (v)
the  absence  of  developed  legal  structures   governing  private  or  foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries,  of a capital
market  structure or  market-oriented  economy;  and (vii) the possibility  that
recent  favorable  economic  developments  in  Eastern  Europe  may be slowed or
reversed by  unanticipated  political or social events in such countries,  or in
the countries of the former  Soviet Union.  The Portfolio may invest up to 5% of
its total assets in the  securities  of issuers  domiciled  in Eastern  European
countries.

         Investments  in  such  countries  involve  risks  of   nationalization,
expropriation and confiscatory  taxation.  The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that  such  expropriation  will not  occur in the  future.  In the event of such
expropriation,  the Fund could lose a substantial  portion of any investments it
has made in the affected countries.  Further,  no accounting  standards exist in
East European countries.  Finally,  even though certain East European currencies
may be convertible into U.S. dollars,  the conversion rates may be artificial to
the actual market values and may be adverse to the Portfolio's shareholders.

Foreign  Currencies.  Investments  in foreign  securities  usually  will involve
currencies of foreign countries.  Moreover,  the Portfolio  temporarily may hold
funds in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency  contracts,  foreign currency
futures contracts and options on such contracts.  Because of these factors,  the
value of the assets of the Portfolio as measured in U.S. dollars may be affected
favorably  or  unfavorably  by changes in foreign  currency  exchange  rates and
exchange  control  regulations,  and the Portfolio may incur costs in connection
with conversions between various currencies.  Although the Portfolio's custodian
values  each Fund's  assets  daily in terms of U.S.  dollars,  none of the Funds
intends to convert its  holdings of foreign  currencies  into U.S.  dollars on a
daily basis. The Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion.  Although foreign exchange dealers do
not  charge  a fee for  conversion,  they  do  realize  a  profit  based  on the
difference  (the  "spread")  between  the  prices at which  they are  buying and
selling various currencies.  Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate,  while  offering a lesser rate of exchange  should
the Portfolio  desire to resell that currency to the dealer.  The Portfolio will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency  exchange  market,  or
through  entering into forward or futures  contracts to purchase or sell foreign
currencies.

         Because  the  Portfolio  normally  will be  invested  in both U.S.  and
foreign  securities  markets,  changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets.  The Portfolio's share price
will reflect the movements of both the different stock and bond markets in which
it is invested and of the currencies in which the investments  are  denominated;
the  strength or weakness of the U.S.  dollar  against  foreign  currencies  may
account for part of the  Portfolio's  investment  performance.  U.S. and foreign
securities  markets do not always  move in step with each  other,  and the total
returns from different markets may vary significantly.  The Portfolio invests in
many  securities  markets  around the world in an attempt to take  advantage  of
opportunities wherever they may arise.

Investing  in  Emerging  Markets.  Most  emerging  securities  markets  may have
substantially  less volume and are subject to less government  supervision  than
U.S. securities  markets.  Securities of many issuers in emerging markets may be


                                       9
<PAGE>

less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges,  securities dealers,
and listed and unlisted companies in emerging markets than in the United States.

         Emerging   markets  also  have   different   clearance  and  settlement
procedures,  and in certain markets there have been times when  settlements have
been unable to keep pace with the volume of securities  transactions.  Delays in
settlement could result in temporary periods when a portion of the assets of the
Portfolio is  uninvested  and no cash is earned  thereon.  The  inability of the
Portfolio to make intended security  purchases due to settlement  problems could
cause the Portfolio to miss attractive  investment  opportunities.  Inability to
dispose of portfolio  securities due to settlement  problems could result either
in losses to the Portfolio due to subsequent  declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result  in  possible   liability  to  the  purchaser.   Costs   associated  with
transactions in foreign  securities are generally  higher than costs  associated
with transactions in U.S. securities.  Such transactions also involve additional
costs for the purchase or sale of foreign currency.

         Foreign  investment  in certain  emerging  market debt  obligations  is
restricted or controlled to varying degrees.  These restrictions or controls may
at times limit or preclude  foreign  investment in certain emerging markets debt
obligations  and  increase  the costs and  expenses  of the  Portfolio.  Certain
emerging markets require prior  governmental  approval of investments by foreign
persons,  limit the  amount of  investment  by foreign  persons in a  particular
company,  limit the  investment by foreign  persons only to a specific  class of
securities of a company that may have less advantageous  rights than the classes
available  for  purchase  by   domiciliaries  of  the  countries  and/or  impose
additional  taxes  on  foreign  investors.  Certain  emerging  markets  may also
restrict  investment  opportunities in issuers in industries deemed important to
national interest.

         Certain  emerging  markets may require  governmental  approval  for the
repatriation  of  investment  income,  capital  or  the  proceeds  of  sales  of
securities by foreign investors.  In addition,  if a deterioration  occurs in an
emerging  market's  balance of payments or for other  reasons,  a country  could
impose  temporary  restrictions  on foreign capital  remittances.  The Portfolio
could be  adversely  affected by delays in, or a refusal to grant,  any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.

         Many emerging markets have experienced substantial, and in some periods
extremely  high  rates  of  inflation  for  many  years.   Inflation  and  rapid
fluctuations  in  inflation  rates  have had and may  continue  to have  adverse
effects on the  economies  and  securities  markets of certain  emerging  market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain  countries.  Of these countries,  some, in recent years, have
begun to control inflation through prudent economic policies.

Investing in Latin America.  Investing in securities of Latin  American  issuers
may entail risks relating to the potential political and economic instability of
certain   Latin   American   countries   and   the   risks   of   expropriation,
nationalization,  confiscation  or the  imposition  of  restrictions  on foreign
investment  and  on   repatriation  of  capital   invested.   In  the  event  of
expropriation,  nationalization  or  other  confiscation  by  any  country,  the
Portfolio could lose its entire investment in any such country.

         The securities  markets of Latin American  countries are  substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S.  Disclosure  and  regulatory  standards are in many respects
less  stringent  than U.S.  standards.  Furthermore,  there is a lower  level of
monitoring and regulation of the markets and the activities of investors in such
markets.

         The limited size of many Latin American  securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the  securities of U.S.  issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and  competitiveness of the
securities  issuers.  For  example,  limited  market size may cause prices to be
unduly influenced by traders who control large positions.  Adverse publicity and
investors'  perceptions,  whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

                                       10
<PAGE>

         The  Portfolio  may  invest  a  portion  of its  assets  in  securities
denominated in currencies of Latin American countries.  Accordingly,  changes in
the  value  of  these   currencies   against  the  U.S.  dollar  may  result  in
corresponding  changes  in the  U.S.  dollar  value  of the  Portfolio's  assets
denominated in those currencies.

         Some Latin American countries also may have managed  currencies,  which
are not free floating against the U.S. dollar.  In addition,  there is risk that
certain  Latin  American  countries  may restrict the free  conversion  of their
currencies into other currencies. Further, certain Latin American currencies may
not be  internationally  traded.  Certain of these currencies have experienced a
steep  devaluation  relative  to  the  U.S.  dollar.  Any  devaluations  in  the
currencies  in  which  the  Portfolio  securities  are  denominated  may  have a
detrimental impact on the Portfolio's net asset value.

         The  economies  of  individual  Latin  American  countries  may  differ
favorably or unfavorably  from the U.S.  economy in such respects as the rate of
growth of gross domestic product, the rate of inflation,  capital  reinvestment,
resource  self-sufficiency  and  balance of  payments  position.  Certain  Latin
American  countries have  experienced  high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic  policies.  Furthermore,  certain Latin
American  countries  may impose  withholding  taxes on dividends  payable to the
Portfolio at a higher rate than those imposed by other foreign  countries.  This
may reduce the  Portfolio's  investment  income  available for  distribution  to
shareholders.

         Certain Latin American  countries such as Argentina,  Brazil and Mexico
are  among  the  world's  largest  debtors  to  commercial   banks  and  foreign
governments.  At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.

         Latin  America  is a  region  rich in  natural  resources  such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region  has a  large  population  (roughly  300  million)  representing  a large
domestic  market.  Economic growth was strong in the 1960s and 1970s, but slowed
dramatically  (and in some  instances  was negative) in the 1980s as a result of
poor economic policies,  higher international  interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently  experiencing lower rates of inflation and higher rates of real growth
in gross  domestic  product  than they have in the past,  other  Latin  American
countries continue to experience significant problems,  including high inflation
rates and high interest  rates.  Capital flight has proven a persistent  problem
and  external  debt has been  forcibly  restructured.  Political  turmoil,  high
inflation,  capital repatriation restrictions,  and nationalization have further
exacerbated conditions.

         Governments  of  many  Latin  American  countries  have  exercised  and
continue  to exercise  substantial  influence  over many  aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result,  government actions in the future could
have a significant  effect on economic  conditions  which may  adversely  affect
prices of certain portfolio securities.  Expropriation,  confiscatory  taxation,
nationalization,  political,  economic or social  instability  or other  similar
developments,  such as military coups,  have occurred in the past and could also
adversely affect the Fund's investments in this region.

         Changes in political leadership,  the implementation of market oriented
economic policies,  such as privatization,  trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth.  External debt
is being  restructured and flight capital  (domestic  capital that has left home
country)  has  begun  to  return.  Inflation  control  efforts  have  also  been
implemented.  Free Trade Zones are being  discussed in various  areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four  countries in the  southernmost  point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the  currencies  to undergo wide  fluctuations  in value over
short periods of time due to changes in the market.

Investing in the Pacific Basin.  Economies of individual Pacific Basin countries
may differ  favorably or unfavorably  from the U.S.  economy in such respects as
growth of gross  national  product,  rate of  inflation,  capital  reinvestment,
resource  self-sufficiency,  interest  rate  levels,  and  balance  of  payments
position. Of particular importance,  most of the economies in this region of the
world are heavily dependent upon exports,  particularly to developed  countries,
and,  accordingly,  have been and may continue to be adversely affected by trade
barriers,   managed   adjustments  in  relative   currency  values,   and  other
protectionist  measures  imposed or negotiated  by the U.S. and other  countries
with which they trade.  These  economies  also have been and may  continue to be


                                       11
<PAGE>

negatively  impacted  by  economic  conditions  in the U.S.  and  other  trading
partners, which can lower the demand for goods produced in the Pacific Basin.

         With  respect to the  Peoples  Republic  of China and other  markets in
which the Fund may  participate,  there is the  possibility of  nationalization,
expropriation   or  confiscatory   taxation,   political   changes,   government
regulation,  social instability or diplomatic  developments that could adversely
impact a Pacific Basin country or the Portfolio's investment in the debt of that
country.

         Foreign companies, including Pacific Basin companies, are not generally
subject to uniform  accounting,  auditing  and  financial  reporting  standards,
practices and  disclosure  requirements  comparable to those  applicable to U.S.
companies.  Consequently, there may be less publicly available information about
such  companies  than about U.S.  companies.  Moreover,  there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.

Investing in Europe. Most Eastern European nations,  including Hungary,  Poland,
Czechoslovakia,  and Romania have had  centrally  planned,  socialist  economies
since shortly after World War II. A number of their governments, including those
of  Hungary,  the Czech  Republic,  and Poland  are  currently  implementing  or
considering reforms directed at political and economic liberalization, including
efforts to foster multi-party political systems, decentralize economic planning,
and move toward free market economies.  At present,  no Eastern European country
has a developed stock market, but Poland,  Hungary,  and the Czech Republic have
small securities markets in operation.  Ethnic and civil conflict currently rage
through the former Yugoslavia. The outcome is uncertain.

         Both the European  Community (the "EC") and Japan,  among others,  have
made  overtures to  establish  trading  arrangements  and assist in the economic
development  of the Eastern  European  nations.  A great deal of  interest  also
surrounds  opportunities  created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable  member  of the EC  and  numerous  other  international  alliances  and
organizations.  To reduce  inflation  caused by the unification of East and West
Germany,  Germany has adopted a tight monetary  policy which has led to weakened
exports and a reduced  domestic demand for goods and services.  However,  in the
long-term,   reunification  could  prove  to  be  an  engine  for  domestic  and
international growth.

         The  conditions  that  have  given  rise  to  these   developments  are
changeable,  and there is no assurance  that reforms will continue or that their
goals will be achieved.

         Portugal is a genuinely  emerging  market which has  experienced  rapid
growth  since  the  mid-1980s,  except  for a brief  period of  stagnation  over
1990-91.  Portugal's  government  remains  committed  to  privatization  of  the
financial  system  away from one  dependent  upon the  banking  system to a more
balanced  structure  appropriate  for  the  requirements  of a  modern  economy.
Inflation continues to be about three times the EC average.

         Economic  reforms  launched in the 1980s  continue to benefit Turkey in
the 1990s.  Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP")  increasing more than 6%
annually.  Agriculture  remains the most important  economic  sector,  employing
approximately  55% of the labor force,  and accounting for nearly 20% of GDP and
20% of exports.  Inflation  and interest  rates remain high,  and a large budget
deficit   will   continue  to  cause   difficulties   in  Turkey's   substantial
transformation to a dynamic free market economy.

         Like many other Western  economies,  Greece suffered  severely from the
global oil price hikes of the 1970s,  with annual GDP growth plunging from 8% to
2% in the  1980s,  and  inflation,  unemployment,  and  budget  deficits  rising
sharply.  The fall of the socialist  government in 1989 and the inability of the
conservative  opposition  to  obtain  a  clear  majority  have  led to  business
uncertainty  and the continued  prospects for flat  economic  performance.  Once
Greece  has  sorted  out  its  political  situation,  it will  have to face  the
challenges posed by the steadily increasing integration of the EC, including the
progressive  lowering of trade and investment  barriers.  Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.

         Securities traded in certain emerging European  securities  markets may
be subject to risks due to the  inexperience  of financial  intermediaries,  the
lack of modern  technology  and the lack of a sufficient  capital base to expand


                                       12
<PAGE>

business  operations.  Additionally,  former  Communist  regimes  of a number of
Eastern  European  countries had  expropriated  a large amount of property,  the
claims of which have not been entirely  settled.  There can be no assurance that
the  Portfolio's  investments in Eastern Europe would not also be  expropriated,
nationalized  or otherwise  confiscated.  Finally,  any change in  leadership or
policies of Eastern European countries, or countries that exercise a significant
influence  over  those  countries,  may halt the  expansion  of or  reverse  the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.

Investing in Africa.  Africa is a continent of roughly 50 countries with a total
population of approximately  840 million people.  Literacy rates (the percentage
of  people  who are  over 15  years  of age and who  can  read  and  write)  are
relatively low,  ranging from 20% to 60%. The primary  industries  include crude
oil, natural gas, manganese ore,  phosphate,  bauxite,  copper,  iron,  diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.

         Many of the countries are fraught with political instability.  However,
there has been a trend over the past five  years  toward  democratization.  Many
countries are moving from a military style,  Marxist, or single party government
to a multi-party  system.  Still, there remain many countries that do not have a
stable political  process.  Other countries have been enmeshed in civil wars and
border clashes.

         Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria,  Zimbabwe and South Africa are the wealthier  countries on
the continent.  The market  capitalization  of these  countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges.  However, religious and ethnic strife has been a
significant source of instability.

         On the  other  end of the  economic  spectrum  are  countries,  such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least  developed in the world.  These  countries are generally  landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international  oil prices. Of all the African  industries,  oil has
been the  most  lucrative,  accounting  for 40% to 60% of many  countries'  GDP.
However,  general  decline  in oil  prices  has had an  adverse  impact  on many
economies.

         Foreign  securities  such as those  purchased by the  Portfolio  may be
subject  to  foreign  government  taxes  which  could  reduce  the yield on such
securities,  although a  shareholder  of the Portfolio  may,  subject to certain
limitations,  be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her  proportionate  share of such foreign  taxes paid by
the Portfolio. (See "TAX STATUS.")

International Portfolio

         The International Portfolio seeks long-term growth of capital primarily
through  diversified  holdings of marketable  foreign  equity  investments.  The
Portfolio invests in companies,  wherever organized, which do business primarily
outside the United  States.  The Fund,  on behalf of the  Portfolio,  intends to
diversify  investments  among several  countries and to have  represented in the
program  business  activities in not less than three  different  countries.  The
management considers it consistent with this policy for the Portfolio to acquire
securities  of  companies  incorporated  in the United  States and having  their
principal  activities  and  interests  outside  of the United  States,  and such
investments may be included in the program.

         It is not the policy of the Portfolio to concentrate its investments in
any particular industry,  and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market  value of the  Portfolio's  assets  above 25% for any one  industry.  The
Portfolio  does not invest for the  purpose of  controlling  or  managing  other
companies.

         The  major  portion  of  the  Portfolio's  assets  consists  of  equity
securities of established companies listed on recognized exchanges;  the Adviser
expects this  condition to continue,  although the Portfolio may invest in other
securities.  Investments may also be made in fixed income  securities of foreign
governments  and  companies  with a view  toward  total  investment  return.  In
determining the location of the principal activities and interests of a company,
the Adviser  takes into account  such  factors as the location of the  company's
assets,  personnel,   sales  and  earnings.  In  selecting  securities  for  the
Portfolio,  the Adviser seeks to identify  companies whose securities  prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment,  the Adviser  ordinarily  looks for one or more of the


                                       13
<PAGE>

following characteristics:  above-average earnings growth per share, high return
on invested  capital,  healthy  balance sheets and overall  financial  strength,
strong  competitive  advantages,  strength of management  and general  operating
characteristics which will enable the companies to compete successfully in their
marketplace.  Investment decisions are made without regard to arbitrary criteria
such as minimum asset size,  debt-equity ratios or dividend history of Portfolio
companies.

         The  Portfolio  may invest in any type of security  including,  but not
limited  to  shares,   preferred  or  common,   bonds  and  other  evidences  of
indebtedness,  and other  securities  of  issuers  wherever  organized,  and not
excluding   evidences  of   indebtedness  of  governments  and  their  political
subdivisions.  Although  no  particular  proportion  of  stocks,  bonds or other
securities is required to be  maintained,  the Fund, on behalf of the Portfolio,
in view of the Portfolio's investment objective, intends under normal conditions
to  maintain  holdings  consisting  primarily  of a  diversified  list of equity
securities.

         Under exceptional  economic or market conditions  abroad, the Portfolio
may temporarily,  until normal conditions return,  invest all or a major portion
of its assets in Canadian  or U.S.  Government  obligations  or  currencies,  or
securities of companies incorporated in and having their principal activities in
Canada or the United States.

         Foreign  securities  such as those  purchased by the  Portfolio  may be
subject  to  foreign  government  taxes  which  could  reduce  the yield on such
securities,  although a  shareholder  of the Portfolio  may,  subject to certain
limitations,  be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her  proportionate  share of such foreign  taxes paid by
the Portfolio. (See "TAXES.")

         The Portfolio is intended to provide  investors  with an opportunity to
invest a portion of their assets in a diversified group of securities of foreign
companies  and   governments.   Management   of  the  Portfolio   believes  that
diversification  of assets on an  international  basis  decreases  the degree to
which events in any one country,  including  the United  States,  will affect an
investor's  entire investment  holdings.  In the period since World War II, many
leading  foreign  economies  and foreign  stock  market  indexes have grown more
rapidly than the United States  economy and leading U.S.  stock market  indexes,
although there can be no assurance that this will be true in the future. Because
of the Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.

         Because the Portfolio  normally will be invested in foreign  securities
markets,  changes in the Portfolio's share price may have a low correlation with
movements  in the U.S.  markets.  The  Portfolio's  share price will reflect the
movements of both the  different  stock and bond markets in which it is invested
and of the currencies in which the investments are denominated;  the strength or
weakness of the U.S. dollar against  foreign  currencies may account for part of
the Portfolio's investment  performance.  U.S. and foreign securities markets do
not always move in step with each other,  and the total  returns from  different
markets may vary significantly. The Portfolio invests in many foreign securities
markets in an attempt  to take  advantage  of  opportunities  wherever  they may
arise.

              POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS

           (See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
                           in the Fund's prospectus.)

         Except  as  otherwise  noted  below,   the  following   description  of
additional  investment  policies  and  techniques  is  applicable  to all of the
Portfolios.

Repurchase Agreements

         On behalf of a Portfolio, the Fund may enter into repurchase agreements
with  member  banks of the Federal  Reserve  System,  any  foreign  bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the  creditworthiness  of the bank or  broker-dealer  has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest  categories  assigned by Moody's or S&P. A repurchase  agreement
with a member bank of the Federal Reserve System, which provides a means for the
Portfolio  to earn  income on funds for  periods  as short as  overnight,  is an
arrangement through which the Portfolio acquires a U.S. Government or other high


                                       14
<PAGE>

quality  short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase  the Obligation at a specified time and price. A
repurchase  agreement  with  foreign  banks may be  available  with  respect  to
government  securities of the particular  foreign  jurisdiction.  The repurchase
price may be higher than the purchase price,  the difference being income to the
Portfolio,  or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the  Portfolio  together  with the  repurchase  price on
repurchase.  In either  case,  the income to the  Portfolio  is unrelated to the
interest  rate  on the  Obligation  subject  to the  repurchase  agreement.  For
purposes of the  Investment  Company Act of 1940, as amended (the "1940 Act"), a
repurchase  agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation  subject to the repurchase  agreement and is therefore subject to
the  Portfolio's  investment  restriction  applicable to loans.  It is not clear
whether a court would consider the Obligation purchased by the Portfolio subject
to a repurchase agreement as being owned by the Portfolio or as being collateral
for a loan by the Portfolio to the seller.  In the event of the  commencement of
bankruptcy  or insolvency  proceedings  of the seller of the  Obligation  before
repurchase of the  Obligation  under a repurchase  agreement,  the Portfolio may
encounter  delay and incur costs before being able to sell the security.  Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes  the  transaction  as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured  creditor,  the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured  debt  instrument  purchased  for the  Portfolio,  the  Fund  seeks to
minimize  the  risk of loss  through  repurchase  agreements  by  analyzing  the
creditworthiness  of the  obligor,  in this case the  seller of the  Obligation.
Apart from the risk of bankruptcy or insolvency  proceedings,  there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation  subject to the repurchase  agreement  becomes less than
the repurchase price (including interest),  the Portfolio will direct the seller
of the Obligation to deliver  additional  securities so that the market value of
all  securities  subject to the  repurchase  agreement  will equal or exceed the
repurchase  price.  It is possible that the Portfolio  will be  unsuccessful  in
seeking to impose on the seller a contractual  obligation to deliver  additional
securities.

   
Debt Securities

         The Bond, Balanced,  Capital Growth and Global Discovery Portfolios may
each invest in debt securities rated below  investment-grade  (those rated below
Baa or BBB). These  securities are commonly  referred to as "junk bonds" and can
entail greater price  volatility and involve a higher degree of speculation with
respect  to  the  payment  of  principal  and  interest   than  higher   quality
fixed-income  securities.  The market prices of such lower rated debt securities
may decline significantly in periods of general economic difficulty. The trading
market for these  securities  is  generally  less liquid  than for higher  rated
securities, and a Portfolio may have difficulty disposing of these securities at
the time it wishes to do so. The lack of a liquid  secondary  market for certain
securities  may also make it more  difficult for a Portfolio to obtain  accurate
market  quotations for purposes of valuing its portfolio and calculating its net
asset value.  The lower the ratings of such debt  securities,  the greater their
risks render them like equity securities.  In addition,  as interest rates fall,
the prices of debt securities tend to rise and vice versa.  Should the rating of
any security held by a Portfolio be downgraded  after the time of purchase,  the
Adviser will  determine  whether it is in the best  interest of the Portfolio to
retain or dispose of the security.

Illiquid or Restricted Securities

         The Portfolios may each occasionally  purchase securities other than in
the open market.  While such purchases may often offer attractive  opportunities
for  investment  not otherwise  available on the open market,  the securities so
purchased are often "restricted  securities" or "not readily  marketable," i.e.,
securities  which cannot be sold to the public  without  registration  under the
Securities Act of 1933 (the "1933 Act") or the availability of an exemption from
registration  (such as Rules 144 or 144A) or because  they are  subject to other
legal or contractual delays in or restrictions on resale.

         Generally speaking, restricted securities may be sold only to qualified
institutional  buyers,  or in a privately  negotiated  transaction  to a limited
number of purchasers,  or in limited  quantities after they have been held for a
specified  period of time and other  conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Portfolio  may be deemed to be an  "underwriter"
for purposes of the 1933 Act when selling  restricted  securities to the public,
and in such event the Portfolio  may be liable to purchasers of such  securities
    


                                       15
<PAGE>

if the registration  statement prepared by the issuer, or the prospectus forming
a part of it, is materially inaccurate or misleading.

   
Trust Preferred Securities

         The Bond  Portfolio  and  Balanced  Portfolio  may each invest in Trust
Preferred  Securities,  which are hybrid instruments issued by a special purpose
trust (the "Special  Trust"),  the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Portfolios of Trust Preferred
Securities are typically used to purchase a junior subordinated  debenture,  and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.

         If payments on the underlying  junior  subordinated  debentures held by
the Special Trust are deferred by the debenture issuer,  the debentures would be
treated as original  issue  discount  ("OID")  obligations  for the remainder of
their term.  As a result,  holders of Trust  Preferred  Securities,  such as the
Portfolios,  would be required to accrue daily for Federal  income tax purposes,
their  share of the stated  interest  and the de minimis  OID on the  debentures
(regardless  of whether a Portfolio  receives  any cash  distributions  from the
Special  Trust),  and the value of Trust  Preferred  Securities  would likely be
negatively  affected.  Interest payments on the underlying  junior  subordinated
debentures  typically  may only be deferred if dividends  are  suspended on both
common and preferred  stock of the issuer.  The underlying  junior  subordinated
debentures generally rank slightly higher in terms of payment priority than both
common and preferred securities of the issuer, but rank below other subordinated
debentures and debt  securities.  Trust  Preferred  Securities may be subject to
mandatory  prepayment  under certain  circumstances.  The market values of Trust
Preferred  Securities  may be more  volatile  than  those of  conventional  debt
securities.  Trust  Preferred  Securities may be issued in reliance on Rule 144A
under the Securities Act of 1933, as amended,  and, unless and until registered,
are  restricted  securities;  there can be no assurance  as to the  liquidity of
Trust  Preferred  Securities  and the  ability  of  holders  of Trust  Preferred
Securities, such as the Portfolios, to sell their holdings.
    

Zero Coupon Securities

   
         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in zero coupon securities which pay
no cash  income  and are  sold at  substantial  discounts  from  their  value at
maturity.  When  held to  maturity,  their  entire  income,  which  consists  of
accretion of  discount,  comes from the  difference  between the issue price and
their value at maturity.  Zero coupon  securities  are subject to greater market
value  fluctuations  from  changing  interest  rates  than debt  obligations  of
comparable  maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation)  as increases (or  decreases)  in market value of such  securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon  convertible  securities  generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually  issued  with  shorter  maturities  (15 years or less) and with  options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
    

         Zero coupon securities  include  securities issued directly by the U.S.
Treasury,  and U.S. Treasury bonds or notes and their unmatured interest coupons
and  receipts  for  their  underlying  principal  ("coupons")  which  have  been
separated by their holder,  typically a custodian  bank or investment  brokerage
firm. A holder will separate the interest coupons from the underlying  principal
(the "corpus") of the U.S. Treasury  security.  A number of securities firms and
banks have  stripped the  interest  coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income  Growth  Receipts"  ("TIGRS")  and  Certificate  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.  Counsel  to the
underwriters  of these  certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes,  in
their opinion  purchasers of such  certificates,  such as the  Portfolios,  most
likely will be deemed the beneficial  holders of the underlying U.S.  government
securities.

         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


                                       16
<PAGE>

Reserve  book-entry  record-keeping  system.  The  Federal  Reserve  program  as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered  Interest and Principal of Securities."  Under the STRIPS program,
the  Portfolio  will be able to have its  beneficial  ownership  of zero  coupon
securities recorded directly in the book-entry  record-keeping system in lieu of
having to hold  certificates  or other  evidences of ownership of the underlying
U.S. Treasury securities.

         When U.S.  Treasury  obligations  have been stripped of their unmatured
interest  coupons  by the  holder,  the  principal  or  corpus is sold at a deep
discount  because the buyer  receives  only the right to receive a future  fixed
payment on the  security  and does not receive  any rights to periodic  interest
(cash) 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  that the Treasury  sells
itself.

   
Real Estate Investment Trusts

         The Bond Portfolio and the Growth and Income  Portfolio may each invest
in REITs. REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid  REITs.  Investment  in REITs may subject a Portfolio  to risks
associated with the direct  ownership of real estate,  such as decreases in real
estate values,  overbuilding,  increased  competition and other risks related to
local or general economic conditions,  increases in operating costs and property
taxes,  changes  in zoning  laws,  casualty  or  condemnation  losses,  possible
environmental  liabilities,  regulatory  limitations on rent and fluctuations in
rental income.  Equity REITs generally  experience  these risks directly through
fee or leasehold  interests,  whereas mortgage REITs generally  experience these
risks indirectly through mortgage interests, unless the mortgage REIT forecloses
on the  underlying  real estate.  Changes in interest  rates may also affect the
value of a Portfolio's  investment in REITs.  For  instance,  during  periods of
declining  interest  rates,  certain  mortgage REITs may hold mortgages that the
mortgagors  elect  to  prepay,  which  prepayment  may  diminish  the  yield  on
securities issued by those REITs.

         Certain REITs have relatively  small market  capitalization,  which may
tend to  increase  the  volatility  of the  market  price of  their  securities.
Furthermore,  REITs are  dependent  upon  specialized  management  skills,  have
limited  diversification  and  are,  therefore,  subject  to risks  inherent  in
operating and financing a limited number of projects.  REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free  pass-through of income under the Internal  Revenue Code
of 1986, as amended and to maintain exemption from the registration requirements
of the 1940  Act.  By  investing  in REITs  indirectly  through a  Portfolio,  a
shareholder will bear not only his or her proportionate share of the expenses of
the Portfolio, but also, indirectly, similar expenses of the REITs. In addition,
REITs  depend  generally  on  their  ability  to  generate  cash  flow  to  make
distributions to shareholders.
    

Mortgage-Backed Securities and Mortgage Pass-Through Securities

   
         The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed  securities,  which are  interests  in pools of mortgage  loans,
including  mortgage  loans  made by  savings  and  loan  institutions,  mortgage
bankers,  commercial banks, and others. Pools of mortgage loans are assembled as
securities  for sale to investors by various  governmental,  government-related,
and private  organizations  as further  described below. The Portfolios may also
invest in debt  securities  which are  secured  with  collateral  consisting  of
mortgage-backed  securities (see "Collateralized Mortgage Obligations"),  and in
other types of mortgage-related securities.
    

         A decline in interest  rates may lead to a faster rate of  repayment of
the  underlying  mortgages,  and expose the Portfolios to a lower rate of return
upon reinvestment.  To the extent that such mortgage-backed  securities are held
by the  Portfolios,  the prepayment  right will tend to limit to some degree the
increase  in net  asset  value  of  the  Portfolios  because  the  value  of the
mortgage-backed  securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.

         Interests  in pools of  mortgage-backed  securities  differ  from other
forms of debt  securities,  which  normally  provide  for  periodic  payment  of
interest in fixed amounts with principal  payments at maturity or specified call
dates.  Instead,  these  securities  provide a monthly payment which consists of
both  interest  and  principal  payments.   In  effect,  these  payments  are  a


                                       17
<PAGE>

"pass-through" of the monthly payments made by the individual borrowers on their
mortgage  loans,  net of any  fees  paid  to the  issuer  or  guarantor  of such
securities.  Additional payments are caused by repayments of principal resulting
from the sale of the underlying property,  refinancing,  or foreclosure,  net of
fees or costs which may be incurred.  Some  mortgage-related  securities such as
securities issued by the Government National Mortgage  Association  ("GNMA") are
described as "modified  pass-through."  These  securities  entitle the holder to
receive all interest and principal  payments owed on the mortgage  pool,  net of
certain fees, at the  scheduled  payment dates  regardless of whether or not the
mortgagor actually makes the payment.

         The principal governmental guarantor of mortgage-related  securities is
GNMA. GNMA is a wholly-owned U.S.  Government  corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S.  Government,  the timely  payment of principal  and
interest on securities issued by institutions  approved by GNMA (such as savings
and loan  institutions,  commercial  banks, and mortgage  bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages.  These guarantees,  however, do
not apply to the market value or yield of  mortgage-backed  securities or to the
value of  Portfolio  shares.  Also,  GNMA  securities  often are  purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.

         Government-related  guarantors  (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan  Mortgage  Corporation  ("FHLMC").  FNMA is a
government-sponsored  corporation owned entirely by private stockholders.  It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases  conventional  (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved  seller/servicers  which include state
and  federally-chartered  savings and loan  associations,  mutual savings banks,
commercial banks, credit unions, and mortgage bankers.  Pass-through  securities
issued by FNMA are  guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.

         FHLMC is a corporate  instrumentality  of the U.S.  Government  and was
created by Congress in 1970 for the purpose of increasing  the  availability  of
mortgage  credit  for  residential  housing.  Its  stock is owned by the  twelve
Federal Home Loan Banks. FHLMC issues  Participation  Certificates ("PCs") which
represent  interests in conventional  mortgages from FHLMC's national portfolio.
FHLMC  guarantees  the timely  payment of interest  and ultimate  collection  of
principal,  but PCs are not  backed  by the full  faith  and  credit of the U.S.
Government.

         Commercial  banks,  savings  and loan  institutions,  private  mortgage
insurance  companies,  mortgage bankers, and other secondary market issuers also
create  pass-through pools of conventional  mortgage loans. Such issuers may, in
addition,  be the originators and/or servicers of the underlying  mortgage loans
as well as the guarantors of the mortgage-related  securities.  Pools created by
such  non-governmental  issuers  generally  offer a higher rate of interest than
government and government-related  pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and  principal of these pools may be supported by various  forms of insurance or
guarantees,  including  individual loan, title,  pool and hazard insurance,  and
letters of credit.  The  insurance  and  guarantees  are issued by  governmental
entities,  private  insurers,  and the  mortgage  poolers.  Such  insurance  and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality  standards.  There can be no  assurance  that the  private  insurers  or
guarantors can meet their obligations under the insurance  policies or guarantee
arrangements.   The  Portfolios  may  buy  mortgage-related  securities  without
insurance or guarantees,  if through an  examination of the loan  experience and
practices of the  originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios'  quality standards.  Although the market for
such securities is becoming  increasingly  liquid,  securities issued by certain
private organizations may not be readily marketable.

Collateralized Mortgage Obligations ("CMOs")

         A CMO  is a  hybrid  between  a  mortgage-backed  bond  and a  mortgage
pass-through  security.  Similar to a bond,  interest and prepaid  principal are
paid, in most cases, semiannually.  CMOs may be collateralized by whole mortgage
loans  but  are  more  typically   collateralized   by  portfolios  of  mortgage
pass-through  securities  guaranteed by GNMA,  FHLMC,  or FNMA, and their income
streams.

                                       18
<PAGE>

         CMOs are  structured  into multiple  classes,  each bearing a different
stated  maturity.  Actual  maturity  and  average  life  will  depend  upon  the
prepayment  experience  of the  collateral.  CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according  to how  quickly the loans are repaid.  Monthly  payment of  principal
received from the pool of underlying mortgages,  including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity  classes  receive  principal only after the first class has been
retired.  An investor is partially  guarded against a sooner than desired return
of principal because of the sequential payments.

         In a typical CMO  transaction,  a corporation  issues multiple  series,
(e.g.,  A, B, C, Z) of CMO bonds  ("Bonds").  Proceeds of the Bond  offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The  Collateral  is pledged to a third party  trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest.  Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond  currently  being
paid  off.  When the  Series A, B, and C Bonds  are paid in full,  interest  and
principal on the Series Z Bond begins to be paid currently.  With some CMOs, the
issuer  serves as a conduit to allow loan  originators  (primarily  builders  or
savings and loan associations) to borrow against their loan portfolios.

FHLMC Collateralized Mortgage Obligations

         FHLMC CMOs are debt  obligations  of FHLMC  issued in multiple  classes
having  different  maturity  dates  which are secured by the pledge of a pool of
conventional  mortgage loans purchased by FHLMC.  Unlike FHLMC PCs,  payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance  with FHLMC's  mandatory  sinking fund schedule,  which,  in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral  pool.  All sinking  fund  payments in the CMOs are  allocated to the
retirement  of the  individual  classes  of bonds in the  order of their  stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's  minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as  additional  sinking fund  payments.
Because of the  "pass-through"  nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement,  the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.

         If  collection  of principal  (including  prepayments)  on the mortgage
loans during any  semiannual  payment  period is not  sufficient to meet FHLMC's
minimum  sinking fund  obligation on the next sinking fund payment  date,  FHLMC
agrees to make up the deficiency from its general funds.

         Criteria  for the  mortgage  loans  in the  pool  backing  the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

Other Mortgage-Backed Securities

         The Adviser expects that governmental,  government-related,  or private
entities may create  mortgage loan pools and other  mortgage-related  securities
offering  mortgage  pass-through  and  mortgage-collateralized   investments  in
addition to those described above. The mortgages underlying these securities may
include alternative  mortgage  instruments,  that is, mortgage instruments whose
principal  or interest  payments  may vary or whose terms to maturity may differ
from  customary  long-term  fixed rate  mortgages.  The Bond  Portfolio  and the
Balanced  Portfolio  will not purchase  mortgage-backed  securities or any other
assets which, in the opinion of the Adviser,  are illiquid if, as a result, more
than 10% of the value of the Portfolio's  total assets will be illiquid.  As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment  objectives,  policies,
and  quality  standards,  consider  making  investments  in such  new  types  of
mortgage-related securities.

Other Asset-Backed Securities

         The   securitization   techniques  used  to  develop   mortgaged-backed
securities are now being applied to a broad range of assets.  Through the use of
trusts and special  purpose  corporations,  various  types of assets,  including


                                       19
<PAGE>

automobile  loans,  computer  leases  and  credit  card  receivables,  are being
securitized  in  pass-through  structures  similar to the mortgage  pass-through
structures  described  above or in a  structure  similar  to the CMO  structure.
Consistent  with the Bond  Portfolio's and the Balanced  Portfolio's  investment
objectives  and policies,  the Portfolios may invest in these and other types of
asset-backed  securities  that may be developed in the future.  In general,  the
collateral  supporting  these  securities  is of shorter  maturity than mortgage
loans and is less likely to  experience  substantial  prepayments  with interest
rate fluctuations.

         Several types of  asset-backed  securities have already been offered to
investors,  including  Certificates  for  Automobile  ReceivablesSM  ("CARSSM").
CARSSM  represent  undivided  fractional  interests in a trust  ("Trust")  whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through  monthly to certificate  holders,  and
are  guaranteed up to certain  amounts and for a certain time period by a letter
of credit  issued by a financial  institution  unaffiliated  with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is  exhausted,  the Trust may be  prevented  from  realizing  the full
amount  due  on  a  sales  contract   because  of  state  law  requirements  and
restrictions  relating to  foreclosure  sales of vehicles  and the  obtaining of
deficiency judgments following such sales or because of depreciation,  damage to
or loss of a vehicle,  the  application  of  federal  and state  bankruptcy  and
insolvency  laws,  or  other  factors.  As a  result,  certificate  holders  may
experience delays in payments or losses if the letter of credit is exhausted.

         Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security  interest in the related  assets.  Credit card  receivables  are
generally  unsecured and the debtors are entitled to the  protection of a number
of state and federal  consumer  credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards,  thereby reducing the
balance due. There is the possibility that recoveries on repossessed  collateral
may not, in some cases, be available to support payments on these securities.

         Asset-backed   securities   are  often  backed  by  a  pool  of  assets
representing  the  obligations of a number of different  parties.  To lessen the
effect of  failures  by  obligors on  underlying  assets to make  payments,  the
securities  may  contain   elements  of  credit  support  which  fall  into  two
categories:  (i)  liquidity  protection,  and  (ii)  protection  against  losses
resulting  from  ultimate  default  by an  obligor  on  the  underlying  assets.
Liquidity  protection  refers to the  provision  of  advances,  generally by the
entity  administering the pool of assets, to ensure that the receipt of payments
on the underlying  pool occurs in a timely  fashion.  Protection  against losses
results from payment of the insurance  obligations  on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit  obtained  by the  issuer or  sponsor  from third  parties,
through various means of structuring the transaction or through a combination of
such approaches.  The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate  fees for credit  support.  The degree of credit  support
provided for each issue is generally based on historical  information respecting
the level of credit risk associated with the underlying  assets.  Delinquency or
loss in excess of that  anticipated,  or  failure of the  credit  support  could
adversely affect the return on an investment in such a security.

         The Bond  Portfolio  and the  Balanced  Portfolio  may also  invest  in
residual  interests  in  asset-backed  securities.  In the case of  asset-backed
securities  issued in a pass-through  structure,  the cash flow generated by the
underlying  assets is applied to make required payments on the securities and to
pay related  administrative  expenses.  The residual in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
after making the foregoing payments.  The amount of residual cash flow resulting
from a particular  issue of asset-backed  securities will depend on, among other
things,  the  characteristics  of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals  not  registered  under the  Securities  Act of 1933 may be subject to
certain  restrictions on  transferability.  In addition,  there may be no liquid
market for such securities.

         The  availability  of  asset-backed   securities  may  be  affected  by
legislative or regulatory  developments.  It is possible that such  developments
may require the Bond Portfolio and the Balanced Portfolio to dispose of any then
existing holdings of such securities.

                                       20
<PAGE>

Municipal Obligations

         The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in
municipal obligations,  which are issued by or on behalf of states, territories,
and possessions of the U.S., and their  political  subdivisions,  agencies,  and
instrumentalities,  and the  District of  Columbia  to obtain  funds for various
public  purposes.  The interest on these  obligations  is generally  exempt from
federal  income  tax  in  the  hands  of  most  investors.   The  two  principal
classifications of municipal  obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations.  The
Bond Portfolio and the Balanced Portfolio may each acquire municipal obligations
when, due to disparities in the debt securities  markets,  the anticipated total
return on such obligations is higher than that on taxable obligations.  The Bond
Portfolio  and the Balanced  Portfolio  have no current  intention of purchasing
tax-exempt  municipal  obligations  that would  amount to greater than 5% of the
Portfolio's total assets.

Convertible Securities

   
         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in convertible securities; that is,
bonds,  notes,  debentures,  preferred  stocks  and other  securities  which are
convertible into common stock. Investments in convertible securities can provide
an  opportunity  for capital  appreciation  and/or income  through  interest and
dividend payments by virtue of their conversion or exchange features.

         The  convertible  securities in which the Portfolios may invest include
fixed-income or zero coupon debt securities  which may be converted or exchanged
at a stated or  determinable  exchange  ratio into  underlying  shares of common
stock.  The  exchange  ratio  for any  particular  convertible  security  may be
adjusted  from time to time due to stock  splits,  dividends,  spin-offs,  other
corporate distributions or scheduled changes in the exchange ratio.  Convertible
securities and  convertible  preferred  stocks,  until  converted,  have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt  securities  generally,  the market  value of  convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest  rates decline.  In addition,  because of the conversion or
exchange feature,  the market value of convertible  securities typically changes
as the market value of the underlying  common stocks  changes,  and,  therefore,
also tends to follow  movements in the general market for equity  securities.  A
unique  feature of  convertible  securities  is that as the market  price of the
underlying  common  stock  declines,   convertible   securities  tend  to  trade
increasingly on a yield basis,  and so may not experience  market value declines
to the same extent as the underlying  common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the  underlying  common stock,  although
typically  not as much as the  underlying  common  stock.  While  no  securities
investments are without risk,  investments in convertible  securities  generally
entail less risk than investments in common stock of the same issuer.
    

         As fixed income  securities,  convertible  securities  are  investments
which provide for a stream of income (or in the case of zero coupon  securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all  fixed  income  securities,  there  can be no  assurance  of  income or
principal payments because the issuers of the convertible securities may default
on their obligations.  Convertible  securities generally offer lower yields than
non-convertible  securities of similar  quality  because of their  conversion or
exchange features.

         Convertible  securities are generally subordinated to other similar but
non-convertible  securities of the same issuer,  although  convertible bonds, as
corporate debt  obligations,  enjoy  seniority in right of payment to all equity
securities,  and  convertible  preferred stock is senior to common stock, of the
same issuer.  However,  because of the subordination feature,  convertible bonds
and  convertible  preferred  stock  typically  have lower  ratings  than similar
non-convertible securities.

         Convertible  securities may be issued as fixed income  obligations that
pay current  income or as zero coupon  notes and bonds,  including  Liquid Yield
Option Notes ("LYONs").  Zero coupon  securities pay no cash income and are sold
at substantial  discounts  from their value at maturity.  When held to maturity,
their entire  income,  which  consists of accretion of discount,  comes from the
difference  between the purchase price and their value at maturity.  Zero coupon
convertible  securities  offer  the  opportunity  for  capital  appreciation  as
increases (or decreases) in market value of such securities  closely follows the
movements  in the market  value of the  underlying  common  stock.  Zero  coupon
convertible  securities  are  generally  expected to be less  volatile  than the
underlying  common stocks as they are usually issued with short to medium length


                                       21
<PAGE>

maturities  (15 years or less) and are issued  with  options  and/or  redemption
features  exercisable  by the holder of the  obligation  entitling the holder to
redeem the obligation and receive a defined cash payment.

Depositary Receipts

         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International  Portfolios  may each invest  indirectly  in securities of foreign
issuers through sponsored or unsponsored  American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"),  International Depositary Receipts ("IDRs")
and other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs
are hereinafter referred to as "Depositary  Receipts").  Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which  they may be  converted.  In  addition,  the  issuers of the stock of
unsponsored   Depositary   Receipts  are  not  obligated  to  disclose  material
information in the United States and, therefore,  there may not be a correlation
between such information and the market value of the Depositary  Receipts.  ADRs
are typically  issued by a United  States bank or trust  company which  evidence
ownership of underlying  securities  issued by a foreign  corporation.  GDRs are
typically issued by foreign banks or trust companies,  although they also may be
issued by United  States banks or trust  companies,  and  evidence  ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally,  Depositary  Receipts in registered  form are designed for use in the
United  States  securities  markets and  Depositary  Receipts in bearer form are
designed for use in securities  markets outside the United States.  For purposes
of the Balanced, Growth and Income, Capital Growth and International Portfolios'
investment policies,  the Portfolios'  investments in ADRs, GDRs and other types
of  Depositary  Receipts  will be deemed  to be  investments  in the  underlying
securities.  Depositary  Receipts other than those  denominated in U.S.  dollars
will be subject to  foreign  currency  exchange  rate risk.  Certain  Depositary
Receipts  may  not be  listed  on an  exchange  and  therefore  may be  illiquid
securities.

Foreign Securities

         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios  (collectively,  the "Non-Money Market Portfolios")
may  each  invest,  without  limit,  except  as  applicable  to debt  securities
generally, in U.S.  dollar-denominated  foreign debt securities (including those
issued by the  Dominion of Canada and its  provinces  and other debt  securities
which meet the criteria applicable to the Portfolio's domestic investments), and
in  certificates  of deposit  issued by foreign  banks and  foreign  branches of
United States banks, to any extent deemed  appropriate by the Adviser.  The Bond
Portfolio  may  invest up to 20% of its  assets in  non-U.S.  dollar-denominated
foreign debt securities. The Balanced Portfolio may invest up to 20% of its debt
securities  in non-U.S.  dollar-denominated  foreign  debt  securities,  and may
invest up to 25% of its equity securities in non-U.S. dollar-denominated foreign
equity  securities.  The Growth and Income Portfolio may invest up to 25% of its
assets in non-U.S.  dollar denominated equity securities of foreign issuers. The
Capital  Growth  Portfolio  may  invest  up  to  25%  of  its  assets,  and  the
International Portfolio may invest without limit, in non-U.S. dollar-denominated
equity securities of foreign issuers.

         Investors  should  recognize  that  investing  in  foreign   securities
involves certain special considerations,  including those set forth below, which
are not typically  associated  with  investing in U.S.  securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally  subject to uniform  accounting and auditing
and financial  reporting  standards,  practices and  requirements  comparable to
those  applicable to domestic  companies,  there may be less publicly  available
information about a foreign company than about a domestic company.  Many foreign
stock markets,  while growing in volume of trading activity,  have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign  companies  are less liquid and more  volatile  than  securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and  liquidity in the U.S. and at times,  volatility of
price can be greater than in the U.S.  Further,  foreign  markets have different
clearance and settlement procedures and in certain markets there have been times
when  settlements  have been  unable to keep pace with the volume of  securities
transactions  making  it  difficult  to  conduct  such  transactions.  Delays in
settlement  could result in temporary  periods when assets of the Portfolios are
uninvested and no return is earned  thereon.  The inability of the Portfolios to
make intended  security  purchases due to  settlement  problems  could cause the
Portfolios to miss attractive investment opportunities.  Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the  Portfolios  have  entered  into a contract to sell the  security,  could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock  exchanges  are  generally  higher  than  negotiated  commissions  on U.S.


                                       22
<PAGE>

exchanges,  although the Portfolios  will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties  or be unable to pursue  legal  remedies  and obtain  judgments  in
foreign courts. There is generally less government supervision and regulation of
business and industry practices,  stock exchanges,  brokers and listed companies
than in the U.S. It may be more  difficult  for the  Portfolios'  agents to keep
currently  informed  about  corporate  actions such as stock  dividends or other
matters  which may  affect the prices of  portfolio  securities.  Communications
between the U.S.  and foreign  countries  may be less  reliable  than within the
U.S., thus increasing the risk of delayed settlements of portfolio  transactions
or loss of certificates for portfolio securities.  In addition,  with respect to
certain  foreign  countries,   there  is  the  possibility  of  nationalization,
expropriation,  the imposition of withholding or confiscatory taxes,  political,
social,  or economic  instability,  devaluations  in the  currencies  in which a
Portfolio's securities are denominated,  or diplomatic  developments which could
affect U.S.  investments in those countries.  Investments in foreign  securities
may also entail certain risks, such as possible  currency  blockages or transfer
restrictions,  and the  difficulty  of  enforcing  rights  in  other  countries.
Moreover,  individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national  product,  rate of
inflation,  capital  reinvestment,  resource  self-sufficiency  and  balance  of
payments position.

         These  considerations  generally  are more of a concern  in  developing
countries.  For example,  the  possibility  of revolution  and the dependence on
foreign  economic  assistance  generally is greater in these  countries  than in
developed countries.  The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through  diversification
and active professional management.  Although investments in companies domiciled
in  developing  countries  may be  subject  to  potentially  greater  risks than
investments  in  developed  countries,  the  Portfolios  will not  invest in any
securities of issuers located in developing countries if the securities,  in the
judgment of the Adviser, are speculative.

         To the extent that the Non-Money  Market  Portfolios  invest in foreign
securities,  the Portfolios' share price could reflect the movements of both the
different  stock and bond markets in which it is invested and the  currencies in
which the  investments  are  denominated;  the  strength or weakness of the U.S.
dollar  against  foreign  currencies  could account for part of the  Portfolios'
investment performance.

Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income and International Portfolios

         Each  Portfolio that invests in foreign  securities  shall invest in no
less than five  foreign  countries;  provided  that,  (i) if foreign  securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries;  (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall  invest  in no  less  than  three  foreign  countries;  (iii)  if  foreign
securities  comprise less than 40% of the value of the  Portfolio's  net assets,
the Portfolio  shall invest in no less than two foreign  countries;  and (iv) if
foreign  securities  comprise less than 20% of the value of the  Portfolio's net
assets the Portfolio may invest in a single foreign country.

         Each  Portfolio  shall  invest no more than 20% of the value of its net
assets in  securities  of issuers  located in any one country;  provided that an
additional  15% of the value of each  Portfolio's  net assets may be invested in
securities of issuers located in any one of the following countries:  Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.

Indexed Securities

         The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in
indexed securities, the value of which is linked to currencies,  interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.

         Indexed  securities differ from other types of debt securities in which
the Fund may invest in several  respects.  First,  the interest  rate or, unlike
other debt  securities,  the principal  amount payable at maturity of an indexed
security  may  vary  based  on  changes  in  one  or  more  specified  reference
instruments, such as an interest rate compared with a fixed interest rate or the


                                       23
<PAGE>

currency  exchange  rates between two  currencies  (neither of which need be the
currency in which the instrument is denominated).  The reference instrument need
not be related to the terms of the indexed security.  For example, the principal
amount of a U.S.  dollar  denominated  indexed  security  may vary  based on the
exchange rate of two foreign  currencies.  An indexed security may be positively
or negatively indexed;  that is, its value may increase or decrease if the value
of the  reference  instrument  increases.  Further,  the change in the principal
amount payable or the interest rate of an indexed  security may be a multiple of
the  percentage  change  (positive or  negative) in the value of the  underlying
reference instrument(s).

         Investment in indexed securities involves certain risks. In addition to
the credit risk of the  security's  issuer and the normal risks of price changes
in  response  to changes in  interest  rates,  the  principal  amount of indexed
securities  may  decrease  as a result  of  changes  in the  value of  reference
instruments.  Further,  in the case of certain  indexed  securities in which the
interest  rate is linked to a reference  instrument,  the  interest  rate may be
reduced to zero, and any further  declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.

When-Issued Securities

         A  Portfolio   may  from  time  to  time   purchase   securities  on  a
"when-issued" or "forward  delivery" 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 or forward  delivery  securities take place at a later date.
During the period  between  purchase and  settlement,  no payment is made by the
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;  however,  it is the Fund's  intention that
each Portfolio will be fully invested to the extent  practicable  and subject to
the policies stated above. While when-issued or forward delivery  securities may
be sold prior to the  settlement  date,  the Portfolio  intends to purchase such
securities  with the purpose of actually  acquiring  them unless a sale  appears
desirable for investment  reasons.  At the time the Fund makes the commitment on
behalf of a  Portfolio  to  purchase  a  security  on a  when-issued  or forward
delivery  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 or forward  delivery  securities may be more or
less than the  purchase  price  payable at  settlement  date.  The Fund does not
believe that a Portfolio's net asset value or income will be adversely  affected
by the purchase of securities on a when-issued or forward  delivery basis.  Each
Portfolio  will  establish a segregated  account in which it will maintain cash,
U.S. Government  securities and other high-grade debt obligations at least equal
in value to commitments for  when-issued or forward  delivery  securities.  Such
segregated securities either will mature or, if necessary,  be sold on or before
the settlement date.

Loans of Portfolio Securities

         The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio)  provided:  (1) 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; (2) the Fund may at any time call the loan and regain
the securities  loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities;  and (4) the aggregate market value of securities
loaned  will  not at any  time  exceed  one-third  of the  total  assets  of the
Portfolio.  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,
the  Adviser  considers  all  relevant  facts and  circumstances  including  the
creditworthiness of the borrower.

Borrowing

         The Board of Trustees has adopted a policy  whereby  each  Portfolio of
the Fund may borrow up to 10% of its total assets; provided,  however, that each
Portfolio  may  borrow  up to 25% of  its  total  assets  for  extraordinary  or
emergency purposes,  including the facilitation of redemptions.  A Portfolio may
only  borrow  money from  banks as a  temporary  measure  for  extraordinary  or
emergency  purposes  (each  Portfolio  is required to  maintain  asset  coverage
(including  borrowings)  of  300%  for  all  borrowings)  and  no  purchases  of
securities  for a  Portfolio  will be made while  borrowings  of that  Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may


                                       24
<PAGE>

offset or exceed the return earned on investment of such funds.

Options for the Bond, Balanced, Growth and Income and International Portfolios

         The Fund  may,  on behalf of each of the  Bond,  Balanced,  Growth  and
Income, Capital Growth and International Portfolios,  write covered call options
on  the  portfolio  securities  of  such  Portfolio  in an  attempt  to  enhance
investment performance.  A call option is a contract generally having a duration
of nine months or less which gives the purchaser of the option,  in return for a
premium  paid,  the right to buy,  and the writer the  obligation  to sell,  the
underlying  security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option,  regardless of the market
price of the  security  during the option  period.  A covered  call option is an
option written on a security which is owned by the writer  throughout the option
period.

         The Fund will write,  on behalf of a  Portfolio,  covered  call options
both to reduce  the risks  associated  with  certain of its  investments  and to
increase  total  investment  return.  In  return  for the  premium  income,  the
Portfolio will give up the  opportunity to profit from an increase in the market
price  of the  underlying  security  above  the  exercise  price  so long as its
obligations  under  the  contract  continue,   except  insofar  as  the  premium
represents a profit.  Moreover, in writing the option, the Portfolio will retain
the risk of loss  should  the  price of the  security  decline,  which  loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options,  must  assume that the call may be  exercised  at any time prior to the
expiration of its obligations as a writer,  and that in such  circumstances  the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of  appreciation  in its  Portfolios on securities  sold pursuant to
call options.

         When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the  "exercise  price") by exercising  the option at any time during
the option  period,  generally  ranging up to nine  months.  Some of the options
which the Fund  writes  may be of the  European  type  which  means  they may be
exercised  only at a specified  time.  If the option  expires  unexercised,  the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised,  a decision over which the Portfolio
has no control,  the Portfolio must sell the  underlying  security to the option
holder at the exercise  price.  By writing a covered call option,  the Portfolio
forgoes,  in exchange for the premium less the commission ("net  premium"),  the
opportunity  to profit  during the option  period from an increase in the market
value of the underlying security above the exercise price.

   
         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International  Portfolios  may each  write  covered  call and put  options  to a
limited  extent in an attempt  to earn  additional  income on their  portfolios,
consistent  with their  investment  objectives.  The  Portfolios  may forego the
benefits of  appreciation  on  securities  sold or  depreciation  on  securities
acquired  pursuant  to call and put  options  written  by the  Portfolios.  Each
Portfolio has no current intention of writing options on more than 5% of its net
assets.
    

         When the Fund,  on behalf of the Balanced,  Growth and Income,  Capital
Growth, Global Discovery and International  Portfolios,  writes a put option, it
gives the purchaser of the option the right to sell the  underlying  security to
the  Portfolio  at the  specified  exercise  price at any time during the option
period. Some of the European type options which the Fund writes may be exercised
only at a specified time. If the option expires unexercised,  the Portfolio will
realize income in the amount of the premium received for writing the option.  If
the put option is exercised, a decision over which the Portfolio has no control,
the Portfolio  must purchase the  underlying  security from the option holder at
the exercise price. By writing a put option, the Portfolio,  in exchange for the
net premium  received,  accepts the risk of a decline in the market value of the
underlying security below the exercise price. With respect to each put option it
writes,  the  Portfolio  will have  deposited  in a  separate  account  with its
custodian U.S. Treasury obligations, high-grade debt securities or cash equal in
value to the exercise price of the put option,  will have purchased a put option
with a higher  exercise  price that will  expire no earlier  than the put option
written or will have used some  combination  of these two  methods.  The Fund on
behalf of each Portfolio,  will only write put options involving  securities for
which a  determination  is made that it wishes to acquire the  securities at the
exercise price at the time the option is written.

                                       25
<PAGE>

         A Portfolio may  terminate its  obligation as a writer of a call or put
option by purchasing an option with the same exercise price and expiration  date
as the option previously written. This transaction is called a "closing purchase
transaction."

         When a Portfolio  writes an option,  an amount equal to the net premium
received by the Portfolio is included in the liability  section of the Portfolio
Statement  of Assets and  Liabilities  as a deferred  credit.  The amount of the
deferred  credit  will be  subsequently  marked to market to reflect the current
market value of the option written.  The current market value of a traded option
is the last sale  price or,  in the  absence  of a sale,  the mean  between  the
closing bid and asked price.  If an option expires on its stipulated  expiration
date  or if the  Portfolio  enters  into a  closing  purchase  transaction,  the
Portfolio  will  realize  a gain  (or  loss if the  cost of a  closing  purchase
transaction  exceeds the  premium  received  when the option was sold),  and the
deferred  credit related to such option will be eliminated.  If a call option is
exercised,  the  Portfolio  will  realize  a gain or loss  from  the sale of the
underlying  security  and the  proceeds  of the sale  will be  increased  by the
premium originally  received.  The writing of covered call options may be deemed
to  involve  the  pledge of the  securities  against  which the  option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.

         The Portfolio  may purchase call options on any  securities in which it
may  invest  in  anticipation  of an  increase  in  the  market  value  of  such
securities.  The  purchase of a call option  would  entitle  the  Portfolio,  in
exchange  for the premium  paid,  to  purchase a security  at a specified  price
during the option  period.  The Portfolio  would  ordinarily  have a gain if the
value of the securities increased above the exercise price sufficiently to cover
the premium and would have a loss if the value of the securities  remained at or
below the exercise price during the option period.

         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International Portfolios will normally purchase put options in anticipation of a
decline in the  market  value of  securities  in their  portfolios  ("protective
puts") or  securities  of the type in which they are  permitted  to invest.  The
purchase of a put option  would  entitle  the  Portfolio,  in  exchange  for the
premium paid, to sell a security, which may or may not be held by the Portfolio,
at a specified  price during the option period.  The purchase of protective puts
is designed  merely to offset or hedge  against a decline in the market value of
the Portfolio's portfolio  securities.  Put options may also be purchased by the
Portfolio  for the  purpose of  affirmatively  benefiting  from a decline in the
price of  securities  which the  Portfolio  does not own.  The  Portfolio  would
ordinarily  recognize a gain if the value of the securities  decreased below the
exercise price  sufficiently  to cover the premium and would recognize a loss if
the value of the securities  remained at or above the exercise price.  Gains and
losses on the  purchase of  protective  put  options  would tend to be offset by
countervailing changes in the value of underlying portfolio securities.

         The hours of trading for options on  securities  may not conform to the
hours during which the underlying  securities are traded. To the extent that the
option  markets  close  before  the  markets  for  the  underlying   securities,
significant price and rate movements can take place in the underlying securities
markets  that cannot be  reflected in the option  markets.  Exchange  markets in
securities  options are a relatively new and untested concept.  It is impossible
to predict the volume of trading that may exist in such  options,  and there can
be no assurance that viable exchange markets will develop or continue.

         The Fund may  engage  in  over-the-counter  options  transactions  with
broker-dealers  who make  markets in these  options.  At present,  approximately
thirty  broker-dealers  make these  markets and the Adviser will  consider  risk
factors such as their  creditworthiness  when  determining a broker-dealer  with
which  to  engage  in   options   transactions.   The   ability   to   terminate
over-the-counter  option  positions is more  limited  than with  exchange-traded
option  positions  because the  predominant  market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers  participating in
such transactions will not fulfill their obligations.  Written  over-the-counter
options  purchased by the Fund and portfolio  securities  "covering"  the Fund's
obligation pursuant to an  over-the-counter  option may be deemed to be illiquid
and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers  with whom the Fund enters into such options  transactions  under the
general supervision of the Fund's Trustees.

Securities Index Options

   
         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and  International  Portfolios  may  each  purchase  call  and  put  options  on
securities  indexes for the purpose of hedging  against the risk of  unfavorable
    


                                       26
<PAGE>

price  movements  adversely  affecting  the value of a  Portfolio's  securities.
Options on  securities  indexes are similar to options on stock  except that the
settlement is made in cash.

         Unlike a  securities  option,  which  gives  the  holder  the  right to
purchase or sell a  specified  security  at a  specified  price,  an option on a
securities  index  gives  the  holder  the  right to  receive  a cash  "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the  underlying  securities  index on the exercise date,
multiplied by (ii) a fixed "index  multiplier."  In exchange for undertaking the
obligation to make such cash payment,  the writer of the securities index option
receives a premium.

         A securities  index fluctuates with changes in the market values of the
securities  so  included.  Some  securities  index  options are based on a broad
market  index  such as the S&P 500 or the NYSE  Composite  Index,  or a narrower
market  index  such as the S&P 100.  Indices  are also based on an  industry  or
market  segment  such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange,  Philadelphia  Exchange,  New York
Stock Exchange, and American Stock Exchange.

         The  effectiveness  of hedging through the purchase of securities index
options  will depend upon the extent to which price  movements in the portion of
the securities  portfolio  being hedged  correlate  with price  movements in the
selected  securities  index.  Perfect  correlation  is not possible  because the
securities holdings of a Portfolio will not exactly match the composition of the
securities  indexes on which options are written.  In addition,  the purchase of
securities index options involves  essentially the same risks as the purchase of
options  on  futures  contracts.  The  principal  risk is that the  premium  and
transactions costs paid by a Portfolio in purchasing an option will be lost as a
result of  unanticipated  movements in prices of the  securities  comprising the
securities index on which the option is written.  Options on securities  indexes
also entail the risk that a liquid secondary market to close out the option will
not exist,  although a Portfolio  will  generally only purchase or write such an
option if the Adviser believes the option can be closed out.

Futures Contracts

         The Fund  may,  on  behalf  of the  Bond,  Balanced  and  International
Portfolios,  purchase and sell futures  contracts  on debt  securities  to hedge
against  anticipated  changes in  interest  rates that might  otherwise  have an
adverse effect upon the value of the Portfolio's debt  securities.  In addition,
the Fund may, on behalf of the Non-Money  Market  Portfolios,  purchase and sell
securities  index  futures to hedge the equity  securities  of a Portfolio  with
regard to market  (systematic) risk as distinguished from  stock-specific  risk.
Each of these five  Portfolios  may also purchase and write put and call options
on futures  contracts of the type which such  Portfolio is  authorized  to enter
into and may engage in related closing transactions. All of such futures on debt
securities,  stock index futures and related options will be traded on exchanges
that are licensed and  regulated by the  Commodity  Futures  Trading  Commission
("CFTC") or on appropriate  foreign  exchanges,  to the extent permitted by law.
Even though at the present time no contracts  based on global indices which meet
the International Portfolio's investment criteria are available,  there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.

Futures on Debt Securities

         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  future  month,  of  securities  having a
standardized  face  value and rate of  return.  By  purchasing  futures  on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself 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 such price
does not appear to the  Trustees to reflect the fair value of the  contract,  in
which  case the  positions  will be  valued  by or under  the  direction  of the
Trustees.

         Positions  taken  in the  futures  markets  are  normally  not  held to
maturity,  but are instead liquidated through offsetting  transactions which may
result  in a profit  or a loss.  While  futures  positions  taken by the Fund on
behalf of a Portfolio  will usually be liquidated  in this manner,  the Fund may
instead make or take delivery of the underlying  securities  whenever it appears


                                       27
<PAGE>

economically  advantageous  to the  Portfolio  to do so. A clearing  corporation
associated with the exchange on which futures are traded assumes  responsibility
for closing-out and guarantees  that the sale and purchase  obligations  will be
performed  with regard to all positions  that remain open 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 will be substantially  offset
by appreciation in the value of the futures position.

         On  other  occasions,  the  Portfolio  may take a  "long"  position  by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends 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 will 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.

Stock  Index  Futures.  A stock  index  futures  contract  does not  require the
physical  delivery of  securities,  but merely  provides  for profits and losses
resulting  from  changes in the market  value of the  contract to be credited or
debited  at the close of each  trading  day to the  respective  accounts  of the
parties  to the  contract.  On the  contract's  expiration  date  a  final  cash
settlement  occurs and the futures  positions are simply closed out.  Changes in
the market value of a particular stock index futures contract reflect changes in
the  specified  index of equity  securities  on which the future is based.  That
index is  designed  to  reflect  overall  price  trends in the market for equity
securities.

         Stock index futures may be used to hedge the equity  securities of each
of the Balanced,  Growth and Income, Capital Growth or International  Portfolios
with regard to market  (systematic)  risk (involving the market's  assessment of
over-all  economic   prospects),   as  distinguished  from  stock-specific  risk
(involving  the market's  evaluation of the merits of the issuer of a particular
security).  By  establishing  an  appropriate  "short"  position  in stock index
futures,  the Fund may seek to protect the value of the equity of a  Portfolio's
securities  against  an overall  decline  in the  market for equity  securities.
Alternatively,  in anticipation of a generally rising market,  the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of  apparently  low current
prices by  establishing  a "long"  position  in stock  index  futures  and later
liquidating that position as particular  equity securities are in fact acquired.
To the extent that these hedging  strategies are successful,  the Portfolio will
be  affected  to a lesser  degree by adverse  overall  market  price  movements,
unrelated  to the merits of specific  portfolio  equity  securities,  than would
otherwise be the case.

Options on Futures.  For bona fide hedging purposes,  the Fund may also purchase
and write, on behalf of each of the Bond, Balanced,  Growth and Income,  Capital
Growth and International Portfolios,  call and put options on futures contracts,
which are traded on exchanges  that are licensed and regulated by the CFTC or on
any foreign exchange for the purpose of options trading, to the extent permitted
by law. A "call" option on a futures  contract gives the purchaser the right, in
return for the premium  paid,  to purchase a futures  contract  (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser  the right,  in return for the premium paid, to
sell a futures contract (assume a "short"  position),  for a specified  exercise
price, at any time before the option expires.

         Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option  exercise  price,  which will  presumably  be lower than the  current
market price of the contract in the futures  market.  Upon  exercise of a "put,"
the writer of the option is obligated to purchase the futures contract  (deliver
a "short"  position to the option holder) at the option  exercise  price,  which
will  presumably be higher than the current  market price of the contract in the
futures  market.  When a person  exercises  an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin  account,  while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures,  most  participants  in the options  markets do not
seek to  realize  their  gains or losses by  exercise  of their  option  rights.


                                       28
<PAGE>

Instead,  the holder of an option will usually  realize a gain or loss by buying
or selling an offsetting  option at a market price that will reflect an increase
or a decrease from the premium originally paid.

         Options on futures  can be used by a Portfolio  to hedge  substantially
the same  risks as might be  addressed  by the  direct  purchase  or sale of the
underlying futures contracts.  If the Portfolio purchases an option on a futures
contract,  it may obtain benefits  similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction,  in which
only transaction costs are involved,  benefits received in an option transaction
will be  reduced  by the amount of the  premium  paid as well as by  transaction
costs. In the event of an adverse market movement,  however,  the Portfolio will
not be subject to a risk of loss on the option  transaction  beyond the price of
the premium it paid plus its transaction  costs,  and may  consequently  benefit
from a favorable  movement in the value of its portfolio  securities  that would
have been more completely  offset if the hedge had been effected through the use
of futures.

         If a Portfolio writes options on futures contracts,  the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying  futures  contract  comparable  to that involved in holding a futures
position. If the option is not exercised,  the Portfolio will gain the amount of
the premium,  which may  partially  offset  unfavorable  changes in the value of
securities  held  in or to be  acquired  for the  Portfolio.  If the  option  is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.

         While the  holder or  writer  of an  option on a futures  contract  may
normally terminate its position by selling or purchasing an offsetting option of
the same series,  the  Portfolio's  ability to  establish  and close out options
positions at fairly  established  prices will be subject to the maintenance of a
liquid  market.  A  Portfolio  will not  purchase  or write  options  on futures
contracts  unless,  in the  Adviser's  opinion,  the market for such options has
sufficient  liquidity that the risks  associated with such options  transactions
are not at unacceptable levels.

Limitations on the Use of Futures Contracts and Options on Futures

         All of the futures  contracts and options on futures  transactions into
which the Fund will  enter will be for bona fide  hedging  or other  appropriate
risk  management  purposes as  permitted by CFTC  regulations  and to the extent
consistent  with  requirements  of the Securities and Exchange  Commission  (the
"SEC").

         To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC  regulations,  subject  to the  requirements  of the SEC.  The Fund will
further seek to assure that  fluctuations in the price of the futures  contracts
and options on futures that it uses for hedging  purposes will be  substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase,  though there can be no assurance that this result
will be  achieved.  The Fund will sell  futures  contracts  or  acquire  puts to
protect  against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures  contracts or calls on futures contracts to protect a
Portfolio  against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.

         As evidence of this  hedging  intent,  the Fund  expects that on 75% or
more of the  occasions  on which it  purchases a long  futures  contract or call
option  on  futures  for a  Portfolio  the Fund  will  effect  the  purchase  of
securities  in the cash market or take  delivery as it closes out a  Portfolio's
futures  position.  In  particular  cases,  however,  when  it  is  economically
advantageous to the Portfolio,  a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.

         As an  alternative  to literal  compliance  with the bona fide  hedging
definition,  a CFTC  definition  now  permits the Fund to elect to comply with a
different test,  under which its long futures  positions will not exceed the sum
of (a) cash or cash equivalents  segregated for this purpose,  (b) cash proceeds
on existing  investments  due within thirty days and (c) accrued  profits on the
particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.

                                       29
<PAGE>

         Futures  on debt  securities  and stock  index  futures  are at present
actively  traded on exchanges  that are licensed and  registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection  with their futures and options  transactions,  and
will be  required  to  deposit  and  maintain  funds  with  brokers as margin to
guarantee  performance  of  futures  obligations.  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  options  on  futures,
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.

         Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment  Restrictions"  in the Fund's  prospectus.  The  Trustees  have also
adopted a policy (which is not  fundamental  and may be modified by the Trustees
without a shareholder  vote) that,  immediately  after the purchase or sale of a
futures  contract or option thereon,  the value of the aggregate  initial margin
with  respect  to all  futures  contracts  and  premiums  on  options on futures
contracts  entered  into by a  Portfolio  will not exceed 5% of the fair  market
value of the Portfolio's total assets. Additionally,  the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets.  A futures contract for the receipt of a debt security and
long  index  futures  will  be  offset  by  assets  of the  Portfolio  held in a
segregated  account in an amount  equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.

Foreign Currency Transactions

         The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes.  These Portfolios
may also, for hedging purposes,  purchase foreign currencies in the form of bank
deposits as well as other  foreign money market  instruments,  including but not
limited to, bankers'  acceptances,  certificates of deposit,  commercial  paper,
short-term government and corporate obligations and repurchase  agreements.  The
International  Portfolio may also enter into foreign currency futures  contracts
and foreign currency options.

         Because   investments  in  foreign   companies   usually  will  involve
currencies of foreign  countries,  and because the Non-Money  Market  Portfolios
temporarily  may hold funds in bank  deposits in foreign  currencies  during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected  favorably or unfavorably by changes in foreign currency
exchange  rates and exchange  control  regulations,  and they may incur costs in
connection with conversions between various  currencies.  Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign  currencies  into U.S.  dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of  currency  conversion.  Although  foreign  exchange  dealers do not
charge a fee for  conversion,  they do realize a profit based on the  difference
(the "spread")  between the prices at which they are buying and selling  various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market  Portfolios at one rate,  while offering a lesser rate of exchange should
the Non-Money  Market  Portfolios  desire to resell that currency to the dealer.
The Non-Money  Market  Portfolios will conduct their foreign  currency  exchange
transactions  either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency  exchange  market,  or through entering into forward or, in
the case of the International  Portfolio,  futures contracts to purchase or sell
foreign currencies.

         A  forward  contract  involves  an  obligation  to  purchase  or sell a
specific  currency at a future date,  which may be any fixed number of days from
the date of the contract agreed upon by the parties,  at a price set at the time
of the contract.  These contracts are traded in the interbank  market  conducted
directly between  currency  traders  (usually large commercial  banks) and their
customers.  A forward  contract  generally  has no deposit  requirement,  and no
commissions are charged at any stage for trades.

         A 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. The agreed price may be fixed or within
a specified range of prices.  Foreign currency  futures  contracts traded in the
United  States are  designed by and traded on  exchanges  regulated by the CFTC,
such as the Chicago  Mercantile  Exchange.  Futures  contracts involve brokerage


                                       30
<PAGE>

costs,  which  may vary from less  than 1% to 2.5% of the  contract  price,  and
require parties to the contract to make "margin" deposits to secure  performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign  currencies.
The  International  Portfolio  would  enter into  futures  contracts  solely for
hedging  or other  appropriate  risk  management  purposes  as  defined  in CFTC
regulations.

         Forward  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, and they may be in
any amounts agreed upon by the parties rather than predetermined  amounts. Also,
forward  contracts  are  traded  directly  between  currency  traders so that no
intermediary is required.  A forward  contract  generally  requires no margin or
other deposit.

         Upon the maturity of a forward or foreign  currency  futures contract a
Portfolio may either  accept or make  delivery of the currency  specified in the
contract or, at or prior to maturity,  enter into a closing purchase transaction
involving  the  purchase or sale of an  offsetting  contract.  Closing  purchase
transactions  with respect to forward  contracts  are usually  effected with the
currency  trader  who is a  party  to the  original  forward  contract.  Closing
purchase  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.

         A Portfolio  may enter into  forward  contracts  and  foreign  currency
futures  contracts under certain  circumstances.  When a Portfolio enters into a
contract  for the  purchase  or  sale of a  security  denominated  in a  foreign
currency,  or when a Portfolio  anticipates the receipt in a foreign currency of
dividends or interest  payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward or futures  contract for the purchase or sale, for a fixed amount
of  dollars,  of the  amount of  foreign  currency  involved  in the  underlying
transactions,  the Portfolio  will attempt to protect  itself against a possible
loss  resulting  from an adverse  change in the  relationship  between  the U.S.
dollar and the 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.

         Additionally, when management of a Portfolio believes that the currency
of a particular  foreign  country may suffer a substantial  decline  against the
U.S.  dollar,  it may enter into a forward or futures  contract  to sell,  for a
fixed amount of dollars, the amount of foreign currency  approximating the value
of  some  or all of the  Portfolio's  securities  denominated  in  such  foreign
currency.  The precise  matching of the forward or futures  contract amounts and
the value of the securities  involved will not generally be possible because the
future  value  of  such  securities  in  foreign  currencies  will  change  as a
consequence  of market  movements in the value of those  securities  between the
date on which the contract is entered into and the date it matures.  The precise
projection  of  short-term  currency  market  movements  is  not  possible,  and
short-term  hedging  provides a means of fixing the dollar value of a portion of
the Portfolio's foreign assets.

         The  Non-Money  Market  Portfolios  do not  intend  to enter  into such
forward or futures contracts to protect the value of their portfolio  securities
on a regular  continuous  basis, and will not do so if, as a result, a Portfolio
will  have  more than 15% of the  value of its  total  assets  committed  to the
consummation  of such  contracts.  A  Portfolio  also will not  enter  into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts  where the  consummation of the contracts would obligate the Portfolio
to  deliver  an  amount  of  foreign  currency  in  excess  of the  value of the
Portfolio's  securities  or other assets  denominated  in that  currency.  Under
normal  circumstances,  consideration of the prospect for currency parities will
be  incorporated  into the long-term  investment  decisions  made with regard to
overall  diversification  strategies.  However,  the Non-Money Market Portfolios
believe that it is important to have the  flexibility to enter into such forward
or  foreign  currency  futures  contracts  when  each  determines  that the best
interests of the Portfolio will be served.

         Except when a Portfolio  enters into a forward contract for the purpose
of the purchase or sale of a security  denominated in a foreign currency,  State
Street  Bank and Trust  Company  (the  "Custodian"),  will  place cash or liquid
securities into a segregated  account of the Portfolio in an amount equal to the
value of the Portfolio's  total assets  committed to the consummation of forward
contracts  (or the  Portfolio's  forward  contracts  will be  otherwise  covered


                                       31
<PAGE>

consistent with applicable  regulatory  policies) and foreign  currency  futures
contracts  that require the  Portfolio to purchase  foreign  currencies.  If the
value of the securities placed in the segregated  account  declines,  additional
cash or  securities  will be placed in the  account on a daily basis so that the
value of the account will equal the amount of the Portfolio's  commitments  with
respect to such contracts.

         The Non-Money Market Portfolios generally will not enter into a forward
or foreign  currency  futures  contract with a term of greater than one year. It
also  should  be  realized  that  this  method  of  protecting  the  value  of a
Portfolio's  securities  against a decline in the value of a  currency  does not
eliminate  fluctuations in the underlying  prices of the  securities.  It simply
establishes  a rate of exchange  which the  Portfolio can achieve at some future
point in time.

         While the Non-Money  Market  Portfolios will enter into forward and, in
the case of the International Portfolio,  foreign currency futures contracts and
foreign currency options to reduce currency exchange rate risks, transactions in
such contracts involve certain other risks.  Thus, while a Portfolio may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall  performance  for the Portfolio than if it had not engaged in any
such transaction. Moreover, there may be imperfect correlation between the value
of the Portfolio's  holdings of securities  denominated in a particular currency
and forward or futures contracts  entered into by the Portfolio.  Such imperfect
correlation  may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.

         The International  Portfolio may purchase options on foreign currencies
for hedging  purposes  in a manner  similar to that of  transactions  in forward
contracts.  For example,  a decline in the dollar value of a foreign currency in
which portfolio  securities are denominated will reduce the dollar value of such
securities,  even if their value in the foreign  currency remains  constant.  In
order to protect  against such  decreases in the value of portfolio  securities,
the Portfolio may purchase put options on the foreign currency.  If the value of
the currency  declines,  the Portfolio will have the right to sell such currency
for a fixed amount of dollars which  exceeds the market value of such  currency.
This would result in a gain that may offset,  in whole or in part,  the negative
effect  of  currency  depreciation  on the value of the  Portfolio's  securities
denominated in that currency.

         Conversely,  if a rise in the dollar  value of a currency is  projected
for  those  securities  to be  acquired,  thereby  increasing  the  cost of such
securities,  the  International  Portfolio  may  purchase  call  options on such
currency.  If the value of such  currency  increased,  the purchase of such call
options  would enable the  Portfolio to purchase  currency for a fixed amount of
dollars  which is less than the market value of such  currency.  Such a purchase
would result in a gain that may offset,  at least  partially,  the effect of any
currency  related  increase in the price of securities the Portfolio  intends to
acquire.  As in the case of other types of options  transactions,  however,  the
benefit the Portfolio  derives from purchasing  foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if  currency  exchange  rates  do not  move in the  direction  or to the  extent
anticipated,  the Portfolio  could  sustain  losses on  transactions  in foreign
currency  options  which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.

         The  International  Portfolio  may close out its position in a currency
option  by either  selling  the  option it has  purchased  or  entering  into an
offsetting option.

Strategic  Transactions  and  Derivatives  Applicable  to the  Global  Discovery
Portfolio

         The Global  Discovery  Portfolio  may, but is not required to,  utilize
various other  investment  strategies as described below to hedge various market
risks (such as interest rates,  currency  exchange rates,  and broad or specific
equity or fixed-income  market  movements),  to manage the effective maturity or
duration of fixed-income  securities in the Portfolio's portfolio, or to enhance
potential gain.  These  strategies may be executed through the use of derivative
contracts.  Such strategies are generally accepted as a part of modern portfolio
management   and  are  regularly   utilized  by  many  mutual  funds  and  other
institutional investors.  Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.

         In the course of pursuing these  investment  strategies,  the Portfolio
may purchase and sell  exchange-listed and over-the-counter put and call options
on securities,  equity and fixed-income indices 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,


                                       32
<PAGE>

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 without limit to attempt to protect against
possible  changes in the market value of  securities  held in or to be purchased
for the Portfolio  resulting from securities  markets or currency  exchange rate
fluctuations,  to protect the Portfolio's  unrealized  gains in the value of its
portfolio securities in the Portfolio, to facilitate the sale of such securities
for  investment  purposes,  to manage the  effective  maturity  or  duration  of
fixed-income  securities  in the  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 enhance
potential  gain  although  no more  than 5% of the  Portfolio's  assets  will be
committed to Strategic  Transactions entered into for non-hedging purposes.  Any
or all of  these  investment  techniques  may be  used  at any  time  and in any
combination  and there is no  particular  strategy  that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions.  The ability of the Portfolio
to  utilize  these  Strategic  Transactions  successfully  will  depend  on  the
Adviser's  ability  to  predict  pertinent  market  movements,  which  cannot be
assured. The Portfolio will comply with applicable regulatory  requirements when
implementing   these   strategies,   techniques   and   instruments.   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 and not for speculative purposes.

         Strategic  Transactions,  including  derivative  contracts,  have risks
associated  with them  including  possible  default  by the  other  party to the
transaction,  illiquidity  and, to the extent the  Adviser's  view as to certain
market  movements  is  incorrect,  the  risk  that  the  use of  such  Strategic
Transactions  could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio  securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might  otherwise  sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors  including the imposition of exchange  controls,
suspension  of  settlements,  or the inability to deliver or receive a specified
currency.  The use of options and futures  transactions  entails  certain  other
risks. In particular, the variable degree of correlation between price movements
of futures  contracts and price movements in the related  portfolio  position of
the Portfolio creates the possibility that losses on the hedging  instrument may
be greater  than gains in the value of the  Portfolio's  position.  In addition,
futures and options markets may not be liquid in all  circumstances  and certain
over-the-counter  options may have no markets.  As a result, in certain markets,
the  Portfolio  might not be able to close out a transaction  without  incurring
substantial  losses,  if at  all.  Although  the  use  of  futures  and  options
transactions  for  hedging  should  tend to  minimize  the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any  potential  gain  which  might  result  from an  increase  in  value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential  financial risk than would purchases of
options,  where the  exposure  is  limited to the cost of the  initial  premium.
Losses resulting from the use of Strategic  Transactions  would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.

General  Characteristics of Options. Put options and call options typically have
similar structural  characteristics and operational  mechanics regardless of the
underlying  instrument on which they are purchased or sold.  Thus, the following
general  discussion relates to each of the particular types of options discussed
in greater  detail below.  In addition,  many Strategic  Transactions  involving
options  require  segregation  of  Portfolio  assets  in  special  accounts,  as
described below under "Use of Segregated and Other Special Accounts."

         A put option  gives the  purchaser  of the  option,  upon  payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security,  commodity, index, currency or other instrument at the exercise price.
For instance,  the  Portfolio's  purchase of a put option on a security might be
designed  to protect  its  holdings in the  underlying  instrument  (or, in some
cases, a similar  instrument)  against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price.  A call  option,  upon payment of a premium,  gives the  purchaser of the
option the right to buy, and the seller the  obligation to sell,  the underlying
instrument at the exercise price. The Portfolio's purchase of a call option on a
security,  financial  future,  index,  currency  or  other  instrument  might be
intended  to  protect  the  Portfolio  against an  increase  in the price of the
underlying  instrument  that it intends to  purchase in the future by fixing the
price at which it may purchase such  instrument.  An American  style put or call
option may be  exercised  at any time during the option  period while a European


                                       33
<PAGE>

style put or call option may be exercised only upon expiration or during a fixed
period prior thereto.  The Portfolio is authorized to purchase and sell exchange
listed options and  over-the-counter  options ("OTC  options").  Exchange listed
options are issued by a  regulated  intermediary  such as the  Options  Clearing
Corporation ("OCC"),  which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.

         With  certain  exceptions,  OCC  issued  and  exchange  listed  options
generally  settle by physical  delivery of the underlying  security or currency,
although in the future cash settlement may become  available.  Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is  "in-the-money"  (i.e.,  where the value of the underlying  instrument
exceeds,  in the case of a call  option,  or is less than,  in the case of a put
option,  the exercise  price of the option) at the time the option is exercised.
Frequently,  rather than taking or making delivery of the underlying  instrument
through  the process of  exercising  the  option,  listed  options are closed by
entering into  offsetting  purchase or sale  transactions  that do not result in
ownership of the new option.

         The  Portfolio's  ability to close out its  position as a purchaser  or
seller of an OCC or exchange  listed put or call option is  dependent,  in part,
upon the  liquidity of the option  market.  Among the  possible  reasons for the
absence of a liquid option market on an exchange are: (i)  insufficient  trading
interest in certain  options;  (ii)  restrictions on transactions  imposed by an
exchange;  (iii) trading halts,  suspensions or other restrictions  imposed with
respect to  particular  classes or series of  options or  underlying  securities
including  reaching  daily  price  limits;   (iv)  interruption  of  the  normal
operations of the OCC or an exchange;  (v)  inadequacy  of the  facilities of an
exchange or OCC to handle current trading  volume;  or (vi) a decision by one or
more exchanges to discontinue  the trading of options (or a particular  class or
series of options),  in which event the relevant  market for that option on that
exchange  would cease to exist,  although  outstanding  options on that exchange
would generally continue to be exercisable in accordance with their terms.

         The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the  option  markets  close  before the  markets  for the  underlying  financial
instruments,  significant  price  and  rate  movements  can  take  place  in the
underlying markets that cannot be reflected in the option markets.

         OTC options are purchased from or sold to securities dealers, financial
institutions  or  other  parties  ("Counterparties")  through  direct  bilateral
agreement with the Counterparty.  In contrast to exchange listed options,  which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement,  term, exercise price,
premium,  guarantees and security,  are set by  negotiation of the parties.  The
Portfolio will only sell OTC options (other than OTC currency  options) that are
subject  to a  buy-back  provision  permitting  the  Portfolio  to  require  the
Counterparty  to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio  expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.

         Unless the  parties  provide  for it,  there is no central  clearing or
guaranty function in an OTC option.  As a result,  if the Counterparty  fails to
make or take delivery of the security,  currency or other instrument  underlying
an OTC option it has  entered  into with the  Portfolio  or fails to make a cash
settlement  payment  due in  accordance  with  the  terms  of that  option,  the
Portfolio  will  lose  any  premium  it  paid  for  the  option  as  well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness   of  each  such   Counterparty  or  any  guarantor  or  credit
enhancement of the  Counterparty's  credit to determine the likelihood  that the
terms of the OTC option  will be  satisfied.  The  Portfolio  will engage in OTC
option transactions only with U.S.  government  securities dealers recognized by
the Federal  Reserve Bank of New York as "primary  dealers",  or broker dealers,
domestic or foreign banks or other  financial  institutions  which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from  Moody's  or an  equivalent  rating  from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency  transactions,  are  determined to be of equivalent  credit
quality by the Adviser.  The staff of the SEC currently  takes the position that
OTC options purchased by the Portfolio,  and portfolio securities "covering" the
amount of the Portfolio's  obligation  pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money  amount,  if any) are illiquid,  and
are subject to the  Portfolio's  limitation on investing no more than 10% of its
assets in illiquid securities.

                                       34
<PAGE>

         If the Portfolio sells a call option,  the premium that it receives may
serve as a  partial  hedge,  to the  extent  of the  option  premium,  against a
decrease  in the  value  of the  underlying  securities  or  instruments  in its
portfolio or will increase the Portfolio's  income.  The sale of put options can
also provide income.

         The  Portfolio  may  purchase  and  sell  call  options  on  securities
including  U.S.  Treasury  and agency  securities,  mortgage-backed  securities,
corporate debt securities,  equity securities (including convertible securities)
and  Eurodollar  instruments  that are  traded on U.S.  and  foreign  securities
exchanges  and in the  over-the-counter  markets,  and  on  securities  indices,
currencies  and  futures  contracts.  All calls  sold by the  Portfolio  must be
"covered"  (i.e.,  the Portfolio  must own the  securities  or futures  contract
subject to the call) or must meet the asset segregation  requirements  described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help protect it against loss, a call sold by the Portfolio
exposes  the  Portfolio  during  the  term of the  option  to  possible  loss of
opportunity  to  realize  appreciation  in the  market  price of the  underlying
security  or  instrument  and may require  the  Portfolio  to hold a security or
instrument which it might otherwise have sold.

         The Portfolio may purchase and sell put options on securities including
U.S.  Treasury  and  agency  securities,   mortgage-backed  securities,  foreign
sovereign  debt,  corporate  debt  securities,   equity  securities   (including
convertible  securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio),  and on securities  indices,  currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the  Portfolio's  assets would be required to be segregated to cover
its potential  obligations  under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the  underlying  security at a  disadvantageous
price above the market price.

General  Characteristics  of Futures.  The  Portfolio  may enter into  financial
futures  contracts or purchase or sell put and call options on such futures as a
hedge against anticipated  interest rate, currency or equity market changes, for
duration  management  and for risk  management  purposes.  Futures are generally
bought and sold on the commodities  exchanges where they are listed with payment
of  initial  and  variation  margin as  described  below.  The sale of a futures
contract  creates a firm obligation by the Portfolio,  as seller,  to deliver to
the buyer the specific type of financial  instrument  called for in the contract
at a specific  future  time for a  specified  price (or,  with  respect to index
futures and  Eurodollar  instruments,  the net cash amount).  Options on futures
contracts  are  similar  to  options on  securities  except  that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.

         The  Portfolio's  use of financial  futures and options thereon will in
all  cases  be  consistent  with  applicable  regulatory   requirements  and  in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging,  risk management (including
duration  management)  or  other  portfolio   management  purposes.   Typically,
maintaining  a futures  contract  or  selling  an option  thereon  requires  the
Portfolio  to  deposit  with  a  financial  intermediary  as  security  for  its
obligations an amount of cash or other specified  assets (initial  margin) which
initially is typically 1% to 10% of the face amount of the contract  (but may be
higher in some circumstances).  Additional cash or assets (variation margin) may
be required to be  deposited  thereafter  on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves  payment of a premium for the option without any further  obligation on
the part of the  Portfolio.  If the  Portfolio  exercises an option on a futures
contract it will be obligated to post initial margin (and  potential  subsequent
variation  margin) for the resulting  futures  position just as it would for any
position.  Futures  contracts  and  options  thereon  are  generally  settled by
entering into an offsetting  transaction  but there can be no assurance that the
position can be offset prior to settlement at an  advantageous  price,  nor that
delivery will occur.

         The Portfolio will not enter into a futures  contract or related option
(except for closing  transactions) if,  immediately  thereafter,  the sum of the
amount of its initial margin and premiums on open futures  contracts and options
thereon  would  exceed 5% of the  Portfolio's  total  assets  (taken at  current
value);  however,  in the case of an option that is  in-the-money at the time of
the purchase,  the  in-the-money  amount may be excluded in  calculating  the 5%
limitation.  The segregation  requirements with respect to futures contracts and
options thereon are described below.

Options on Securities  Indices and Other Financial  Indices.  The Portfolio also
may  purchase  and sell call and put  options on  securities  indices  and other
financial  indices and in so doing can achieve  many of the same  objectives  it


                                       35
<PAGE>

would achieve  through the sale or purchase of options on individual  securities
or other instruments.  Options on securities indices and other financial indices
are similar to options on a security or other  instrument  except  that,  rather
than settling by physical delivery of the underlying instrument,  they settle by
cash  settlement,  i.e.,  an option on an index  gives the  holder  the right to
receive,  upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based  exceeds,  in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified).  This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option,  which also may be multiplied by a formula  value.  The seller of
the option is obligated, in return for the premium received, to make delivery of
this  amount.  The  gain or loss on an  option  on an  index  depends  on  price
movements in the instruments making up the market,  market segment,  industry or
other  composite  on which the  underlying  index is based,  rather  than  price
movements in  individual  securities,  as is the case with respect to options on
securities.

Currency  Transactions.  The Portfolio may engage in currency  transactions with
Counterparties in order to hedge the value of portfolio holdings  denominated in
particular   currencies  against   fluctuations  in  relative  value.   Currency
transactions  include  forward  currency  contracts,  exchange  listed  currency
futures,  exchange  listed and OTC options on currencies,  and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract  agreed upon
by the parties,  at a price set at the time of the contract.  A currency swap is
an agreement to exchange cash flows based on the notional  difference  among two
or more  currencies  and operates  similarly to an interest rate swap,  which is
described  below.  The  Portfolio  may enter  into  currency  transactions  with
Counterparties  which have  received (or the  guarantors of the  obligations  of
which  have  received)  a  credit  rating  of A-1  or  P-1  by  S&P or  Moody's,
respectively,  or that have an equivalent  rating from a NRSRO or are determined
to be of equivalent credit quality by the Adviser.

         The  Portfolio's  dealings  in  forward  currency  contracts  and other
currency  transactions  such as futures,  options,  options on futures and swaps
will be limited to hedging  involving either specific  transactions or portfolio
positions.  Transaction  hedging is entering  into a currency  transaction  with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt  of income  therefrom.  Position  hedging  is  entering  into a currency
transaction  with  respect  to  portfolio  security  positions   denominated  or
generally quoted in that currency.

         The  Portfolio  will not enter  into a  transaction  to hedge  currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions,  than the aggregate market value (at the
time of entering into the  transaction)  of the securities held in its portfolio
that are denominated or generally  quoted in or currently  convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.

         The  Portfolio  may  also  cross-hedge   currencies  by  entering  into
transactions  to purchase or sell one or more  currencies  that are  expected to
decline in value  relative to other  currencies to which the Portfolio has or in
which the Portfolio expects to have portfolio exposure.

         To reduce the effect of currency  fluctuations on the value of existing
or anticipated holdings of portfolio  securities,  the Portfolio may also engage
in proxy  hedging.  Proxy  hedging is often used when the  currency to which the
Portfolio's  portfolio is exposed is difficult to hedge or to hedge  against the
dollar.  Proxy  hedging  entails  entering into a commitment or option to sell a
currency  whose changes in value are generally  considered to be correlated to a
currency  or  currencies  in  which  some  or all of the  Portfolio's  portfolio
securities are or are expected to be denominated,  in exchange for U.S. dollars.
The  amount of the  commitment  or  option  would  not  exceed  the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser  considers  that the  Austrian  schilling  is  correlated  to the German
deutschemark  (the  "D-mark"),  the Portfolio  holds  securities  denominated in
schillings  and the Adviser  believes that the value of schillings  will decline
against the U.S.  dollar,  the Adviser may enter into a commitment  or option to
sell D-marks and buy dollars.  Currency  hedging involves some of the same risks
and  considerations  as other  transactions with similar  instruments.  Currency
transactions  can result in losses to the Portfolio if the currency being hedged
fluctuates  in value  to a degree  or in a  direction  that is not  anticipated.
Further,  there  is the risk  that the  perceived  correlation  between  various
currencies may not be present or may not be present  during the particular  time
that the Portfolio is engaging in proxy hedging.  If the Portfolio enters into a
currency  hedging  transaction,   the  Portfolio  will  comply  with  the  asset
segregation requirements described below.

                                       36
<PAGE>

Risks of  Currency  Transactions.  Currency  transactions  are  subject to risks
different from those of other portfolio  transactions.  Because currency control
is of great  importance  to the  issuing  governments  and  influences  economic
planning and policy, purchases and sales of currency and related instruments can
be  negatively  affected  by  government  exchange  controls,   blockages,   and
manipulations or exchange restrictions imposed by governments.  These can result
in losses to the  Portfolio  if it is unable to deliver or receive  currency  or
funds in  settlement of  obligations  and could also cause hedges it has entered
into to be rendered  useless,  resulting  in full  currency  exposure as well as
incurring  transaction costs. Buyers and sellers of currency futures are subject
to the  same  risks  that  apply  to  the  use of  futures  generally.  Further,
settlement of a currency  futures  contract for the purchase of most  currencies
must occur at a bank based in the issuing  nation.  Trading  options on currency
futures is relatively  new, and the ability to establish and close out positions
on such options is subject to the  maintenance  of a liquid market which may not
always be available.  Currency  exchange  rates may  fluctuate  based on factors
extrinsic to that country's economy.

Combined  Transactions.  The  Portfolio  may enter into  multiple  transactions,
including multiple options transactions, multiple futures transactions, multiple
currency  transactions  (including  forward  currency  contracts)  and  multiple
interest rate transactions and any combination of futures, options, currency and
interest  rate  transactions  ("component"  transactions),  instead  of a single
Strategic  Transaction,  as part of a single or combined  strategy  when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined  transaction  will usually contain elements of risk that are present in
each of its component transactions.  Although combined transactions are normally
entered into based on the Adviser's  judgment that the combined  strategies will
reduce  risk  or  otherwise  more  effectively  achieve  the  desired  portfolio
management  goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to 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  the Portfolio  anticipates  purchasing at a
later date. The Portfolio intends to 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 and 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.

         The Portfolio  will usually enter into swaps on a net basis,  i.e., the
two payment  streams are netted out in a cash  settlement on the payment date or
dates specified in the instrument,  with the Portfolio  receiving or paying,  as
the case may be,  only the net  amount of the two  payments.  Inasmuch  as these
swaps,  caps,  floors  and  collars  are  entered  into for good  faith  hedging
purposes,  the  Adviser  and  the  Portfolio  believe  such  obligations  do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its  borrowing  restrictions.  The  Portfolio  will not
enter into any swap,  cap, floor or collar  transaction  unless,  at the time of
entering  into  such   transaction,   the  unsecured   long-term   debt  of  the
Counterparty,  combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an  equivalent  rating from an NRSRO or is determined to be of
equivalent  credit  quality  by  the  Adviser.  If  there  is a  default  by the
Counterparty,  the  Portfolio  may have  contractual  remedies  pursuant  to the
agreements related to the transaction.  The swap market has grown  substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as 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.

                                       37
<PAGE>

Eurodollar  Instruments.  The  Portfolio  may  make  investments  in  Eurodollar
instruments.   Eurodollar  instruments  are  U.S.   dollar-denominated   futures
contracts or options  thereon which are linked to the London  Interbank  Offered
Rate ("LIBOR"), although foreign currency-denominated  instruments are available
from time to time.  Eurodollar  futures  contracts enable purchasers to obtain a
fixed  rate for the  lending  of funds and  sellers  to obtain a fixed  rate for
borrowings.  The Portfolio  might use Eurodollar  futures  contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.

Risks of Strategic  Transactions  Outside the U.S.  When  conducted  outside the
U.S., Strategic  Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees,  and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities,  currencies and other instruments.  The value of such positions also
could be adversely affected by: (i) other complex foreign  political,  legal and
economic factors,  (ii) lesser availability than in the U.S. of data on which to
make  trading  decisions,  (iii) delays in the  Portfolio's  ability to act upon
economic events  occurring in foreign markets during  non-business  hours in the
U.S.,  (iv) the  imposition  of  different  exercise  and  settlement  terms and
procedures  and  margin  requirements  than in the U.S.,  and (v) lower  trading
volume and liquidity.

   
Use of Segregated and Other Special Accounts.  Many Strategic  Transactions,  in
addition to other  requirements,  require that the Portfolio  segregate  cash or
liquid assets with its  custodian to the extent  Portfolio  obligations  are not
otherwise  "covered"  through  ownership of the underlying  security,  financial
instrument or currency. In general,  either the full amount of any obligation by
the  Portfolio  to pay or deliver  securities  or assets  must be covered at all
times by the securities,  instruments or currency required to be delivered,  or,
subject to any regulatory  restrictions,  an amount of cash or liquid high grade
securities  at least  equal to the  current  amount  of the  obligation  must be
segregated  with  the  custodian.  The  segregated  assets  cannot  be  sold  or
transferred  unless equivalent assets are substituted in their place or it is no
longer  necessary to segregate  them. For example,  a call option written by the
Portfolio will require the Portfolio to hold the securities  subject to the call
(or  securities  convertible  into  the  needed  securities  without  additional
consideration) or to segregate cash or liquid securities  sufficient to purchase
and deliver the  securities if the call is exercised.  A call option sold by the
Portfolio on an index will require the  Portfolio  to own  portfolio  securities
which  correlate  with the index or to segregate  cash or liquid assets equal to
the excess of the index value over the exercise  price on a current basis. A put
option  written by the  Portfolio  requires the  Portfolio to segregate  cash or
liquid assets equal to the exercise price.
    

         Except  when the  Portfolio  enters  into a  forward  contract  for the
purchase  or sale of a security  denominated  in a  particular  currency,  which
requires no  segregation,  a currency  contract which obligates the Portfolio to
buy or sell currency will  generally  require the Portfolio to hold an amount of
that currency or liquid  securities  denominated  in that currency  equal to the
Portfolio's  obligations  or to segregate  liquid high grade assets equal to the
amount of the Portfolio's obligation.

         OTC  options  entered  into  by  the  Portfolio,   including  those  on
securities,  currency,  financial  instruments  or  indices  and OCC  issued and
exchange listed index options, will generally provide for cash settlement.  As a
result,  when the Portfolio  sells these  instruments  it will only segregate an
amount  of  assets  equal  to  its  accrued  net  obligations,  as  there  is no
requirement  for  payment or  delivery  of amounts in excess of the net  amount.
These  amounts  will  equal  100% of the  exercise  price  in the  case of a non
cash-settled  put,  the  same as an OCC  guaranteed  listed  option  sold by the
Portfolio,  or the in-the-money  amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when the Portfolio sells a call
option on an index at a time when the  in-the-money  amount exceeds the exercise
price, the Portfolio will segregate,  until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.  OCC issued and exchange
listed  options sold by the Portfolio  other than those above  generally  settle
with physical delivery,  or with an election of either physical delivery or cash
settlement  and the  Portfolio  will  segregate an amount of assets equal to the
full value of the option. OTC options settling with physical  delivery,  or with
an election of either  physical  delivery or cash settlement will be treated the
same as other options settling with physical delivery.

         In the case of a futures  contract or an option thereon,  the Portfolio
must deposit initial margin and possible daily  variation  margin in addition to
segregating  assets  sufficient  to meet its  obligation  to purchase or provide
securities  or  currencies,  or to pay the amount owed at the  expiration  of an


                                       38
<PAGE>

index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.

         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 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 the  Portfolio's  net
obligation, if any.

         Strategic  Transactions  may be covered by other means when  consistent
with  applicable  regulatory  policies.   The  Portfolio  may  also  enter  into
offsetting  transactions  so  that  its  combined  position,  coupled  with  any
segregated assets, equals its net outstanding  obligation in related options and
Strategic  Transactions.  For example, the Portfolio could purchase a put option
if the strike  price of that option is the same or higher than the strike  price
of a put option sold by the Portfolio.  Moreover,  instead of segregating assets
if the Portfolio  held a futures or forward  contract,  it could  purchase a put
option on the same  futures or forward  contract  with a strike price as high or
higher than the price of the contract held.  Other  Strategic  Transactions  may
also be offset in combinations.  If the offsetting transaction terminates at the
time of or after the primary  transaction no segregation is required,  but if it
terminates  prior to such time,  assets equal to any remaining  obligation would
need to be segregated.

         The Portfolio's  activities  involving  Strategic  Transactions  may be
limited by the  requirements  of  Subchapter M of the Internal  Revenue Code for
qualification as a regulated investment company. (See "TAX STATUS.")

Debt Securities

         If the  Adviser  determines  that  the  capital  appreciation  of  debt
securities  is likely to exceed  that of common  stocks,  the  Global  Discovery
Portfolio  may invest in debt  securities  of foreign and U.S.  issuers.  Global
Discovery  Portfolio debt  investments  will be selected on the basis of capital
appreciation potential, by evaluating,  among other things,  potential yield, if
any, credit quality, and the fundamental outlooks for currency and interest rate
trends in different parts of the world, taking into account the ability to hedge
a degree of currency or local bond price risk.  The Global  Discovery  Portfolio
may purchase  "investment-grade"  bonds, which are those rated Aaa, Aa, A or Baa
by  Moody's  or  AAA,  AA,  A or BBB by S&P  or,  if  unrated,  judged  to be of
equivalent quality as determined by the Adviser. Bonds rated Baa or BBB may have
speculative  elements as well as  investment-grade  characteristics.  The Global
Discovery  Portfolio  may  also  invest  up to 5% of  its  net  assets  in  debt
securities which are rated below  investment-grade,  that is, rated below Baa by
Moody's or below BBB by S&P and in unrated securities of equivalent quality.

High Yield, High Risk Securities

         The Bond, Balanced,  Capital Growth and Global Discovery Portfolios may
each invest in below investment grade securities  (rated Ba and lower by Moody's
and BB and lower by S&P) or unrated  securities.  Such  securities  carry a high
degree of risk  (including  the  possibility  of default or  bankruptcy of these
issuers of such securities)  generally  involve greater  volatility of price and
risk of  principal  and income,  and may be less liquid than  securities  in the
higher ratings categories and are considered  speculative.  The Global Discovery
Portfolio  may invest up to 5% of its net assets in such  securities.  The lower
the ratings of such debt  securities,  the greater  their risks render them like
equity securities.  See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.

         As economic  downturn  may disrupt the high yield market and impair the
ability of  issuers to repay  principal  and  interest.  Also,  an  increase  in
interest rates could adversely  affect the value of such  obligations  held by a
Portfolio.  Prices and yields of high yield  securities will fluctuate over time
and may affect a Portfolio's net asset value.  In addition,  investments in high
yield zero coupon or pay-in-kind bonds,  rather than  income-bearing  high yield
securities,  may be more speculative and may be subject to greater  fluctuations
in value due to changes in interest rates.

         The trading market for high yield  securities may be thin to the extent
that there is no established  retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the


                                       39
<PAGE>

values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.

         Credit quality in the high yield securities  market can change suddenly
and unexpectedly,  and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield  security.  For these reasons,
it is the policy of the Adviser  not to rely  exclusively  on ratings  issued by
established credit rating agencies,  but to supplement such ratings with its own
independent  and  on-going  review of credit  quality.  The  achievement  of the
Portfolios'  investment objectives may be more dependent on the Adviser's credit
analysis  than is the case for  higher  quality  bonds.  Should  the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.

         Prices  for  below  investment  grade  securities  may be  affected  by
legislative  and  regulatory  developments.  For example,  federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security.  Also,  Congress has from time to time  considered  legislation  which
would restrict or eliminate the corporate tax deduction for interest payments in
these  securities and regulate  corporate  restructurings.  Such legislation may
significantly depress the prices of outstanding securities of this type.

Combined Transactions

         Each Portfolio may enter into multiple transactions, including multiple
options transactions,  multiple futures transactions,  multiple foreign currency
transactions  (including  forward  contracts)  and any  combination  of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction,  as part of a single hedging strategy when, in the opinion
of the Adviser,  it is in the best  interest of a Portfolio to do so. A combined
transaction,  while part of a single hedging strategy,  may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions.  (See above for the risk
characteristics of certain transactions.)

Risks of Specialized Investment Techniques Abroad

         The above described  specialized  investment  techniques when conducted
abroad may not be  regulated as  effectively  as in the United  States;  may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of  governmental  actions  affecting  trading  in,  or the  prices  of,  foreign
securities. The value of such positions also could be adversely affected by: (i)
other  complex  foreign  political,  legal and  economic  factors;  (ii)  lesser
availability  than  in the  United  States  of  data on  which  to make  trading
decisions;  (iii)  delays in the  Fund's  ability  to act upon  economic  events
occurring in foreign markets during on-business hours in the United States; (iv)
the  imposition of different  exercise and  settlement  terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.

                             INVESTMENT RESTRICTIONS

            (See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)

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

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, the Fund may not on behalf of any Portfolio:

                                       40
<PAGE>

         (1)      purchase  and  sell  real  estate  (though  it may  invest  in
                  securities of companies which deal in real estate and in other
                  permitted  investments  secured by real estate) or commodities
                  or commodities  contracts,  except (a) debt securities futures
                  contracts and securities  index futures  contracts and options
                  thereon,  and (b) in the case of the International  Portfolio,
                  foreign currency futures contracts;

         (2)      participate  on a joint or a joint  and  several  basis in any
                  trading  account  in  securities,  but may for the  purpose of
                  possibly   achieving   better   net   results   on   portfolio
                  transactions  or lower  brokerage  commission  rates join with
                  other  investment  company  and  client  accounts  managed  by
                  Scudder,  Stevens & Clark or its affiliates in the purchase or
                  sale of portfolio securities;

         (3)      purchase  or  retain  securities  of an  issuer  any of  whose
                  officers,  directors,  trustees  or  security  holders  is  an
                  officer or Trustee of the Fund or a member, officer,  director
                  or  trustee  of the  investment  adviser of the Fund if one or
                  more of such individuals owns  beneficially more than one-half
                  of one percent (1/2 of 1%) of the shares or securities or both
                  (taken at market  value) of such  issuer and such  individuals
                  owning more than  one-half of one percent  (1/2 of 1%) of such
                  shares or securities together own beneficially more than 5% of
                  such shares or securities or both;

         (4)      purchase  securities on margin or make short sales unless,  by
                  virtue of its ownership of other securities,  it has the right
                  to  obtain  securities  equivalent  in kind and  amount to the
                  securities sold and, if the right is conditional,  the sale is
                  made upon the same conditions;

         (5)      issue senior  securities,  except as  appropriate  to evidence
                  indebtedness  which a Portfolio is permitted to incur pursuant
                  to  the  Investment  Restrictions  set  forth  in  the  Fund's
                  prospectus and except for shares of various  additional series
                  which may be established by the Trustees; or

         (6)      act as underwriter of the securities issued by others,  except
                  to the extent that the purchase of  securities  in  accordance
                  with its investment  objective and policies  directly from the
                  issuer thereof and the later disposition thereof may be deemed
                  to be underwriting.

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery and International Portfolios:

         (1)      hedge by purchasing put and call options,  futures  contracts,
                  or other derivative  instruments on securities in an aggregate
                  amount  equivalent to more than 10% of the  Portfolio's  total
                  assets;

         (2)      make securities  loans if the value of such securities  loaned
                  exceeds 10% of the value of the  Portfolio's  total  assets at
                  the time any loan is made.

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery Portfolio:

         (1)      purchase  or  retain  securities  of any  open-end  investment
                  company,  or  securities of  closed-end  investment  companies
                  except by purchase in the open market where no  commission  or
                  profit to a sponsor or dealer results from such purchases,  or
                  except when such purchase, though not made in the open market,
                  is part of a plan of merger, consolidation,  reorganization or
                  acquisition  of  assets;  in any event the  Portfolio  may not
                  purchase more than 3% of the outstanding  voting securities of
                  another investment company, may not invest more than 5% of its
                  total assets in another investment company, and may not invest
                  more  than  10%  of  its  total  assets  in  other  investment
                  companies;

         (2)      invest more than 10% of its net assets in securities which are
                  not readily marketable, the disposition of which is restricted
                  under Federal securities laws, or in repurchase agreements not
                  terminable  within 7 days,  and the Portfolio  will not invest
                  more than 5% of its total assets in restricted securities;

         (3)      buy options on securities or financial instruments, unless the
                  aggregate  premiums  paid  on all  such  options  held  by the
                  Portfolio at any time do not exceed 20% of its net assets;  or
                  sell put options on securities if, as a result,  the aggregate


                                       41
<PAGE>

                  value of the  obligations  underlying  such put options  would
                  exceed 50% of the Portfolio's net assets;

         (4)      enter into  futures  contracts  or  purchase  options  thereon
                  unless  immediately  after  the  purchase,  the  value  of the
                  aggregate initial margin with respect to all futures contracts
                  entered into on behalf of the  Portfolio and the premiums paid
                  for  options  on futures  contracts  does not exceed 5% of the
                  Portfolio's  total  assets  provided  that  in the  case of an
                  option  that is  in-the-money  at the  time of  purchase,  the
                  in-the-money amount may be excluded in computing the 5% limit;

         (5)      borrow  other  than from  banks,  or borrow  money  (including
                  reverse  repurchase  agreements) in excess of 10% of its total
                  assets  (taken at market  value)  except that for temporary or
                  emergency  purposes the  Portfolio may borrow up to 25% of its
                  total assets;

         (6)      purchase  securities on margin or make short sales unless,  by
                  virtue of its ownership of other securities,  it has the right
                  to  obtain  securities  equivalent  in kind and  amount to the
                  securities  sold  at no  added  cost  and,  if  the  right  is
                  conditional, the sale is made upon the same conditions, except
                  in connection with arbitrage  transactions and except that the
                  Fund may obtain such  short-term  credits as may be  necessary
                  for the clearance of purchases and sales of securities;

         (7)      purchase  warrants if as a result  warrants taken at the lower
                  of cost or market value would  represent  more than 10% of the
                  value of the Portfolio's net assets or more than 2% of its net
                  assets  in  warrants  that are not  listed  on the New York or
                  American  Stock  Exchanges or on an exchange  with  comparable
                  listing  requirements (for this purpose,  warrants attached to
                  securities will be deemed to have no value).

         If a percentage  restriction  on investment or utilization of assets as
set forth under "Investment  Restrictions" and "Other Investment Policies" above
is adhered to at the time an  investment  is made, a later change in  percentage
resulting from changes in the value or the total cost of the Portfolio's  assets
will not be considered a violation of the restriction.

         "Value" for the purposes of all investment  restrictions shall mean the
value  used in  determining  a  Portfolio's  net asset  value.  (See "NET  ASSET
VALUE.")

                            PURCHASES AND REDEMPTIONS

           (See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)

   
         The separate accounts of the Participating Insurance Companies 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 variable  annuity  contracts  and variable life
insurance  policies  but only on days on which the Exchange is open for trading.
Such  purchases and  redemptions of the shares of each Portfolio are effected at
their  respective  net  asset  values  per share  determined  as of the close of
regular trading on the Exchange  (normally 4 p.m. eastern time) on that same day
except that, in the case of the Money Market  Portfolio,  purchases  will not be
effected  until the next  determination  of net asset value after  federal funds
have been made  available  to the Fund.  (See "NET ASSET  VALUE.")  Payment  for
redemptions  will be made by  State  Street  Bank  and  Trust  Company  or Brown
Brothers  Harriman  & Co. on behalf  of the Fund and the  applicable  Portfolios
within seven days  thereafter.  No fee is charged the  separate  accounts of the
Participating Insurance Companies when they redeem Fund shares.
    

         The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted;  (ii) when the SEC determines  that a state of emergency
exists which may make payment or transfer not reasonably  practicable,  (iii) as
the SEC may by order permit for the  protection  of the security  holders of the
Fund or (iv) at any  other  time when the Fund may,  under  applicable  laws and
regulations, suspend payment on the redemption of its shares.

                                       42
<PAGE>

         Should any conflict  between VA contract and VLI policy  holders  arise
which would  require that a substantial  amount of net assets be withdrawn  from
the Fund,  orderly  portfolio  management  could be disrupted  to the  potential
detriment of such contract and policy holders.

                       INVESTMENT ADVISER AND DISTRIBUTOR

     (See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's prospectus.)

Investment Adviser
   

         The Fund has four  investment  advisory  agreements,  one for the Money
Market  Portfolio,  Bond  Portfolio,   Balanced  Portfolio  and  Capital  Growth
Portfolio,  one for the International  Portfolio,  one for the Growth and Income
Portfolio and one for the Global Discovery Portfolio (the  "Agreements").  These
Agreements  are with the  investment  counsel firm of Scudder,  Stevens & Clark,
Inc., a Delaware corporation,  doing business under the name Scudder,  Stevens &
Clark. This organization is one of the most experienced investment counsel firms
in the United States.  It currently  manages in excess of $115 billion in assets
for its clients, including: more than $50 billion in U.S. and foreign bonds, and
over $10 billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international  investment company
clients exceed $6 billion.  Scudder,  Stevens & Clark,  Inc. was  established in
1919 and  pioneered the practice of providing  investment  counsel to individual
clients on a fee basis.  In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.

         The  principal  source of the  Adviser's  income is  professional  fees
received from providing  continuous  investment  advice, and the firm derives no
income  from  brokerage  or  underwriting  of  securities.  Today,  it  provides
investment  counsel for many individuals and institutions,  including  insurance
companies,   colleges,  industrial  corporations,   and  financial  and  banking
organizations.  In addition,  it manages  Montgomery  Street Income  Securities,
Inc., Scudder California Tax Free Trust,  Scudder Cash Investment Trust, Scudder
Equity Trust,  Scudder Fund,  Inc.,  Scudder Funds Trust,  Scudder  Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust,  Scudder  Institutional  Fund,
Inc.,  Scudder  International  Fund, Inc.,  Scudder  Investment  Trust,  Scudder
Municipal  Trust,  Scudder  Mutual  Funds,  Inc.,  Scudder New Asia Fund,  Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder  State Tax Free Trust,  Scudder  Tax Free Money  Fund,  Scudder Tax Free
Trust,  Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
Scudder World Income  Opportunities  Fund,  Inc., The Argentina Fund,  Inc., The
Brazil Fund, Inc., The First Iberian Fund, Inc., The Korea Fund, Inc., The Japan
Fund,  Inc. and The Latin America Dollar Income Fund, Inc. Some of the foregoing
companies or trusts have two or more series.

         The Adviser also provides  investment  advisory  services to the mutual
funds  which  comprise  the  AARP  Investment  Program  from  Scudder.  The AARP
Investment  Program  from  Scudder has assets over $13 billion and  includes the
AARP Growth Trust,  AARP Income Trust,  AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
    

         Certain  investments  may be  appropriate  for the Fund  and for  other
clients  advised by the  Adviser.  Investment  decisions  for the Fund and other
clients 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 on the same day.  In
such event,  such  transactions  will be allocated among the clients in a manner
believed by the 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 Fund.  Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of the most  favorable net
results to the Fund.

         The  Adviser  maintains a large  research  department,  which  conducts
continuous   studies  of  the  factors  that  affect  the  position  of  various
industries,  companies and individual securities. The Adviser receives published
reports and statistical  compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the


                                       43
<PAGE>

Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities.  Scudder's  international  investment
management  team  travels  the world,  researching  hundreds  of  companies.  In
selecting  the  securities  in which the Fund may invest,  the  conclusions  and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.

         Under the  Agreements,  the Adviser  regularly  provides  the Fund with
investment  research,  advice and  supervision  and  furnishes  continuously  an
investment  program  consistent  with the investment  objectives and policies of
each Portfolio,  and determines,  for each Portfolio,  what securities  shall be
purchased,  what  securities  shall  be held or  sold,  and  what  portion  of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the  Fund's  Declaration  of  Trust  and  By-Laws,  and of the 1940 Act and to a
Portfolio's  investment  objectives,  policies  and  restrictions,  and  subject
further to such policies and  instructions as the Trustees may from time to time
establish.  The Adviser  also  advises  and assists the  officers of the Fund in
taking such steps as are necessary or  appropriate to carry out the decisions of
its Trustees  and the  appropriate  committees  of the  Trustees  regarding  the
conduct of the business of the Fund.

         The  Adviser  pays the  compensation  and  expenses  of all  affiliated
Trustees  and  executive  employees  of the Fund and  makes  available,  without
expense to the Fund,  the  services  of such  affiliated  persons as may duly be
elected Trustees of the Fund,  subject to their individual  consent to serve and
to any limitations  imposed by law, and pays the Fund's office rent and provides
investment  advisory,  research  and  statistical  facilities  and all  clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
   
                                        % of the average
                                        daily net asset
                                         values of each       Dollar Amount
                Portfolio                  Portfolio              1994                1995                1996

     <S>                                   <C>                <C>                 <C>                 <C>     
      Money Market Portfolio                .370%              $269,963            $306,996            $325,791
      Bond Portfolio                        .475%               650,361             657,112             291,740
      Balanced Portfolio                    .475%               218,621             269,230             372,176
      Growth and Income Portfolio           .475%                     0             169,852             326,033
      Capital Growth Portfolio              .475%             1,199,585           1,383,919           1,870,361
      Global Discovery Portfolio            .975%                    --                  --              80,681
      International Portfolio               .875%*            3,363,597           4,357,541           5,590,601
    
</TABLE>

   
*        For any calendar  month  during  which the average  daily net assets of
         International  Portfolio exceed $500,000,000,  the fee payable for that
         month, with respect to the excess over  $500,000,000,  is calculated at
         an annual rate of .775%. As a result, the Adviser received compensation
         at an annual rate of .863% for the fiscal year ended December 31, 1996.
    

         Under  the  Agreements,  the  Fund is  responsible  for  all its  other
expenses,  including clerical salaries; fees and expenses incurred in connection
with  membership  in investment  company  organizations;  brokers'  commissions;
legal,  auditing and  accounting  expenses;  taxes and  governmental  fees;  the
charges of custodians,  transfer  agents and other agents;  any other  expenses,
including  clerical  expenses,  of  issue,  sale,  underwriting,   distribution,
redemption or repurchase of shares;  the expenses of and fees for registering or
qualifying  securities  for sale;  the fees and  expenses of the Trustees of the
Fund who are not  affiliated  with the Adviser;  and the cost of  preparing  and
distributing  reports and notices to shareholders.  The Fund may arrange to have
third  parties  assume  all or part of the  expense  of sale,  underwriting  and
distribution  of its shares.  (See  "Distributor"  for expenses  paid by Scudder
Investor Services,  Inc.) The Fund is also responsible for its expenses incurred
in connection with  litigation,  proceedings and claims and the legal obligation
it may have to indemnify its officers and Trustees with respect thereto.

         In addition to payments for investment  advisory  services  provided by
the  Adviser,  the  Trustees,  consistent  with the Fund's  investment  advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder  Investor  Services,  Inc. for  clerical,  accounting  and certain other
services  they may provide the Fund.  Effective  October 1, 1994,  the  Trustees


                                       44
<PAGE>

authorized  the  elimination  of  these  administrative  expenses.  Under  a new
agreement,  effective  October 1, 1994,  the Trustees  authorized  the Fund,  on
behalf  of  each  Portfolio,  to pay  Scudder  Fund  Accounting  Corporation,  a
subsidiary of the Adviser,  for  determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Fund.

         For the year ended  December 31, 1994,  such  compensation  amounted to
$40,297 for the Money Market Portfolio,  $40,238 for the Bond Portfolio, $38,204
for the Balanced Portfolio, $25,179 for the Growth and Income Portfolio, $45,253
for the  Capital  Growth  Portfolio,  $45,272 for the  International  Portfolio;
administrative   expenses  not  imposed   aggregated  $7,119  for  the  Balanced
Portfolio.

         For the year ended  December 31, 1995,  such  compensation  amounted to
$30,000 for the Money Market Portfolio,  $43,187 for the Bond Portfolio, $37,353
for the Balanced Portfolio, $38,256 for the Growth and Income Portfolio, $73,583
for the Capital Growth Portfolio and $277,867 for the International Portfolio.

   
         For the year ended  December 31, 1996,  such  compensation  amounted to
$___ for the Money Market Portfolio,  $___ for the Bond Portfolio,  $___ for the
Balanced  Portfolio,  $___ for the  Growth and  Income  Portfolio,  $___ for the
Capital Growth Portfolio,  $___ for the Global Discovery  Portfolio and $___ for
the International Portfolio.

         The Agreements dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio, Balanced Portfolio and Capital Growth Portfolio), April 30, 1987
(for the  International  Portfolio),  May 1, 1994  (for the  Growth  and  Income
Portfolio)  will remain in effect until  September 30, 1997. The Agreement dated
May 1, 1996 (for the Global  Discovery  Portfolio)  will remain in effect  until
September  30, 1997.  The  Agreements  will continue in effect from year to year
thereafter  only if their  continuance  is  approved  annually  by the vote of a
majority of those Trustees who are not parties to such Agreements or "interested
persons" of the  Adviser or the Fund cast in person at a meeting  called for the
purpose  of voting on such  approval  and  either by vote of a  majority  of the
Trustees or a majority of the  outstanding  securities  of such  Portfolio.  The
Agreement for the Money Market Portfolio, Bond Portfolio, Balanced Portfolio and
Capital Growth Portfolio,  the Agreement for the International Portfolio and the
Agreement  for the  Growth  and  Income  Portfolio  were last  approved  by such
Trustees  (including  a majority of the  Trustees  who are not such  "interested
persons") on August 9, 1996.  The Agreement for the Global  Discovery  Portfolio
was last approved by such Trustees (including a majority of the Trustees who are
not such  "interested  persons")  on  October  5, 1995.  Each  Agreement  may be
terminated at any time without payment of penalty by either party on sixty days'
written notice, and automatically terminates in the event of its assignment.
    

         Each  Agreement  also  provides  that the Fund may use any name derived
from the name "Scudder,  Stevens & Clark" only as long as such Agreement remains
in effect.

         In reviewing the terms of the Agreements  and in  discussions  with the
Adviser concerning the Agreements,  Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.

         The  Agreements  provide  that the Adviser  shall not be liable for any
error of  judgment  or  mistake of law or for any loss  suffered  by the Fund in
connection with matters to which the Agreements relate,  except a loss resulting
from  willful  misfeasance,  bad  faith or gross  negligence  on the part of the
Adviser in the  performance  of its  duties or from  reckless  disregard  by the
Adviser of its obligations and duties under the Agreements.

         Each  Participating  Insurance  Company  has agreed with the Adviser to
reimburse  the  Adviser  for a  period  of five  years  to the  extent  that the
aggregate  annual  advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all  Portfolios  held in that
Participating  Insurance  Company's  general or  separate  account  (or those of
affiliates)  is less than  $25,000 in any year.  It is expected  that  insurance
companies which become  Participating  Insurance Companies in the future will be
required to enter into similar arrangements.

         Until  April 30,  1998,  the Adviser has agreed to waive part or all of
both the management and administrative  fees for the Global Discovery  Portfolio
to the extent that the Portfolio's expenses will be maintained at 1.50%.

                                       45
<PAGE>

         Officers  and  employees  of the  Adviser  from  time to time  may have
transactions with various banks,  including the Fund's custodian bank. It is the
Adviser's  opinion that the terms and conditions of those  transactions were not
influenced by existing or potential custodial or other Fund relationships.

         None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.

Personal Investments by Employees of the Adviser

         Employees  of the Adviser are  permitted  to make  personal  securities
transactions,  subject  to  requirements  and  restrictions  set  forth  in  the
Adviser's  Code  of  Ethics.   The  Code  of  Ethics  contains   provisions  and
requirements  designed to identify  and address  certain  conflicts  of interest
between personal investment  activities and the interests of investment advisory
clients such as the Portfolios.  Among other things,  the Code of Ethics,  which
generally  complies  with  standards   recommended  by  the  Investment  Company
Institute's  Advisory Group on Personal  Investing,  prohibits  certain types of
transactions  absent prior approval,  imposes time periods during which personal
transactions may not be made in certain securities,  and requires the submission
of  duplicate  broker   confirmations   and  monthly   reporting  of  securities
transactions.  Additional  restrictions  apply to portfolio  managers,  traders,
research  analysts  and others  involved  in the  investment  advisory  process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

Distributor

         The Fund has an underwriting  agreement with Scudder Investor Services,
Inc. (the "Distributor"),  a subsidiary of the Adviser, Two International Place,
Boston,  Massachusetts 02110-4103.  The Fund's underwriting agreement dated July
12, 1985,  will remain in effect until September 30, 1997, and from year to year
thereafter  only if its  continuance  is approved  annually by a majority of the
Trustees who are not parties to such  agreement or  "interested  persons" of any
such party and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund.

         Under the  principal  underwriting  agreement  between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection  with the preparation  and filing of any  registration  statement and
prospectus  covering  the issue and sale of  shares,  and the  registration  and
qualification  of shares for sale with the SEC in the various states,  including
registering the Fund as a broker or dealer.  The Fund will also pay the fees and
expenses of preparing,  printing and mailing  prospectuses  annually to existing
shareholders  and any  notice,  proxy  statement,  report,  prospectus  or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free  telephone service for shareholders,  wiring funds for share purchases
and redemptions  (unless paid by the shareholder who initiates the transaction),
printing and postage of business  reply  envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.

         The Distributor will pay for printing and distributing  prospectuses or
reports  prepared for its use in  connection  with the offering of the shares to
the  public  and  preparing,  printing  and  mailing  any  other  literature  or
advertising  in  connection  with the offering of the shares to the public.  The
Distributor will pay all fees and expenses in connection with its  qualification
and  registration  as a broker or dealer under Federal and state laws, a portion
of the  toll-free  telephone  service  and  of  computer  terminals,  and of any
activity  which is primarily  intended to result in the sale of shares issued by
the Fund,  unless a 12b-l Plan is in effect which  provides  that the Fund shall
bear some or all of such expenses.  The  Distributor has entered into agreements
with  broker-dealers  authorized to offer and sell VA contracts and VLI policies
on behalf of the  Participating  Insurance  Companies under which agreements the
broker-dealers  have agreed to be  responsible  for the fees and expenses of any
prospectus,   statement  of  additional   information  and  printed  information
supplemental  thereto of the Fund  distributed in connection with their offer of
VA contracts and VLI policies.

         As agent, the Distributor  currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all  states  in which  the  Portfolio  or the  Fund may from  time to time be
registered or where  permitted by  applicable  law. The  underwriting  agreement
provides  that the  Distributor  accepts  orders for  shares at net asset  value


                                       46
<PAGE>

without sales commission or load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.

         A  description  of the  Rule  12b-1  plan  for  Class B  shares  of the
Portfolio (the "Plan") and related  services and fees  thereunder is provided in
the  prospectus.  On  October  5,  1995,  the  Board  of  Trustees  of the  Fund
unanimously approved the Plan. In connection with its consideration of the Plan,
the  Board of  Trustees  was  furnished  with  drafts  of the  Plan and  related
materials,  including information related to the advantages and disadvantages of
Rule 12b-1 plans currently being used in the mutual fund industry. Legal counsel
for the Fund provided additional  information,  summarized the provisions of the
proposed Plan and discussed the legal and regulatory  considerations in adopting
such Plan.

         The Board considered various factors in connection with its decision as
to  whether  to  approve  the Plan,  including  (a) the nature and causes of the
circumstances  which make  implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those  circumstances,  including the
nature and potential amount of  expenditures;  (c) the nature of the anticipated
benefits;  (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI  policies;  (f) the  merits of  possible  alternative  plans or  pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.

         Based  upon its  review  of the  foregoing  factors  and the  materials
presented to it, and in light of its fiduciary  duties under  relevant state law
and the  1940  Act,  the  Board  determined,  in the  exercise  of its  business
judgment,  that the Fund's Plan is reasonably likely to benefit the Fund and the
VA contract and VLI policy owners in at least one of several ways. Specifically,
the Board concluded that the Participating  Insurance  Companies would have less
incentive  to  educate  VA  contract  and VLI  policy  owners  and sales  people
concerning the Fund if expenses  associated with such services were not paid for
by the Fund. In addition,  the Board determined that the payment of distribution
fees to  insurers  should  motivate  them to  maintain  and enhance the level of
services  relating to the Fund  provided to VA contract  and VLI policy  owners,
which would, of course, benefit such VA contract and VLI policy owners. Further,
the  adoption  of the Plan  would  likely  help to  maintain  and may lead to an
increase  in net  assets  under  management  given  the  distribution  financing
alternatives  available through the multi-class  structure.  The Board also took
into account expense  structures of other competing  products and administrative
compensation  arrangements  between  other funds,  their  advisers and insurance
companies that currently are in use in the variable products industry.  Further,
it is anticipated  that Plan fees may be used to educate  potential and existing
owners of VA contracts  and VLI policies  concerning  the Fund,  the  securities
markets and related  risks. A better  educated  investor,  in the  Distributor's
view,  is less likely to surrender  his or her VA contract or VLI policy  early,
thereby avoiding the costs associated with such an event. Accordingly,  the Plan
may help the Fund and Participating  Insurance Companies meet investor education
needs.

         The Board realizes that there is no assurance  that the  expenditure of
Fund assets to finance  distribution  of Fund  shares will have the  anticipated
results.  However, the Board believes there is a reasonable  likelihood that one
or more of such benefits will result,  and since the Board will be in a position
to monitor the  distribution  expenses of the Fund,  it will be able to evaluate
the benefit of such expenditures in deciding whether to continue the Plan.

         The Plan and any Rule  12b-1-related  agreement that is entered into by
the Fund or the  Distributor in connection with the Plan will continue in effect
for a period of more than one year only so long as continuance  is  specifically
approved  at least  annually  by a vote of a  majority  of the  Fund's  Board of
Trustees,  and of a majority of the Trustees who are not interested  persons (as
defined in the 1940 Act) of the Fund or a  Portfolio  ("Independent  Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable.  In addition, the Plan and any Rule
12b-1 related  agreement,  may be terminated as to Class B shares of a Portfolio
at any time,  without penalty,  by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the  Independent  Trustees.
The Plan also  provides  that it may not be amended to increase  materially  the
amount  that may be spent  for  distribution  of Class B shares  of a  Portfolio
without the approval of Class B shareholders of that Portfolio.

                                       47
<PAGE>
<TABLE>
<CAPTION>
                                                MANAGEMENT OF THE FUND

Trustees and Officers
                                                                                               Position with
                                                                                               Underwriter, Scudder
                                                                                               Investor Services,
Name, Age and Address               Position with Fund       Principal Occupation**            Inc.
---------------------               ------------------       ----------------------            --------------------
   
<S>                                 <C>                      <C>                               <C>
David B. Watts*@+ (62)              President and Trustee    Managing Director of Scudder,     Assistant Treasurer
                                                             Stevens & Clark, Inc.

Daniel Pierce*@+ (63)               Vice President and       Chairman of the Board and         Vice President,
                                    Trustee                  Managing Director of Scudder,     Director and Assistant
                                                             Stevens & Clark, Inc.             Treasurer

Dr. Kenneth Black, Jr. (72)         Trustee                  Regents' Professor Emeritus of       ----
Educational Foundation, Inc.                                 Insurance, Georgia State
35 Broad Street                                              University
11th Floor, Room 1144
Atlanta, GA  30303

Dr. Rosita P. Chang (42)            Trustee                  Professor of Finance,                _____
PACAP Research Center                                        University of Rhode Island
College of Business
  Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802

Peter B. Freeman@ (64)              Trustee                  Corporate Director and Trustee      ----
100 Alumni Avenue
Providence, RI  02906

Dr. J. D. Hammond (63)              Trustee                  Dean, Smeal College of Business     ----
801 Business                                                 Administration, Pennsylvania
  Administration Bldg.                                       State University
Pennsylvania State University
University Park, PA  16802

Thomas S. Crain++ (56)              Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Carol Franklin*#(44)                Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

William F. Gadsden*#(42)            Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

Jerard K. Hartman#(64)              Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

Robert T. Hoffman*#(38)             Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.
    
                                       48
<PAGE>
                                                                                               Position with
                                                                                               Underwriter, Scudder
                                                                                               Investor Services,
Name, Age and Address               Position with Fund       Principal Occupation**            Inc.
---------------------               ------------------       ----------------------            --------------------
   
Richard A. Holt*** (55)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

William M. Hutchinson*+(49)         Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Thomas W. Joseph+ (58)              Vice President           Principal of Scudder, Stevens &   Vice President,
                                                             Clark, Inc.                       Director, Treasurer
                                                                                               and Assistant Clerk

David S. Lee+ (63)                  Vice President           Managing Director of Scudder,     President, Assistant
                                                             Stevens & Clark, Inc.             Treasurer and Director

Valerie F. Malter*#(38)             Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Steven M. Meltzer+ (38)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Gerald J. Moran*#(57)               Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Randall K. Zeller# (42)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Thomas F. McDonough+ (50)           Vice President and       Principal of Scudder, Stevens &   Clerk
                                    Secretary                Clark, Inc.

Pamela A. McGrath+ (43)             Vice President and       Managing Director of Scudder,       ----
                                    Treasurer                Stevens & Clark, Inc.

Edward J. O'Connell# (51)           Vice President and       Principal of Scudder, Stevens &   Assistant Treasurer
                                    Assistant Treasurer      Clark, Inc.

Kathryn L. Quirk# (44)              Vice President and       Managing Director of Scudder,     Vice President
                                    Assistant Secretary      Stevens & Clark, Inc.
    
          *         Messrs. Watts and Pierce are considered by the Fund and its counsel to be Trustees who are
                    "interested persons" of the Adviser or of the Fund (within the meaning of the 1940 Act).
          **        Unless otherwise stated,  all the officers and Trustees have
                    been  associated  with their  respective  companies for more
                    than five years, but not necessarily in the same capacity.
          @         Peter B. Freeman, Daniel Pierce and David B. Watts are members of the Executive Committee, which
                    has the power to declare dividends from ordinary income and distributions of realized capital
                    gains to the same extent as the Board is so empowered.
          +         Address:  Two International Place, Boston, Massachusetts  02110-4103
          #         Address:  345 Park Avenue, New York, New York  10154
          ++        Address:  600 Vine Street - Suite 2000, Cincinnati, Ohio  45202
          ***       Address:  111 E. Wacker Drive - Suite 2200, Chicago, Illinois  60601
</TABLE>

                                       49
<PAGE>

   
Certain  of the  Trustees  and  officers  of the  Fund  also  serve  in  similar
capacities with other Scudder Funds.

                                  REMUNERATION

Responsibilities of the Board--Board and Committee Meetings

         The Board of Trustees is responsible  for the general  oversight of the
Fund's  business.  A majority of the Board's  members  are not  affiliated  with
Scudder,  Stevens & Clark, Inc. (The "Advisor").  These  "Independent  Trustees"
have primary  responsibility  for assuring  that the Fund is managed in the best
interests of its shareholders.

         The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational  matters,  including  policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually,  the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder  services.  In this regard, they evaluate,  among other things, each
Funds' investment  performance,  the quality and efficiency of the various other
services  provided,  costs  incurred  by the  Adviser  and its  affiliates,  and
comparative  information  regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.

         All of the  Independent  Trustees serve on the Committee on Independent
Trustees,  which  nominates  Independent  Trustees and  considers  other related
matters,  and the Audit Committee,  which selects the Fund's  independent public
accountants  and  reviews  accounting   policies  and  controls.   In  addition,
Independent  Trustees  from time to time  have  established  and  served on task
forces and  subcommittees  focusing on  particular  matters such as  investment,
accounting and shareholder service issues.

         The Independent  Trustees met _____ times during 1996,  including Board
and  Committee   meetings  and  meetings  to  review  each  Fund's   contractual
arrangements as described above. All of the Independent  Trustees attended ____%
of all such meetings.

Compensation of Officers and Trustees

         The Independent Trustees receive the following compensation from Funds:
an annual  trustee's fee of $12,000;  a fee of $300 for attendance at each Board
meeting,  audit  committee  meeting,  or other  meeting held for the purposes of
considering  arrangements  between the Fund and the Adviser or any  affiliate of
the Adviser;  $100 for any other committee  meeting  (although in some cases the
Independent  Trustees have waived committee  meeting fees); and reimbursement of
expenses  incurred  for  travel  to  and  from  Board  Meetings.  No  additional
compensation  is paid to any  Independent  Trustee for travel time to  meetings,
attendance  at  directors'  educational  seminars  or  conferences,  service  on
industry or  association  committees,  participation  as speakers at  directors'
conferences,  service on special trustee task forces or subcommittees or service
as lead or liaison  trustee.  Independent  Trustees do not receive any  employee
benefits such as pension, retirement or health insurance.

         The  Independent  Trustees  also serve in the same  capacity  for other
funds managed by the Adviser.  These funds differ  broadly in type an complexity
and in some  cases have  substantially  different  Trustee  fee  schedules.  The
following table shows the aggregate  compensation  received by each  Independent
Trustee during 1996 from the Trust and from all of Scudder funds as a group.
    

                                       50
<PAGE>
<TABLE>
<CAPTION>
   
                                                  Compensation Table
                                         for the year ended December 31, 1996
------------------------------------------------------------------------------------------------------------------
           (1)                          (2)                      (3)                (4)                 (5)

                                                              Pension or                        Total Compensation
                                                              Retirement                         From the Fund and
                                                           Benefits Accrued      Estimated       Fund Complex Paid
                            Aggregate Compensation from    As Part of Fund    Annual Benefits       to Trustee
     Name of Person,         the Scudder Variable Life         Expenses       Upon Retirement
         Position                 Investment Fund*
------------------------------------------------------------------------------------------------------------------

<S>                                  <C>                        <C>                <C>              <C>     
Dr. Kenneth Black, Jr.,              $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)

Dr. Rosita P. Chang,                 $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)

Peter B. Freeman, Trustee            $ 16,483                   N/A                N/A              $ 131,734
                                                                                                   (33 funds)

Dr. J.D. Hammond,                    $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)
    
</TABLE>

   
*        Scudder  Variable Life  Investment  Fund consists of seven  Portfolios:
         Money Market Portfolio, Bond Portfolio,  Balanced Portfolio, Growth and
         Income Portfolio,  Capital Growth Portfolio, Global Discovery Portfolio
         and International Portfolio.

         Members of the Board of Trustees  who are  employees  of Scudder or its
affiliates  receive  no direct  compensation  from the Fund,  although  they are
compensated  as employees of Scudder,  or its  affiliates,  as a result of which
they may be deemed to participate in fees paid by the Fund.
    


                                 NET ASSET VALUE

         (See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
                            in the Fund's prospectus)

         The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular  trading on the  Exchange on each day the Exchange is
open for trading (the "Value  Time").  The Exchange is scheduled to be closed on
the following holidays:  New Year's Day,  Presidents Day, Good Friday,  Memorial
Day,  Independence Day, Labor Day,  Thanksgiving and Christmas.  Net asset value
per share is  determined  by dividing  the value of the total  assets of a Fund,
less all liabilities, by the total number of shares outstanding.

         The  valuation of the Money Market  Portfolio  securities is based upon
their amortized  cost,  which does not take into account  unrealized  securities
gains or losses.  This method  involves  initially  valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.  While this method provides certainty in valuation,  it
may result in periods  during which value,  as determined by amortized  cost, is
higher or lower than the price the Money Market  Portfolio  would  receive if it
sold the  instrument.  During periods of declining  interest  rates,  the quoted
yield on shares of the Money Market  Portfolio may tend to be higher than a like
computation  made by a fund with  identical  investments  utilizing  a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio  instruments.  Thus,  if the use of  amortized  cost by the  Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he  purchased  shares of the Money Market  Portfolio on that day,  than
would  result/from  investment in a fund  utilizing  solely market  values,  and


                                       51
<PAGE>

existing  investors in the Money Market  Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.

         An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the  security  is valued at the  calculated  mean  between  the most  recent bid
quotation and the most recent asked quotation (the "Calculated  Mean"). If there
are no bid and asked  quotations,  the security is valued at the most recent bid
quotation.  An  unlisted  equity  security  which  is  traded  on  the  National
Association  of Securities  Dealers  Automated  Quotation  ("NASDAQ")  system is
valued at the most recent sale price.  If there are no such sales,  the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another  over-the-counter market,
is the most  recent  sale price.  If there are no such  sales,  the  security is
valued at the Calculated  Mean. If there is no Calculated  Mean, the security is
valued at the most recent bid quotation.

         Debt securities, other than short-term securities, are valued at prices
supplied  by the Fund's  pricing  agent  which  reflect  broker/dealer  supplied
valuations and electronic data processing techniques. Short-term securities with
remaining  maturities  of sixty  days or less are valued by the  amortized  cost
method,  which  the  Board  believes  approximates  market  value.  If it is not
possible  to value a  particular  debt  security  pursuant  to  these  valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker.  If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.

         Option contracts on securities, currencies, futures and other financial
instruments  traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported,  the value is the Calculated Mean, or if
the Calculated Mean is not available,  the most recent bid quotation in the case
of purchased options,  or the most recent asked quotation in the case of written
options.  Option contracts traded over-the-counter are valued at the most recent
bid  quotation  in the case of  purchased  options and at the most recent  asked
quotation in the case of written  options.  Futures  contracts are valued at the
most recent settlement  price.  Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.

         If a security  is traded on more than one  exchange,  or on one or more
exchanges  and in the  over-the-counter  market,  quotations  are taken from the
market in which the security is traded most extensively.

         If, in the opinion of the Fund's Valuation  Committee,  the value of an
asset as determined in accordance  with these  procedures does not represent the
fair market value of the asset,  the value of the asset is taken to be an amount
which, in the opinion of the Valuation  Committee,  represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is  determined  in a manner  which,  in the  discretion of the
Valuation  Committee  most fairly  reflects fair market value of the property on
the valuation date.

         Following the  valuations of  securities or other  portfolio  assets in
terms of the currency in which the market  quotation  used is expressed  ("Local
Currency"),  the value of these assets in terms of U.S. dollars is calculated by
converting  the Local  Currency  into U.S.  dollars at the  prevailing  currency
exchange rates on the valuation date.

                                   TAX STATUS

    (See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)

         Each  Portfolio  of the Fund has  elected to be treated as a  regulated
investment  company under  Subchapter M of the Internal Revenue Code of 1986, as
amended  (the  "Code").   Such  qualification  does  not  involve   governmental
supervision or management of investment practices or policy.

         Each Portfolio  intends to comply with the provisions of Section 817(h)
of the Code  relating to  diversification  requirements  for  variable  annuity,
endowment and life insurance contracts.  Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified,  or (ii) the "Safe Harbor for Diversification"
specified  in  Section  817(h)(2)  of the  Code,  or (iii)  the  diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets


                                       52
<PAGE>

invested in U.S.  Treasury  securities  which  qualify for the "Special Rule for
Investments in United States Obligations"  specified in Section 817(h)(3) of the
Code.

         A regulated  investment  company  qualifying  under Subchapter M of the
Code is required to  distribute to its  shareholders  at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes  annually its investment  company  taxable
income and net realized capital gains in the manner required under the Code.

         Investment  company taxable income of a Portfolio  generally is made up
of dividends,  interest,  certain  currency gains and losses and  net-short-term
capital gains in excess of net long-term  capital  losses,  less  expenses.  Net
realized  capital  gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.

         At December  31, 1994 the Bond  Portfolio  had a net tax basis  capital
loss  carryforward of approximately  $4,153,327 which may be applied against any
realized net taxable  capital gains of each succeeding year until fully utilized
or until December 31, 2002,  whichever occurs first. In addition,  from November
1, 1994 through December 31, 1994, the Balanced  Portfolio  incurred $275,417 of
net realized capital losses which the Fund intends to defer and treat as arising
in the fiscal year ended December 31, 1995.

         If any net realized  long-term  capital gains in excess of net realized
short-term  capital  losses  are  retained  by  a  Portfolio  for  reinvestment,
requiring  federal  income  taxes  to be paid  thereon  by the  Portfolio,  such
Portfolio  intends  to  elect  to  treat  such  capital  gains  as  having  been
distributed to  shareholders.  As a result,  each  shareholder  will report such
capital  gains as long-term  capital  gains,  will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability,  and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference  between its pro rata
share of such gains and its tax credit.

         Distributions  of  investment  company  taxable  income are  taxable to
shareholders as ordinary income.

         Distributions  of the  excess of net  long-term  capital  gain over net
short-term  capital loss are taxable to shareholders as long-term  capital gain,
regardless of the length of time the shares of the relevant  Portfolio have been
held by such shareholders.  Any loss realized upon the redemption of shares held
at the time of redemption  for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as  distributions of long-term
capital gain during such six-month period.

         Distributions  of investment  company  taxable  income and net realized
capital  gains  will be  taxable  as  described  above,  whether  reinvested  in
additional shares or in cash.  Shareholders electing to receive distributions in
the form of  additional  shares  will have a cost basis for  federal  income tax
purposes  in each share so  received  equal to the net asset value of a share on
the reinvestment date.

         All distributions of investment company taxable income and net realized
capital  gain,  whether  reinvested  in  additional  shares or in cash,  must be
reported  by each  shareholder  on its  federal  income  tax  return.  Dividends
declared  in October,  November  or December  with a record date in such a month
will be deemed to have been  received  by  shareholders  on  December 31 if paid
during  January of the following  year.  Redemptions of shares may result in tax
consequences  (gain or loss) to the  shareholder  and are also  subject to these
reporting requirements.

         Distributions by a Portfolio (except the Money Market Portfolio) result
in a  reduction  in the net  asset  value of the  Portfolio's  shares.  Should a
distribution  reduce the net asset value below a shareholder's  cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment  standpoint,
it may constitute a partial return of capital.  In particular,  investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares  purchased at that time  includes the amount of the  forthcoming
distribution.  Those purchasing just prior to a distribution will then receive a
partial  return of capital upon the  distribution,  which will  nevertheless  be
taxable to them.

         If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International   Portfolios  invest  in  stock  of  certain  foreign   investment
companies,  the Portfolios may be subject to U.S.  federal income  taxation on a


                                       53
<PAGE>

portion  of any  "excess  distribution"  with  respect  to,  or  gain  from  the
disposition  of, such stock.  The tax would be  determined  by  allocating  such
distribution or gain ratably to each day of a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition,  would be
taxed to a  Portfolio  at the  highest  ordinary  income rate in effect for such
year,  and the tax would be further  increased by an interest  charge to reflect
the value of the tax deferral  deemed to have resulted from the ownership of the
foreign  company's  stock.  Any amount of  distribution or gain allocated to the
taxable  year  of  the  distribution  or  disposition  would  be  included  in a
Portfolio's  investment  company taxable income and,  accordingly,  would not be
taxable to a Portfolio to the extent distributed by a Portfolio as a dividend to
its shareholders.

         Proposed  regulations  have been issued  which may allow the  Balanced,
Growth and  Income,  Capital  Growth  and  International  Portfolios  to make an
election to mark to market their shares of these foreign investment companies in
lieu of  being  subject  to U.S.  federal  income  taxation.  At the end of each
taxable  year to which the  election  applies,  the  Balanced,  Capital  Growth,
International  and Growth and Income  Portfolios would report as ordinary income
the amount by which the fair market value of the foreign company's stock exceeds
the Balanced,  Capital Growth,  International and Growth and Income  Portfolios'
adjusted  basis in these shares.  No mark to market losses would be  recognized.
The effect of the election  would be to treat excess  distributions  and gain on
dispositions  as ordinary  income  which is not subject to a fund level tax when
distributed to  shareholders  as a dividend.  Alternatively,  the Portfolios may
elect to include as income and gain their share of the ordinary earnings and net
capital gain of certain foreign  investment  companies in lieu of being taxed in
the manner described above.

         Equity options  (including options on stock and options on narrow-based
stock  indexes)  and  over-the-counter  options  on debt  securities  written or
purchased by a Portfolio  will be subject to tax under Section 1234 of the Code.
In general,  no loss is recognized  by a Portfolio  upon payment of a premium in
connection with the purchase of a put or call option.  The character of any gain
or loss recognized (i.e.,  long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's  holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security.  The purchase of a put option may constitute
a short sale for  federal  income tax  purposes,  causing an  adjustment  in the
holding period of the underlying security or a substantially  identical security
of the  Portfolio.  If the  Portfolio  writes a put or call  option,  no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is  treated as a  short-term  capital  gain or loss.  If a call
option  written by a Portfolio is  exercised,  the character of the gain or loss
depends on the holding period of the underlying security.  The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.

         Many futures  contracts,  certain foreign  currency  forward  contracts
entered  into by a  Portfolio  and  all  listed  nonequity  options  written  or
purchased by the Portfolio  (including  options on debt  securities,  options on
futures  contracts,  options on  securities  indexes and options on  broad-based
stock  indexes)  will be  governed  by  Section  1256 of the Code.  Absent a tax
election to the contrary,  gain or loss  attributable to the lapse,  exercise or
closing out of any such position  generally will be treated as 60% long-term and
40%  short-term  capital gain or loss, and on the last trading day of the fiscal
year,  all  outstanding  Section 1256  positions  will be marked to market (i.e.
treated as if such  positions  were  closed out at their  closing  price on such
day),  with any  resulting  gain or loss  recognized  as 60%  long-term  and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign  currency-related  forward contracts,
certain futures and options and similar  financial  instruments  entered into or
acquired  by a  Portfolio  will be treated as  ordinary  income.  Under  certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security owned by
the Portfolio.

         Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual  gross  income  from the sale or other  disposition  of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation.  Accordingly,  the amount of such  transactions that a Portfolio may
undertake may be limited.

         Positions  of a  Portfolio  which  consist of at least one stock and at
least one stock  option or other  position  with  respect to a related  security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle"  which is governed by Section 1092 of the
Code,  the operation of which may cause  deferral of losses,  adjustments in the


                                       54
<PAGE>

holding  periods of stock or securities  and  conversion  of short-term  capital
losses into  long-term  capital  losses.  An exception to these  straddle  rules
exists for any "qualified covered call options" on stock written by a Portfolio.

         Positions  of a Portfolio  which  consist of at least one  position not
governed by Section  1256 and at least one futures  contract,  foreign  currency
forward   contract  or   nonequity   option   governed  by  Section  1256  which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed  straddle."  Although  mixed  straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or  eliminate  the  operation  of these rules.  Each
Portfolio  will  monitor  its  transactions  in options and futures and may make
certain tax elections in connection with these investments.

         Under  the  Code,  gains or  losses  attributable  to  fluctuations  in
exchange rates which occur between the time a Portfolio  accrues  receivables or
liabilities  denominated  in a  foreign  currency  and the  time  the  Portfolio
actually  collects  such  receivables  or pays such  liabilities  generally  are
treated as ordinary income or ordinary loss.  Similarly,  on disposition of debt
securities  denominated  in a foreign  currency  and on  disposition  of certain
futures contracts,  forward contracts and options,  gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the  security or contract  and the date of  disposition  are also  treated as
ordinary  gain or loss.  These  gains or losses,  referred  to under the Code as
"Section  988"  gains or  losses,  may  increase  or  decrease  the  amount of a
Portfolio's   investment  company  taxable  income  to  be  distributed  to  its
shareholders as ordinary income.

         If a Portfolio holds zero coupon  securities or other  securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon  securities and the face value  ("original  issue discount") will be
treated as 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 investment company taxable
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 Portfolio  level.  Shareholders  will be
subject to income tax on such original issue discount, whether or not they elect
to  receive  their  distributions  in  cash.  If a  Portfolio  acquires  a  debt
instrument at a market discount,  a portion of the gain  recognized,  if any, on
disposition of such instrument may be treated as ordinary income.

         Dividend and interest  income  received by the Portfolios  from sources
outside the U.S. may be subject to  withholding  and other taxes imposed by such
foreign  jurisdictions.  Tax conventions  between certain countries and the U.S.
may reduce or eliminate  these foreign  taxes,  however,  and foreign  countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.

         Each  Portfolio  will be  required  to report to the  Internal  Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the  redemption or exchange of shares,  except in
the case of certain exempt shareholders,  which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code,  distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated  investment  company may be subject to  withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to  furnish  the  investment  company  with their  taxpayer  identification
numbers  and with  required  certifications  regarding  their  status  under the
federal  income tax law.  Withholding  may also be required  if a  Portfolio  is
notified  by  the  IRS or a  broker  that  the  taxpayer  identification  number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income.  Participating Insurance Companies
that are corporations should furnish their taxpayer  identification  numbers and
certify  their  status  as  corporations  in order to avoid  possible  erroneous
application of backup withholding.

         Shareholders  of the Portfolios may be subject to state and local taxes
on  distributions  received from such  Portfolios  and on  redemptions  of their
shares.

         Each distribution is accompanied by a brief explanation of the form and
character of the distribution.

         The Fund is organized as a Massachusetts  business  trust,  and neither
the Fund nor the  Portfolios  are liable for any income or franchise  tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.

                                       55
<PAGE>

         The foregoing  discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons.  Each shareholder which is not a
U.S. person should  consider the U.S. and foreign tax  consequences of ownership
of shares of the Portfolio,  including the  possibility  that such a shareholder
may be  subject to a U.S.  withholding  tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts  constituting  ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.

         For further information  concerning federal income tax consequences for
the holders of the VA contracts and VLI policies,  shareholders  should  consult
the  prospectus  used in  connection  with  the  issuance  of  their  particular
contracts or policies.  Shareholders should consult their tax advisers about the
application  of the  provisions  of tax  law  described  in  this  statement  of
additional information in light of their particular tax situations.

                           DIVIDENDS AND DISTRIBUTIONS

    (See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)

Money Market Portfolio

         The net investment  income of the Money Market  Portfolio is determined
as of the close of regular  trading on the  Exchange  (normally  4 p.m.  eastern
time) on each day on which the  Exchange  is open for  business.  All of the net
income so determined  normally will be declared as a dividend to shareholders of
record as of the close of regular  trading on such  Exchange  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 will be
invested in additional shares of the Portfolio at the net asset value per share,
normally  $1.00,  determined  as of the first  business day of each month unless
payment of the dividend in cash has been requested.

         Net  investment  income of the Money Market  Portfolio  consists of all
interest  income accrued on portfolio  assets less all expenses of the Portfolio
and amortized  market premium.  Accreted 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.

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

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


                                       56
<PAGE>

extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing  shareholders.  Such actions may reduce the
amount of the daily dividend received by existing shareholders.

Global Discovery Portfolio and International Portfolio

         The Global Discovery  Portfolio and  International  Portfolio will each
follow the practice of distributing  substantially all of its investment company
taxable income.  The Portfolios  intend to distribute the excess of net realized
long-term capital gains over net realized short-term capital losses.

         Distributions of investment  company taxable income and any net capital
gain will be made within  three months of the end of the Fund's  fiscal  taxable
year.  Both  distributions  will be  reinvested  in  additional  shares  of each
Portfolio unless a shareholder has elected to receive cash.

Other Portfolios

         Each of the Bond,  Capital  Growth,  Balanced  and  Growth  and  Income
Portfolios has followed the practice of declaring and distributing a dividend of
investment company taxable income, if any,  quarterly,  in January,  April, July
and October.  Each Portfolio has  distributed  its net capital gain within three
months  of the  end of  each  fiscal  year.  Both  dividends  and  capital  gain
distributions will be reinvested in additional shares of such a Portfolio unless
an election  is made on behalf of a separate  account to receive  dividends  and
capital gain distributions in cash.

                             PERFORMANCE INFORMATION

            (See "Performance Information" in the Fund's prospectus)

         From  time to time,  quotations  of a  Portfolio's  performance  may be
included in  advertisements,  sales  literature  or reports to  shareholders  or
prospective  investors.  These  performance  figures  may be  calculated  in the
following manner:

Money Market Portfolio

         A.       Yield is the net annualized  yield based on a specified  seven
                  calendar days calculated at simple  interest  rates.  Yield is
                  calculated by determining the net change, exclusive of capital
                  changes, in the value of a hypothetical  pre-existing  account
                  having a balance of one share at the  beginning  of the period
                  subtracting a hypothetical  charge reflecting  deductions from
                  shareholder  accounts and dividing the difference by the value
                  of the account at the  beginning  of the base period to obtain
                  the base period return. The yield is annualized by multiplying
                  the base period return by 365/7. The yield figure is stated to
                  the nearest  hundredth of one percent.  The yield of the Money
                  Market  Portfolio for the seven-day  period ended December 31,
                  1995, was 5.28%.

         B.       Effective  yield is the net  annualized  yield for a specified
                  seven calendar days assuming a  reinvestment  of the income or
                  compounding.  Effective yield is calculated by the same method
                  as yield  except the yield figure is  compounded  by adding 1,
                  raising  the sum to a power  equal  to 365  divided  by 7, and
                  subtracting  one from the result,  according to the  following
                  formula:

                        Effective Yield = [(Base  Period Return + 1)^365/7] - 1.

   
                  The net  annualized  yield of the  Portfolio for the seven-day
                  period ended December 31, 1996, was 5.04%.
    

         As described  above,  yield and effective yield are based on historical
earnings  and show the  performance  of a  hypothetical  investment  and are not
intended to indicate  future  performance.  Yield and effective  yield will vary
based on changes in market conditions and the level of expenses.

                                       57
<PAGE>

         In  connection  with  communicating  its  yield or  effective  yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these  figures to the  performance  of other mutual funds tracked by mutual fund
rating services or to other unmanaged  indexes which may assume  reinvestment of
dividends  but  generally  do not  reflect  deductions  for  administrative  and
management costs.

         From time to time, in marketing pieces and other fund  literature,  the
Fund's yield and  performance  over time may be compared to the  performance  of
broad groups of comparable  mutual funds, bank money market deposit accounts and
fixed-rate  insured  certificates  of deposit  (CDs),  or  unmanaged  indexes of
securities  that are comparable to money market funds in their terms and intent,
such as Treasury bills,  bankers'  acceptances,  negotiable  order of withdrawal
accounts, and money market certificates.  Most bank CDs differ from money market
funds in several ways:  the interest rate is fixed for the term of the CD, there
are interest  penalties  for early  withdrawal  of the deposit,  and the deposit
principal is insured by the FDIC.

Bond Portfolio

         Yield is the net annualized  yield based on a specified  30-day (or one
         month) period  assuming a semiannual  compounding  of income.  Yield is
         calculated  by  dividing  the net  investment  income per share  earned
         during the period by the maximum  offering  price per share on the last
         day of the period, according to the following formula:

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

                     a     =   dividends and interest earned during the period.
                     b     =   expenses  accrued  for  the  period  (net  of 
                               reimbursements).
                     c     =   the average  daily  number of shares  outstanding
                               during  the period that were  entitled to receive
                               dividends.
                     d     =   the maximum offering price per share  on the last
                               day of the period.

   
                           Yield for the 30-day period ended December 31, 1996

                                           Bond Portfolio  __%
    

All Portfolios

         A.       Average  Annual  Total Return is the average  annual  compound
                  rate of return for the  periods of one year and five years (or
                  such  shorter  periods as may be  applicable  dating  from the
                  commencement of the  Portfolio's  operations) all ended on the
                  date of a recent calendar quarter.

                  Average annual total return quotations  reflect changes in the
                  price of a  Portfolio's  shares and assume that all  dividends
                  and capital gains distributions  during the respective periods
                  were  reinvested  in Portfolio  shares.  Average  annual total
                  return is  calculated by finding the average  annual  compound
                  rates  of  return  of  a  hypothetical  investment  over  such
                  periods,  according to the following  formula  (average annual
                  total return is then expressed as a percentage):

                                          T = (ERV/P)1/n - 1

         Where:

                       P      =      a hypothetical initial investment of $1,000
                       T      =      Average Annual Total Return
                       n      =      number of years
                       ERV    =      ending redeemable value: ERV is the value,
                                     at the end  of the applicable period, of a
                                     hypothetical $1,000 investment made at the
                                     beginning  of  the applicable period.

                                       58
<PAGE>

<TABLE>
<CAPTION>
   
                   Average Annual Total Return for periods ended December 31, 1995

                                       One Year      Five Years      Ten Years        Life of Fund
                                                                                     
         <S>                             <C>           <C>            <C>              <C>            
         Money Market Portfolio           5.65%         4.20%           5.65% (1)        -- %
         Bond Portfolio                   2.82          6.83            7.74 (1)         --
         Balanced Portfolio*             11.89          9.79           10.30 (1)         --
         Growth and Income Portfolio     22.17         --              --               21.69 (3)
         Capital Growth Portfolio        20.13         12.42           13.05 (1)     
         Global Discovery Portfolio      --            --              --                -- (4)
         International Portfolio         14.78         11.05           --                9.93 (2)
    
</TABLE>
                                                                    
   
(1) For the period beginning July 16, 1985  (commencement of operations) 
(2) For the period beginning May 1, 1987 (commencement of operations) 
(3) For the period beginning May 2, 1994 (commencement of operations) 
(4) For the period beginning May 1, 1996 (commencement of operations)
    

        B.        Cumulative  Total Return is the cumulative rate of return on a
                  hypothetical  initial  investment  of $1,000  for a  specified
                  period.  Cumulative total return quotations reflect changes in
                  the price of a Fund's shares and assume that all dividends and
                  capital gains distributions  during the period were reinvested
                  in Fund  shares.  Cumulative  total  return is  calculated  by
                  finding  the  cumulative  rates of  return  of a  hypothetical
                  investment  over  such  periods,  according  to the  following
                  formula  (cumulative  total  return  is  then  expressed  as a
                  percentage):

                                                 C = (ERV/P) - 1
         Where:

                         C     =    Cumulative Total Return
                         P     =    a hypothetical initial investment of $1,000
                         ERV   =    ending  redeemable value: ERV is the  value,
                                    at the end  of  the applicable  period, of a
                                    hypothetical $1,000 investment made  at  the
                                    beginning  of  the applicable period.
<TABLE>
<CAPTION>
   
                              Cumulative Total Return for periods ended December 31, 1995

                                              One Year        Five Years      Ten Years        Life of Fund

          <S>                                   <C>            <C>             <C>              <C>            
          Money Market Portfolio                 5.65%          22.85%          73.27% (1)        -- %
          Bond Portfolio                         2.82           39.12          110.71 (1)        --
          Balanced Portfolio*                   11.89           59.55          166.55 (1)        --
          Growth and Income Portfolio           22.17           --              --               68.84 (3)
          Capital Growth Portfolio              20.13           79.59          240.95 (1)        --
          Global Discovery Portfolio            --              --              --                5.5 (4)
          International Portfolio               14.78           68.90           --              149.86 (2)
    
</TABLE>

   
(1) For the period beginning July 16, 1985 (commencement of operations) 
(2) For the period beginning May 1, 1987 (commencement of operations) 
(3) For the period beginning May 2, 1994 (commencement of operations) 
(4) For the period beginning May 1, 1996 (commencement of operations)
    

------------------------------------
*        On May 1, 1993,  the Portfolio  adopted its present name and investment
         objective  which is a balance of growth and income  from a  diversified
         portfolio  of equity and fixed income  securities.  Prior to that date,
         the  Portfolio was known as the Managed  Diversified  Portfolio and its
         investment  objective  was to realize a high level of  long-term  total
         rate of return  consistent with prudent  investment  risk.  Performance
         information  for the five years and life of Fund periods  should not be
         considered representative of the present Portfolio.


                                       59
<PAGE>

         As described  above,  average  annual total  return,  cumulative  total
return  and yield are  based on  historical  earnings  and are not  intended  to
indicate  future  performance.  Average  annual total return,  cumulative  total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.

         In connection with  communicating  its total return or yield to current
or  prospective  shareholders,  the Fund also may  compare  these  figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services  or to  other  unmanaged  indexes  which  may  assume  reinvestment  of
dividends  but  generally  do not  reflect  deductions  for  administrative  and
management costs.

         Quoted  yields on shares of the  Fund's  Portfolios  will be of limited
usefulness to policy and contract  holders for comparable  purposes because such
quoted yields will be more than yields on  participating  contracts and policies
due to charges imposed at the separate account level.

   
Comparison of Portfolio Performance

         A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there  are  different  methods  of  calculating  performance,  investors  should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with  performance  quoted with respect to other investment
companies or types of investments.

         In  connection  with   communicating  its  performance  to  current  or
prospective  shareholders,  a  Fund  also  may  compare  these  figures  to  the
performance of unmanaged  indices which may assume  reinvestment of dividends or
interest  but  generally  do  not  reflect  deductions  for  administrative  and
management  costs.  Examples  include,  but are  not  limited  to the Dow  Jones
Industrial  Average,  the Consumer Price Index,  Standard & Poor's 500 Composite
Stock  Price  Index  (S&P  500),  the NASDAQ  OTC  Composite  Index,  the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.

         Because some or all each Fund's  investments are denominated in foreign
currencies,  the  strength  or  weakness  of the U.S.  dollar as  against  these
currencies may account for part the Fund's  investment  performance.  Historical
information  on the value of the dollar versus  foreign  currencies  may be used
from  time to time in  advertisements  concerning  the  Funds.  Such  historical
information  is not indicative of future  fluctuations  in the value of the U.S.
dollar  against  these  currencies.  In addition,  marketing  materials may cite
country and economic  statistics and historical stock market performance for any
of the  countries in which either Fund invests,  including,  but not limited to,
the following:  population  growth,  gross  domestic  product,  inflation  rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.

         From time to time, in advertising  and marketing  literature,  a Fund's
performance  may be compared to the  performance of broad groups of mutual funds
with similar investment goals, as tracked by independent  organizations such as,
Investment  Company  Data,  Inc.  ("ICD"),   Lipper  Analytical  Services,  Inc.
("Lipper"), CDA Investment Technologies,  Inc. ("CDA"), Morningstar, Inc., Value
Line  Mutual  Fund  Survey  and  other  independent  organizations.  When  these
organizations'  tracking  results  are  used,  a Fund  will be  compared  to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the  appropriate  volatility  grouping,  where  volatility  is a measure of a
fund's risk.  For instance,  a Scudder  growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund  category;  and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent  organizations.  In addition,  a Fund's  performance  may also be
compared  to the  performance  of  broad  groups  of  comparable  mutual  funds.
Unmanaged indices with which a Fund's  performance may be compared include,  but
are not limited to, the following:
    

                                       60
<PAGE>

   
                  The Europe/Australia/Far East (EAFE) Index
                  International Finance Corporation's Latin America Investable 
                    Total Return Index
                  Morgan Stanley Capital International World Index
                  J.P. Morgan Global Traded Bond Index
                  Salomon Brothers World Government Bond Index
                  NASDAQ Composite Index
                  Wilshire 5000 Stock Index

         From  time  to  time,   in   marketing   and  other  Fund   literature,
(Trustees)(Directors)  and officers of the Funds, the Funds' portfolio  manager,
or members of the portfolio  management  team may be depicted and quoted to give
prospective and current  shareholders a better sense of the outlook and approach
of those who manage  the  Funds.  In  addition,  the  amount of assets  that the
Adviser  has under  management  in various  geographical  areas may be quoted in
advertising and marketing materials.

         The Funds  may be  advertised  as an  investment  choice  in  Scudder's
college planning program. The description may contain illustrations of projected
future  college  costs  based on assumed  rates of  inflation  and  examples  of
hypothetical fund performance, calculated as described above.

         Statistical and other  information,  as provided by the Social Security
Administration,  may be used in marketing  materials  pertaining  to  retirement
planning  in order to  estimate  future  payouts  of social  security  benefits.
Estimates may be used on demographic and economic data.

         Marketing and other Fund  literature  may include a description  of the
potential  risks and rewards  associated  with an investment  in the Funds.  The
description  may include a  "risk/return  spectrum"  which compares the Funds to
other Scudder funds or broad categories of funds, such as money market,  bond or
equity funds,  in terms of potential  risks and returns.  Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating  yield.
Share  price,  yield and total return of a bond fund will  fluctuate.  The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank  products,  such as  certificates  of deposit.  Unlike
mutual  funds,  certificates  of deposit  are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.

         Because bank products  guarantee  the principal  value of an investment
and money  market funds seek  stability  of  principal,  these  investments  are
considered  to be less risky than  investments  in either bond or equity  funds,
which may involve the loss of principal.  However,  all  long-term  investments,
including investments in bank products,  may be subject to inflation risk, which
is the risk of erosion of the value of an investment  as prices  increase over a
long time period.  The  risks/returns  associated  with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity,  credit quality of the securities  held, and interest rate  movements.
For equity funds,  factors include a fund's overall  investment  objective,  the
types of equity securities held and the financial position of the issuers of the
securities.  The  risks/returns  associated with an investment in  international
bond or equity funds also will depend upon currency exchange rate fluctuation.

         A risk/return  spectrum  generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds.  Shorter-term  bond funds  generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase  higher  quality  securities  relative to bond funds that purchase
lower  quality  securities.   Growth  and  income  equity  funds  are  generally
considered  to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.

         Risk/return  spectrums  also  may  depict  funds  that  invest  in both
domestic and foreign securities or a combination of bond and equity securities.
    

                                       61
<PAGE>

         Evaluation  of  Fund   performance   or  other   relevant   statistical
information  made by  independent  sources  may  also be used in  advertisements
concerning the Funds,  including reprints of, or selections from,  editorials or
articles  about  these  Funds.  Sources  for Fund  performance  information  and
articles about the Funds include the following:

American Association of Individual  Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.

Asian Wall Street  Journal,  a weekly Asian  newspaper  that often  reviews U.S.
mutual funds investing internationally.

Banxquote,  an on-line source of national  averages for leading money market and
bank CD interest  rates,  published  on a weekly  basis by  Masterfund,  Inc. of
Wilmington, Delaware.

Barron's,  a Dow Jones and  Company,  Inc.  business and  financial  weekly that
periodically reviews mutual fund performance data.

Business  Week,  a  national  business  weekly  that  periodically  reports  the
performance rankings and ratings of a variety of mutual funds investing abroad.

CDA Investment  Technologies,  Inc., an organization which provides  performance
and ranking  information  through  examining the dollar results of  hypothetical
mutual fund investments and comparing these results against  appropriate  market
indices.

Consumer  Digest, a monthly  business/financial  magazine that includes a "Money
Watch" section featuring financial news.

Financial Times,  Europe's business newspaper,  which features from time to time
articles on international or country-specific funds.

Financial World, a general  business/financial  magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.

Forbes,  a national  business  publication  that from time to time  reports  the
performance of specific investment companies in the mutual fund industry.

Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.

The  Frank  Russell  Company,  a  West-Coast  investment  management  firm  that
periodically  evaluates  international stock markets and compares foreign equity
market performance to U.S. stock market performance.

Global  Investor,   a  European   publication  that  periodically   reviews  the
performance of U.S. mutual funds investing internationally.

IBC Money  Fund  Report,  a weekly  publication  of IBC  Financial  Data,  Inc.,
reporting on the  performance  of the nation's  money market funds,  summarizing
money  market fund  activity  and  including  certain  averages  as  performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."

Ibbotson  Associates,  Inc., a company  specializing in investment  research and
data.

Investment  Company  Data,  Inc., an  independent  organization  which  provides
performance ranking information for broad classes of mutual funds.

Investor's Business Daily, a daily newspaper that features financial,  economic,
and business news.

Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.

                                       62
<PAGE>

Lipper Analytical  Services,  Inc.'s Mutual Fund Performance  Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.

Money,  a monthly  magazine that from time to time features both specific  funds
and the mutual fund industry as a whole.

Morgan  Stanley  International,  an  integrated  investment  banking  firm  that
compiles statistical information.

Mutual Fund Values,  a biweekly  Morningstar,  Inc.  publication  that  provides
ratings  of  mutual  funds  based  on  fund  performance,   risk  and  portfolio
characteristics.

The New York Times, a nationally  distributed  newspaper which regularly  covers
financial news.

The No-Load Fund Investor,  a monthly  newsletter,  published by Sheldon Jacobs,
that includes mutual fund  performance data and  recommendations  for the mutual
fund investor.

No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund  performance,  rates funds and discusses  investment
strategies for the mutual fund investor.

Personal  Investing  News,  a monthly  news  publication  that often  reports on
investment opportunities and market conditions.

Personal  Investor,  a monthly investment  advisory  publication that includes a
"Mutual Funds Outlook" section  reporting on mutual fund  performance  measures,
yields, indices and portfolio holdings.

Smart Money, a national personal finance magazine published monthly by Dow Jones
and  Company,  Inc.  and The  Hearst  Corporation.  Focus is placed on ideas for
investing, spending and saving.

Success,  a monthly magazine  targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.

United Mutual Fund Selector, a semi-monthly investment newsletter,  published by
Babson United  Investment  Advisors,  that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.

USA Today, a leading national daily newspaper.

U.S. News and World Report,  a national  news weekly that  periodically  reports
mutual fund performance data.

Value Line  Mutual  Fund  Survey,  an  independent  organization  that  provides
biweekly performance and other information on mutual funds.

The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.

Wiesenberger  Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds,  management policies, salient features,  management results,
income and dividend records and price ranges.

Working  Woman,  a monthly  publication  that  features a  "Financial  Workshop"
section reporting on the mutual fund/financial industry.

Worth, a national  publication  put out 10 times per year by Capital  Publishing
Company,  a  subsidiary  of  Fidelity  Investments.  Focus is placed on personal
financial journalism.

                                       63
<PAGE>

   
Taking a Global Approach

         Many U.S.  investors  limit their holdings to U.S.  securities  because
they assume that international or global investing is too risky. While there are
risks  connected  with  investing  overseas,  it's important to remember that no
investment  -- even in blue-chip  domestic  securities -- is entirely risk free.
Looking  outside U.S.  borders,  an investor today can find  opportunities  that
mirror  domestic  investments  -- everything  from large,  stable  multinational
companies to start-ups in emerging markets.  To determine the level of risk with
which you are comfortable,  and the potential for reward you're seeking over the
long term,  you need to review the type of investment,  the world  markets,  and
your time horizon.

         The U.S.  is unusual in that it has a very broad  economy  that is well
represented in the stock market.  However,  many countries  around the world are
not only  undergoing a revolution in how their  economies  operate,  but also in
terms of the role their stock  markets  play in financing  activities.  There is
vibrant  change  throughout  the  global  economy  and  all of  this  represents
potential investment opportunity.

         Investing  beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world  markets.  In 1970, the
United States alone  accounted for  two-thirds of the value of the world's stock
markets.  Now,  the  situation  is reversed -- only 35% of global  stock  market
capitalization  resides  here.  There are  companies in Southeast  Asia that are
starting to dominate regional  activity;  there are companies in Europe that are
expanding  outside of their  traditional  markets and taking advantage of faster
growth in Asia and  Latin  America;  other  companies  throughout  the world are
getting out from under state  control and  restructuring;  developing  countries
continue to open their doors to foreign investment.

         Stocks in many foreign markets can be attractively  priced.  The global
stock markets do not move in lock step.  When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation.  A wider set of  opportunities  can help make it possible to find the
best values available.

         International or global investing  offers  diversification  because the
investment is not limited to a single country or economy.  In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.

Scudder's 30% Solution

         The 30 Percent Solution -- A Global Guide for Investors  Seeking Better
Performance  With Reduced  Portfolio Risk is a booklet,  created by Scudder,  to
convey its vision  about the new global  investment  dynamic.  This dynamic is a
result of the  profound  and  ongoing  changes  in the  global  economy  and the
financial  markets.   The  booklet  explains  how  Scudder  believes  an  equity
investment  portfolio  with  up to  30% in  international  holdings  and  70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
    

                           SHAREHOLDER COMMUNICATIONS

         Owners of policies  and  contracts  issued by  Participating  Insurance
Companies for which shares of one or more Portfolios are the investment  vehicle
will receive from the Participating  Insurance Companies  unaudited  semi-annual
financial  statements and audited year-end financial statements certified by the
Fund's  independent  public  accountants.  Each report will show the investments
owned by the Fund and the market  values  thereof as  determined by the Trustees
and will provide other information about the Fund and its operations.

         Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write  Scudder  Investor  Services,   Inc.,  Two  International  Place,  Boston,
Massachusetts 02110-4103.

                                       64
<PAGE>

                         ORGANIZATION AND CAPITALIZATION

                   (See "ADDITIONAL INFORMATION - Shareholder
                   Indemnification" in the Fund's prospectus.)
   
General

         The Fund is an open-end  investment company  established under the laws
of The  Commonwealth  of  Massachusetts  by Declaration of Trust dated March 15,
1985.

         As of December 31, 1996,  AEtna Life Insurance and Annuity Company (151
Farmington Avenue TS41,  Hartford,  CT 06156),  owned of record and beneficially
46.9% of the  International  Portfolio;  they owned of record  and  beneficially
7.75% of the Fund's total outstanding  shares; and Banner Life Insurance Company
of Rockville,  MD (1701 Research Blvd., Rockville, MD 20850) owned of record and
beneficially  1.3% of the Money Market  Portfolio,  2.0% of the Bond  Portfolio,
7.1% of the Balanced Portfolio, 0.7% of the International Portfolio, 5.0% of the
Growth and Income Portfolio, 4.4% of the Global Discovery Portfolio and 21.0% of
the Capital Growth Portfolio;  they owned of record and beneficially 2.3% of the
Fund's total  outstanding  shares;  and Charter National Life Insurance  Company
(8301 Maryland  Avenue,  St. Louis,  MO 63105, a Missouri  corporation)  and its
subsidiary, Intramerica Life Insurance Company (1 Blue Hills Plaza, Pearl River,
NY 10965), owned of record and beneficially 56.1% of the Money Market Portfolio,
33.9%  of the Bond  Portfolio,  62.3% of the  Balanced  Portfolio,  25.8% of the
Capital Growth Portfolio, 88.0% of the Growth and Income Portfolio, 95.6% of the
Global Discovery Portfolio and 13.1% of the International Portfolio;  they owned
of record and  beneficially  53.1% of the Fund's total  outstanding  shares.  In
1991, Charter National Life Insurance Company purchased the Colonial Penn Group,
Inc., which indirectly owns  Intramerica,  a New York domestic life insurer.  On
November 1, 1992,  First Charter Life Insurance  Company  ("First  Charter"),  a
subsidiary of Charter National Life Insurance Company,  was merged with and into
Intramerica.  As the company  surviving the merger,  Intramerica  acquired legal
ownership of all of First Charter's assets,  including the Variable Account, and
became responsible for all of First Charter's liabilities and obligations.  As a
result of the merger,  all Contracts  issued by First Charter  before the merger
became  Contracts  issued by  Intramerica  after  the  merger.  Fortis  Benefits
Insurance  Company (Norwest Bank, Sixth and  Marquette-MS0063,  Minneapolis,  MN
55479) owned of record and  beneficially  0.4% of the  International  Portfolio;
they owned of record and  beneficially  0.05% of the  Fund's  total  outstanding
shares; and Lincoln Benefit Life Insurance Company (206 South 13th Street,  Ste.
300,  Lincoln,  NE 68508)  owned of  record  and  beneficially  4.1% of the Bond
Portfolio  and  6.8%  of the  Balanced  Portfolio;  they  owned  of  record  and
beneficially 0.96% of the Fund's total outstanding shares; and Mutual of America
Life Insurance  Company of New York (320 Park Ave., 6th Fl., New York, NY 10022,
a New York corporation) and its subsidiary, American Life Insurance Company (666
5th Avenue,  New York, NY 10103),  owned of record and beneficially 40.3% of the
Bond  Portfolio,  55.9%  of  the  Capital  Growth  Portfolio  and  23.5%  of the
International  Portfolio;  they owned of record and  beneficially  23.73% of the
Fund's total outstanding  shares;  and Paragon Life Insurance Company (100 South
Brentwood,  St. Louis,  MO 63105) owned of record and  beneficially  0.2% of the
Bond  Portfolio,  0.2% of the Capital  Growth  Portfolio,  0.4% of the  Balanced
Portfolio,   0.1%  of  the  Growth  and  Income  Portfolio,   and  0.1%  of  the
International  Portfolio;  they  owned of record and  beneficially  0.11% of the
Fund's total outstanding shares; and Providentmutual Life and Annuity Company of
America, (1050 Westlakes Dr., Berwyn, PA 19312) owned of record and beneficially
9.3% of the Bond Portfolio, 5.6% of the Growth and Income Portfolio, and 0.8% of
the International Portfolio;  they owned of record and beneficially 1.08% of the
Fund's total outstanding shares; and Safeco Life Insurance Companies (15411 N.E.
51st Street,  Redmond, WA 98052),  owned of record and beneficially 23.4% of the
Balanced Portfolio and 3.7% of the International Portfolio; they owned of record
and beneficially 2.1% of the Fund's total outstanding shares; and Security First
Life Insurance  Company (11365 West Olympic Blvd., Los Angeles,  CA 90064) owned
of record and beneficially 0.3% of the International Portfolio; and Southwestern
Life Insurance  Company (500 North Akard,  Dallas, TX 75201) owned of record and
beneficially  1.5% of the Capital Growth  Portfolio;  and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially  39.7% of the Money Market  Portfolio,  6.2% of the Capital  Growth
Portfolio  and 8.2% of the  International  Portfolio;  they  owned of record and
beneficially 8.31% of the Fund's total outstanding  shares; and United Companies
Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA 70809) owned of
record  and  beneficially  2.4% of the Money  Market  Portfolio  and 0.2% of the
International  Portfolio;  and United of Omaha Life Insurance Company (Mutual of
Omaha Plaza, Law Division,  3301 Dodge Street,  Omaha, NE 68131) owned of record
and beneficially 0.3% of the Money Market Portfolio, 0.6% of the Bond Portfolio,
and 2.1% of the International  Portfolio;  they owned of record and beneficially
0.16% of the Fund's total  outstanding  shares and USAA Life  Insurance  Company
(R.A.F.A.,  F-2-E,  9800  Fredericksburg  Rd., San  Antonio,  TX 78288) owned of
    


                                       65
<PAGE>

   
record and  beneficially  2.3% of the Capital Growth  Portfolio;  and Washington
National Life Insurance Company (c/o United Presidential Life Insurance Co., One
Presidential  Pkwy.,  Kokomo, IN 46904) owned of record and beneficially 0.5% of
the Money Market Portfolio,  9.3% of the Bond Portfolio,  1.3% of the Growth and
Income Portfolio and 6.0% of the Capital Growth Portfolio.

         Shares entitle their holders to one vote per share;  however,  separate
votes  will be  taken by each  Portfolio  on  matters  affecting  an  individual
Portfolio.  For  example,  a change in  investment  policy for the Money  Market
Portfolio  would  be  voted  upon  only  by  shareholders  of the  Money  Market
Portfolio. Additionally,  approval of the investment advisory agreement covering
a Portfolio 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,  which means that holders of more than 50% of
the shares  voting for the election of Trustees  can elect all Trustees  and, in
such  event,  the holders of the  remaining  shares  voting for the  election of
Trustees  will not be able to elect any person or persons  as  Trustees.  Shares
have no preemptive or subscription rights, and are transferable.

         Shareholders  have certain  rights,  as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more  Trustees.  Such  removal can be
effected upon the action of two-thirds of the  outstanding  shares of beneficial
interest of the Fund.
    

Shareholder and Trustee Liability

         The Fund is an entity of the type  commonly  known as a  "Massachusetts
business  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 for acts or obligations of the Fund. Notice
of such  disclaimer  will normally be given in each  agreement,  obligation,  or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of  Trust  provides  for  indemnification  out  of  the  Fund  property  of  any
shareholder  held  personally  liable  for  the  obligations  of the  Fund.  The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any  shareholder  for any act or obligation of
the Fund and satisfy  any  judgment  thereon.  Thus,  the risk of a  shareholder
incurring  financial  loss on account  of  shareholder  liability  is limited to
circumstances  in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal  liability
of shareholders is remote.

         The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment  or  mistakes  of fact or law,  but nothing in the
Declaration of Trust protects a Trustee  against any liability to which he would
otherwise  be  subject  by reason  of  willful  misfeasance,  bad  faith,  gross
negligence,  or reckless  disregard of the duties involved in the conduct of his
office.

                        ALLOCATION OF PORTFOLIO BROKERAGE

         To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on  behalf  of the Fund  with the  issuer,  underwriters  or other  brokers  and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.

         The Fund's  purchases  and sales of portfolio  securities  of the Money
Market Portfolio and the Bond Portfolio and of debt securities  acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers  serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting  fee paid to the  underwriter.  Transactions  in equity  securities
generally involve the payment of a brokerage commission.

         The primary objective of the Adviser in placing orders for the purchase
and sale of  securities  for any  Portfolio is to obtain the most  favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock  exchange  transactions  but which is generally  fixed in the
case of foreign  exchange  transactions),  if any, size of order,  difficulty of
execution  and skill  required of the  executing  broker/dealer.  Subject to the
foregoing,  the Adviser may consider sales of variable life  insurance  policies
and variable annuity  contracts for which the Fund is an investment  option as a


                                       66
<PAGE>

factor in the selection of firms to execute portfolio transactions.  The Adviser
seeks to evaluate  the overall  reasonableness  of  brokerage  commissions  paid
through  the  familiarity  of  the  Distributor  with  commissions   charged  on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported  commissions  paid by others.  The Adviser  reviews on a routine  basis
commission rates,  execution and settlement services performed,  making internal
and external comparisons.

         When it can be done  consistently with the policy of obtaining the most
favorable net results,  it is the  Adviser's  practice to place such orders with
brokers and dealers who supply research,  market and statistical  information to
the Adviser. The term "research,  market and statistical  information"  includes
advice  as to the  value  of  securities,  the  advisability  of  investing  in,
purchasing  or  selling  securities;  and  the  availability  of  securities  or
purchasers  or  sellers of  securities;  and  furnishing  analyses  and  reports
concerning  issuers,  industries,   securities,  economic  factors  and  trends,
portfolio  strategy and the  performance of accounts.  The Adviser is authorized
when placing portfolio  transactions for the Fund to pay a brokerage  commission
(to the extent  applicable)  in excess of that which  another  broker might have
charged for effecting the same  transaction  solely on account of the receipt of
research,  market or  statistical  information.  Subject to the  foregoing,  the
Adviser may  consider  sales of variable  life  insurance  policies and variable
annuity contracts for which the Fund is an investment option, as a factor in the
selection of firms to execute  portfolio  transactions.  Except for implementing
the policy stated above,  there is no intention to place portfolio  transactions
with  any  particular  brokers  or  dealers  or  groups  thereof.  In  effecting
transactions  in  over-the-counter  securities,   orders  are  placed  with  the
principal  market-makers  for the securities being traded unless, in the opinion
of the Adviser,  after exercising  care, it appears that more favorable  results
are available otherwise.

         Although  certain  research,  market and statistical  information  from
brokers and dealers is useful to the Fund and the Adviser,  it is the opinion of
the Adviser that such  information  is only  supplementary  to the Adviser's own
research  effort,  since the information  must still be analyzed,  weighed,  and
reviewed by the Adviser's  staff.  Such information may be useful to the Adviser
in  providing  services  to  clients  other  than  the  Fund  and not  all  such
information is used by the Adviser in connection with the Fund. Conversely, such
information  provided to the Adviser by brokers and dealers  through  whom other
clients  of the  Adviser  effect  securities  transactions  may be useful to the
Adviser in providing services to the Fund.

   
         In the years ended  December  31,  1994,  1995 and 1996,  the Fund paid
brokerage commissions of $2,006,264,  $2,669,610, and $2,106,414,  respectively.
In the  years  ended  December  31,  1994,  1995,  and 1996,  the  International
Portfolio paid brokerage commissions of $1,471,275,  $1,813,248, and $1,403,778,
respectively,  the  Capital  Growth  Portfolio  paid  brokerage  commissions  of
$420,391,  $788,596, and $505,817,  respectively and the Balanced Portfolio paid
brokerage commissions of $79,629, $67,758, and $67,828, respectively. The Growth
and Income  Portfolio  paid  brokerage  commissions  of  $34,967,  $54,235,  and
$78,517,  respectively.  In the year ended December 31, 1996,  $967,678 (69%) of
the total brokerage  commissions paid by the International  Portfolio,  $447,832
(89%) of the total brokerage  commissions paid by the Capital Growth  Portfolio,
$59,359 (76%) of the total brokerage  commissions  paid by the Growth and Income
Portfolio, $59,289 (87%) of the total brokerage commissions paid by the Balanced
Portfolio,  and $47,463  (94%) of the total  brokerage  commissions  paid by the
Global  Discovery  Portfolio  resulted from orders placed,  consistent  with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided  supplementary  research  information to the Portfolios or the Adviser.
The amount of such  transactions  aggregated  $309,783,591 for the International
Portfolio  (66% of all  brokerage  transactions),  $373,506,365  for the Capital
Growth Portfolio (72% of all brokerage transactions), $38,460,391 for the Growth
and Income  Portfolio (57% of all brokerage  transactions),  $43,374,165 (40% of
all brokerage  transactions) for the Balanced  Portfolio and $19,601,728 (85% of
all brokerage  transactions) for the Global Discovery Portfolio.  The balance of
such brokerage was not allocated to any particular  broker or dealer with regard
to the above-mentioned or other special factors.
    

         The Trustees  will  periodically  review  whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.

                                       67
<PAGE>
   



                               PORTFOLIO TURNOVER

         The average annual portfolio turnover rate for each Portfolio, i.e. 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),  for the years
ended December 31, 1995 and 1996, respectively, was:

                                                              December 31,
                                                          1995           1996

           Bond Portfolio                              177.21%          85.11%
           Balanced Portfolio                           87.98           67.56
           Growth and Income Portfolio                  24.33           32.18
           Capital Growth Portfolio                    119.41           65.56
           Global Discovery Portfolio                   --              50.31
           International Portfolio                      45.76           32.63
    

         Under the above  definition,  the Money Market  Portfolio  will have no
portfolio turnover.  Purchases and sales, for these Portfolios, are made for the
Portfolio whenever necessary,  in management's  opinion, to meet the Portfolio's
objective.

                                     EXPERTS

         The Financial Highlights of the Fund included in the prospectus and the
Financial  Statements  incorporated by reference in this Statement of Additional
Information  have been  audited by  Coopers & Lybrand  L.L.P.,  One Post  Office
Square, Boston,  Massachusetts 02109, independent accountants,  and have been so
included or incorporated by reference in reliance upon the  accompanying  report
of said  firm,  which  report  is given  upon  their  authority  as  experts  in
accounting and auditing.

                                     COUNSEL

         The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.

                             ADDITIONAL INFORMATION

         The  activities of the Fund are  supervised  by its  Trustees,  who are
elected  by  shareholders.  Shareholders  have one vote  for  each  share  held.
Fractional shares have fractional votes.

         Portfolio securities of the Money Market,  Bond,  Balanced,  Growth and
Income,  and  Capital  Growth  Portfolios  are held  separately,  pursuant  to a
custodian  agreement,  by State  Street  Bank and Trust  Company,  225  Franklin
Street,  Boston,  Massachusetts  02110,  as custodian.  Portfolio  securities of
Global Discovery and International Portfolios are held separately, pursuant to a
custodian agreement,  by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as custodian.

         Scudder Fund Accounting  Corporation ("SFAC"), Two International Place,
Boston,  Massachusetts  02110-4103,  a subsidiary  of the Adviser,  computes net
asset value for the Portfolios.  Money Market  Portfolio pays SFAC an annual fee
equal to 0.020% of the first $150 million of average  daily net assets,  0.0060%
of such assets in excess of $150 million and 0.0035% of such assets in excess of
$1  billion,  plus  holding  and  transaction  charges  for this  service.  Bond
Portfolio,  Balanced  Portfolio,  Growth and Income Portfolio and Capital Growth
Portfolio  each pay SFAC an annual fee equal to 0.025% of the first $150 million
of average  daily net assets,  0.0075% of such assets in excess of $150  million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. Global Discovery and International Portfolios pay SFAC
an annual  fee equal to 0.065% of the first $150  million  of average  daily net
assets,  0.040% of such  assets in excess  of $150  million  and  0.020% of such
assets in excess of $1 billion,  plus holding and  transaction  charges for this


                                       68
<PAGE>

service.  SFAC  computes  net asset  value  for the Fund.  The Fund pays SFAC an
annual  fee equal to  0.065% of the first  $150  million  of  average  daily net
assets,  0.040% of such  assets in excess  of $150  million  and  0.020% of such
assets in excess of $1 billion,  plus holding and  transaction  charges for this
service.

         Scudder  Service  Corporation,  P.O. Box 2291,  Boston,  Massachusetts,
02107-2291, is the transfer and dividend paying agent for the Fund.

         The Fund has a December 31 fiscal year end.

         The name "Scudder  Variable Life Investment Fund" is the designation of
the  Trustees  for the time being under a  Declaration  of Trust dated March 15,
1985, as amended from time to time,  and all persons  dealing with the Fund must
look  solely  to the  property  of the Fund for the  enforcement  of any  claims
against  the Fund as neither  the  Trustees,  officers,  agents or  shareholders
assume any  personal  liability  for  obligations  entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Fund's  Declaration of Trust,  as amended from time to time. The Declaration
of Trust is on file at the Massachusetts  Secretary of State's Office in Boston,
Massachusetts.

         The Fund's prospectus and this Statement of Additional Information omit
certain information  contained in the Registration  Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement, and its amendments,  for further information with
respect  to the  Fund  and  the  securities  offered  hereby.  The  Registration
Statement, and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.

                              FINANCIAL STATEMENTS

         The financial  statements of Scudder  Variable Life Investment Fund are
comprised of the following:

                           Money Market Portfolio
                           Balanced Portfolio
                           Bond Portfolio
                           Growth and Income Portfolio
                           Capital Growth Portfolio
                           International Portfolio

   
         The  financial  statements,  including  the  investment  portfolios  of
Scudder Variable Life Investment  Fund,  together with the Report of Independent
Accountants,   Financial  Highlights  and  notes  to  financial  statements  are
incorporated  by reference  and  attached  hereto,  in the Annual  Report to the
Shareholders  of the Fund dated  December 31, 1996,  and are hereby deemed to be
part of this Statement of Additional Information.
    

                                       69
<PAGE>

                                    APPENDIX

Description of Bond Ratings

Moody's Investors Service, Inc.

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

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

         Baa:   Bonds  that  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 that 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  that  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.

Standard & Poor's

         AAA:  Bonds rated AAA are highest grade debt  obligations.  This rating
indicates an extremely strong capacity to pay principal and interest.

         AA: Bonds rated AA also qualify as high-quality  obligations.  Capacity
to pay principal  and interest is very strong,  and in the majority of instances
they differ from AAA issues only in small degree.

         A: Bonds rated A have a strong  capacity to pay principal and interest,
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
debt in this category than in higher rated categories.

         Bonds rated BB and B are regarded as having  predominantly  speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some

<PAGE>

quality  and   protective   characteristics,   these  are  outweighed  by  large
uncertainties or major risk exposures to adverse conditions.

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

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

Description of Commercial Paper Ratings

Moody's Investors Service, Inc.

       P-1:       Moody's  Commercial  Paper ratings are opinions of the ability
                  of issuers to repay punctually  senior debt obligations  which
                  have  an  original   maturity  not  exceeding  one  year.  The
                  designation  "Prime-1" or "P-1"  indicates the highest quality
                  repayment capacity of the rated issue.

Standard & Poor's

       A-1:       Standard  &  Poor's   Commercial  Paper  ratings  are  current
                  assessments  of the  likelihood  of  timely  payment  of  debt
                  considered   short-term  in  the  relevant  market.   The  A-1
                  designation  indicates the degree of safety  regarding  timely
                  payment  is  strong.   Those  issues   determined  to  possess
                  extremely  strong  safety  characteristics  are denoted with a
                  plus (+) sign designation.

<PAGE>



                              Scudder Variable Life
                                 Investment Fund




                                  Annual Report
                                December 31, 1996

































          An open-end management investment company that offers shares
        of beneficial interest in seven types of diversified portfolios.

<PAGE>

                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                                    Contents


Letter from the Fund's President ............................................  2

Money Market Portfolio Management Discussion ................................  3

Bond Portfolio Management Discussion ........................................  4

Bond Portfolio Summary ......................................................  5

Balanced Portfolio Management Discussion ....................................  6

Balanced Portfolio Summary ..................................................  7

Growth and Income Portfolio Management Discussion ...........................  8

Growth and Income Portfolio Summary .........................................  9

Capital Growth Portfolio Management Discussion .............................. 10

Capital Growth Portfolio Summary ............................................ 11

Global Discovery Portfolio Management Discussion ............................ 12

Global Discovery Portfolio Summary .......................................... 13

International Portfolio Management Discussion ............................... 14

International Portfolio Summary ............................................. 15

Investment Portfolios, Financial Statements, and Financial Highlights

           Money Market Portfolio ........................................... 16

           Bond Portfolio ................................................... 22

           Balanced Portfolio ............................................... 29

           Growth and Income Portfolio ...................................... 38

           Capital Growth Portfolio ......................................... 47

           Global Discovery Portfolio ....................................... 55

           International Portfolio .......................................... 64

Notes to Financial Statements ............................................... 74

<PAGE>

SCUDDER VARIABLE LIFE INVESTMENT FUND
LETTER FROM THE FUND'S PRESIDENT
--------------------------------------------------------------------------------

Dear Shareholders,

     Perhaps the most important lesson we learned from 1996 is to expect the
unexpected. After very strong domestic equity performance in 1995, stocks
delivered another year of outstanding results. However, this attractive
performance masked the challenging environment of conflicting economic signals
and rapid sector rotation that characterized much of the year.

     Bond investors were challenged by rising U.S. interest rates in the first
half of the year which contributed to increased stock market volatility, as
stronger than expected economic growth raised fears of accelerating inflation.
Growth slowed in the second half of the year, relieving upward pressure on
interest rates, and permitting the stock rally to resume.

     The U.S. stock market's upward march was fueled by strong corporate
earnings, benign inflation, and relatively low interest rates. Overseas, the
picture was significantly different. Many foreign economies continued to
struggle with slow economic growth, prompting governments to lower interest
rates to stimulate their economies. Selected markets responded by rebounding
strongly from depressed levels.

New Portfolio Added in 1996

     Reflecting our continuing commitment to providing investors with a wide
range of investment choices, we introduced Global Discovery Portfolio in May.
This portfolio invests in small company stocks from around the world, with an
emphasis on individual stock selection. With more than two-thirds of the world's
stock market capitalization based outside the United States, we see many
investment opportunities among small, rapidly growing companies. Many of these
companies have not been well-covered by Wall Street and have accelerating growth
rates. Because their businesses are often tied more closely to local or regional
economies, they tend to offer an added element of diversification for U.S.
investors. Of course, investing overseas carries special risks and the potential
for greater price fluctuations, but we believe Global Discovery Portfolio can
provide the opportunity for valuable diversification and maximum capital
appreciation for long-term investors.

     Scudder Variable Life Investment Fund provides a broad selection of
portfolios to fit your particular investment objectives. Combined with its
comparatively low fees, we believe the Fund can provide investors with a
powerful savings advantage over the long term.

     Thank you for your continued investment in Scudder Variable Life Investment
Fund.

                                        Sincerely,

                                        /s/David B. Watts
                                        David B. Watts
                                        President,
                                        Scudder Variable Life Investment Fund


2
<PAGE>

                                                          MONEY MARKET PORTFOLIO
                                                 PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------

Dear Shareholders,

     In 1996, money market funds provided investors with respectable yields, as
well as a haven for those uncomfortable with stock and bond market gyrations.
Money Market Portfolio posted a 5.04% 7-day net annualized yield as of December
31, 1996. The Portfolio's total return was 5.09% for the full 12-month period.

Locating Opportunities

     Money managers spent much of the year with their eyes on the Federal
Reserve, anticipating a potential interest rate hike. As a result, many money
funds defensively shortened their average maturities. Volatile sentiment in the
market caused us to keep Money Market Portfolio's average maturity in the 40-45
day range for much of the year, as investors prepared for potentially rising
short-term rates that never materialized. While the defensive position prepared
us for a rate increase, the tradeoff was the lost opportunity to capture the
superior yields offered by longer maturity instruments. After the September
meeting of the Federal Reserve in which no action was taken to raise short-term
interest rates, market sentiment shifted, prompting us to increase the
Portfolio's average maturity. As of December 31, the Portfolio's average
maturity stood at 58 days.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     Interest rates generally 
     rose over the year for 
     money market instruments.

     At the close of the period, 90% of the Portfolio was invested in commercial
paper. Commercial paper with one-year maturities also provided a boost to the
Portfolio's yield. The remainder of the Portfolio's assets was principally
invested in short-term notes. A small portion (5%) was invested in repurchase
agreements.

The Coming Months

     Absent any unforeseen shocks, we believe 1997 should provide investors with
moderate economic growth, stable to higher stock prices, and stable to
moderately lower interest rates. While always a possibility, we don't expect the
Federal Reserve to lower short-term interest rates any time soon.

     In this environment, we plan to favor money market securities at the longer
end of the maturity spectrum in order to lock in attractive yields. Our focus
will remain on quality as we select investments to maintain the Portfolio's
stable share price and competitive yield. We believe Money Market Portfolio
continues to offer a vehicle for meeting your short-term investment needs.

     Sincerely,

     Your Portfolio Management Team

     /s/Stephen L. Akers                      /s/David Wines
     Stephen L. Akers                         David Wines
     Lead Portfolio Manager

     /s/Debra A. Hanson                       /s/Nicca B. Alcantara
     Debra A. Hanson                          Nicca B. Alcantara


                                                                               3
<PAGE>

BOND PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------

Dear Shareholders,

     Stronger-than-expected economic growth in the first half of 1996 resulted
in higher interest rates and lower bond prices for the year. However, the
increase in rates from point-to-point did not fully reflect the increased price
volatility that pervaded the bond markets during the year. Despite this
challenging environment, Bond Portfolio provided a total return of 2.82% for the
12-month period ended December 31, 1996. For the same period, the unmanaged
Lehman Brothers Aggregate Bond Index returned 3.63%.

     Bonds provided positive but modest total returns in 1996. Yields rose
during the first half of the year and eased in the second half, but still ended
the year higher. The economy turned out to be much stronger than expected,
causing yields to rise and bond prices to decline. Later in the year growth
moderated, enabling yields to ease and bond prices to recover, though not to
levels seen at the beginning of 1996.

     During the 12-month period we managed the portfolio actively, seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate sectors. Our strategy in this more volatile environment was a
defensive one. We attempted to reduce sensitivity to changes in interest rates
by shortening the Portfolio's duration. We achieved a shorter duration primarily
by reducing our holdings of Treasury securities, with most of the reduction
occurring during the first half of the year. We redeployed assets in several
areas, including corporate bonds, mortgage securities, and cash.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     Rising interest rates 
     created a challenging 
     environment for bond 
     investors.

     Corporate bonds turned out to be the strongest performing sector of the
bond market in 1996. We held an overweighted position in corporates at the
beginning of the year and continued to add to our position throughout 1996. We
maintained the Fund's high quality portfolio composition, closing the year with
an average quality rating of AA.

     Mortgage securities also constituted an increasing share of the Portfolio
during the year. These securities, which typically offer a yield premium over
Treasuries, became increasingly attractive values as interest rates rose in the
first half of the year. We added mortgage securities to the Portfolio primarily
between March and July. These securities played a significant role in providing
stability, diversification, and attractive income to the Portfolio.

     Heading into 1997, we anticipate at least a neutral environment for bond
investors. We expect economic growth to moderate and inflation to remain under
control. We believe this should help to relieve upward pressure on interest
rates. There are no major excesses in the corporate sector, and inventories are
being managed well. Longer term, if the current enthusiasm for the stock market
wanes, we could see renewed interest in bonds for their attractive yields and
relative price stability.

     Sincerely,

     Your Portfolio Management Team


     /s/William M. Hutchinson                 /s/Ruth Heisler
     William M. Hutchinson                    Ruth Heisler
     Lead Portfolio Manager


4
<PAGE>

                                                                  BOND PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
BOND PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $10,282     2.82%     2.82%
5 Year    $13,912    39.12%     6.83%
10 Year   $21,071   110.71%     7.74%

LB AGGREGATE BOND INDEX
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $10,363     3.63%     3.63%
5 Year    $14,050    40.50%     7.03%
10 Year   $22,547   125.47%     8.46%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Bond Portfolio 
Year            Amount
----------------------
86             $10,000
87             $10,122
88             $10,675
89             $11,918
90             $12,879
91             $15,147
92             $16,208
93             $18,214
94             $17,343
95             $20,494
96             $21,071

LB Aggregate Bond Index
Year            Amount
----------------------
86             $10,000
87             $10,276
88             $11,086
89             $12,697
90             $13,834
91             $16,048
92             $17,236
93             $18,916
94             $18,365
95             $21,757
96             $22,547

The Lehman Brothers (LB) Aggregate Bond Index is an unmanaged market
value-weighted measure of treasury issues, agency issues, corporate
bond issues and mortgage securities. Index returns assume reinvestment
of dividends and, unlike Fund returns, do not reflect any fees or
expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some 
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Bond Portfolio. 


-------------------------------------------------------------------
ASSET QUALITY
-------------------------------------------------------------------
By Quality
-------------------
AAA             60%                       
AA               5%             Shortening the portfolio's
A               21%             duration helped to limit the
BBB             13%             effects of higher interest
BB               1%             rates.
               ----
               100%
               ====
-------------------
Average Quality: AA

A graph in the form of a pie chart appears here,
illustrating the exact data points in the above table.

-------------------------------------------------------------------
EFFECTIVE MATURITY
-------------------------------------------------------------------
---------------------------
Less than 1 year        11%                       
1 - 3 years              8%
3 - 7 years             35%
7 - 12 years            25%
12 years or greater     21%
                       ----
                       100%
                       ====
---------------------------
Weighted average effective maturity: 9 years

-------------------------------------------------------------------
DIVERSIFICATION
-------------------------------------------------------------------
-----------------------------------
Corporate Bonds                 34%
U.S. Government Agency          21%
U.S. Treasury Obligations       16%
Repurchase Agreement            12%
Asset-Backed Securities          7%
U.S. Government Guaranteed
  Mortgages                      7%
Foreign Bonds                    3%
                               ----
                               100%
                               ====
-----------------------------------


                                                                               5
<PAGE>

BALANCED PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------

Dear Shareholders,

     Investor concern over stronger than expected economic growth and the
possibility of accelerating inflation fueled an environment of volatile price
changes for stocks and bonds in 1996. Nevertheless, the stock market completed
its second consecutive year of strong overall performance as evidenced by the
22.96% total return of the S&P 500. In contrast, the bond market provided
positive but more modest total returns, as measured by the unmanaged Lehman
Brothers Aggregate Bond Index, which returned 3.63% for the year. Balanced
Portfolio's conservative approach to investing in stocks and bonds resulted in a
total return of 11.89% for the same period. At the end of the period, the
Portfolio's assets were allocated 59% in equities and 41% in fixed income
securities (including cash).

     The Portfolio's equity holdings were invested with the expectation that the
economic environment would be lackluster, inflation would remain under control,
and rapid earnings growth would be increasingly hard to sustain for the more
cyclically sensitive companies and industries. While the Fund's sector breakdown
remained relatively unchanged during the period, we made some strategic shifts
within sectors such as technology.

     Although the health care sector was a poor performer during 1996, we
maintained our exposure as we believed the stocks owned by the Portfolio were
among the best positioned in the sector. This proved a sensible strategy, as
health care was one of the Portfolio's best performing sectors later in the
year.

     Over the 12 months covered by this report, our exposure to the
manufacturing sector increased. On more than one occasion during the period,
signs of a strengthening economy led investors toward manufacturing stocks,
which generally respond well to an acceleration of economic activity.

     In the bond portion of the Portfolio we took an active approach seeking to
capitalize on shifts in relative valuation among the Treasury, mortgage, and
corporate sectors. We pursued a defensive strategy by shortening the duration of
our bond holdings in an effort to reduce sensitivity to changes in interest
rates. We achieved this primarily by trimming our holdings of Treasury
securities, with most of the reduction occurring during the first half of the
year. We redeployed assets in several areas including corporate bonds, mortgage
securities, and cash.

     Looking ahead, we believe quality growth stocks and bonds should benefit
from the current environment of slower economic growth and low inflation. With
the probability of rapid economic expansion low at this stage of the cycle, we
believe that higher interest rates are less likely. This scenario is typically
viewed as positive by the stock and bond markets, and should particularly
benefit investors in the months ahead.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     The strong performance 
     of stocks more than offset 
     the effects of rising rates 
     on bonds.

     Sincerely,

     Your Portfolio Management Team

     /s/Valerie F. Malter                     /s/William M. Hutchinson
     Valerie F. Malter                        William M. Hutchinson
     Lead Portfolio Manager


     /s/Ruth Heisler
     Ruth Heisler


6
<PAGE>

                                                              BALANCED PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
BALANCED PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $11,189    11.89%    11.89%
5 Year    $15,855    59.55%     9.79%
10 Year   $26,655   166.55%    10.30%

S&P 500 INDEX (60%)
AND LBAB INDEX (40%)
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $11,496    14.96%    14.96%
5 Year    $17,583    75.89%    11.94%
10 Year   $33,291   232.91%    12.77%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Balanced Portfolio 
Year            Amount
----------------------
86             $10,000
87             $ 9,632
88             $11,229
89             $13,419
90             $13,162
91             $16,706
92             $17,870
93             $19,202
94             $18,807
95             $23,823
96             $26,575

S&P 500 Index
Year            Amount
----------------------
86             $10,000
87             $10,525
88             $12,273
89             $15,162
90             $15,660
91             $20,431
92             $21,988
93             $24,204
94             $24,524
95             $33,739
96             $41,485

LBAB Index
Year            Amount
----------------------
86             $10,000
87             $10,276
88             $10,085
89             $12,697
90             $13,834
91             $16,040
92             $17,236
93             $18,916
94             $18,265
95             $21,757
96             $22,547


The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market and
The Lehman Brothers Aggregate Bond (LBAB) Index is an unmanaged market 
value-weighted measure of treasury issues, agency issues, corporate bond
issues and mortgage securities. Index returns assume reinvestment of 
dividends and, unlike Fund returns, do not reflect any fees or expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some 
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Balanced Portfolio. The Balanced Portfolio, with its
current name and investment objective, commenced operations on May 1, 1993.
Performance figures include the performance of its predecessor, the Managed
Diversified Portfolio. Since adopting its current objectives, the cumulative
and average annual returns are 48.78% and 11.43%, respectively.


-------------------------------------------------------------------
EQUITY HOLDINGS
-------------------------------------------------------------------
Sector breakdown of the                Five Largest Equity Holdings
Portfolio's equity holdings            ----------------------------
---------------------------            1. PHILIP MORRIS COMPANIES INC.
Consumer Staples        21%               Tobacco, food products and brewing
Health                  17%               
Technology              15%            2. COCA-COLA CO, INC.
Manufacturing           12%               International soft drink company
Service Industries       9%               
Financial                8%            3. GENERAL ELECTRIC CO. 
Consumer Discretionary   8%               Leading producer of electrical
Media                    5%               equipment
Durables                 4%               
Energy                   1%            4. MERCK & CO. INC.
                       ----               Leading drug manufacturer
                       100%               
                       ====            5. COLGATE-PALMOLIVE CO.        
---------------------------               Manufacturer of household and
                                          personal care products       
                                       


-------------------------------------------------------------------
FIXED INCOME HOLDINGS
-------------------------------------------------------------------
By Asset Type                                  By Quality
-----------------------------------            -----------------
Corporate Bonds                 26%            AAA           70%
U.S. Treasury Obligations       25%            AA             3%
U.S. Government Agency                         A             14%
  Pass-Thrus                    22%            BBB           13%
Cash Equivalents                11%                         ----
U.S. Government Guaranteed                                  100%
  Mortgages                      8%                         ====
Asset-Backed Securities          7%            -----------------
Foreign Bonds                    1%            
                               ----
                               100%
                               ====
-----------------------------------


                                                                               7
<PAGE>

GROWTH AND INCOME PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,

     For the second year in a row, both the Dow Jones Industrial Average and the
S&P 500 reached new heights. Growth and Income Portfolio returned 22.17% for the
year versus a return of 22.96% for the market as represented by the unmanaged
S&P 500 Index. We are pleased with the Portfolio's return given the year's
challenging environment of conflicting economic signals and rapid sector
rotation.

     Unlike 1995, when the market was driven largely by a one percentage point
drop in long-term interest rates and 18% growth in corporate profits, 1996
marked a slowing of corporate profit growth to 8% and a decidedly more volatile
bond market. Overall, the year was characterized by market forecasts which
seemed to flip-flop with each new release of corporate earnings or economic
data. In the end, however, nothing seemed to be able to hold back the market for
long.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     Stocks posted a second 
     consecutive year of strong 
     performance despite 
     increased volatility.

     Early in the year, portfolio changes were concentrated in the cyclical
area, where we used depressed valuations in chemicals, paper, and retailing as
an opportunity to increase holdings. At the same time, we scaled back more
defensive consumer products and health care stocks, which had outperformed
significantly.

     During the fourth quarter, we accelerated our trimming of health care and
consumer staples. We used a portion of the proceeds from the sales to increase
the Portfolio's position in Regional Bell Operating Companies and domestic
electric utilities, where we have been underweighted. In the communications
sector, we initiated positions in BellSouth and Frontier, and increased our
weighting in Bell Atlantic and NYNEX. With respect to electric utilities, we
believe that while uncertainty remains in the restructuring of the industry, the
process is proceeding at an appropriate pace, with many states allowing
utilities ample time to make the transition. On the sell side, we eliminated
positions in Bausch & Lomb and Reader's Digest due to company fundamentals which
no longer supported a strong case for ownership in the Portfolio.

     While we watch the endless stream of economic data and the trends in
corporate profit growth, and remain cautious with respect to the current level
of the stock market, we will not place large sector bets in the portfolio based
on financial market forecasts. We have seen, particularly in 1996, how
expectations can shift overnight, only to come full circle in a short a time
period. Rather than attempt to outguess the market, we remain focused on our
primary activity -- investing in undervalued securities with above-average
dividend yields -- which we believe is a superior strategy in almost any market
environment.

     Sincerely,

     Your Portfolio Management Team


     /s/Robert T. Hoffman                      /s/Kathleen T. Millard
     Robert T. Hoffman                         Kathleen T. Millard
     Lead Portfolio Manager


     /s/Benjamin W. Thorndike                  /s/Lori J. Ensinger
     Benjamin W. Thorndike                     Lori J. Ensinger


8
<PAGE>

                                                     GROWTH AND INCOME PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
GROWTH AND INCOME PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $12,217    22.17%    22.17%
Life of
 Fund*    $16,884    68.84%    21.69%

S&P 500 INDEX 
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $12,295    22.96%    22.96%
Life of
 Fund*    $17,590    75.90%    23.57%

*The Fund commenced operations on May 2, 1994.

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

Growth and Income Portfolio 
Year            Amount
----------------------
5/2/94*        $10,000
6/94           $ 9,854
9/94           $10,488
12/94          $10,235
3/95           $10,903
6/95           $11,817
9/95           $12,688
12/95          $13,483
3/96           $14,300
6/96           $14,645
9/96           $15,199
12/96          $16,472


S&P 500 Index
Year            Amount
----------------------
5/2/94*        $10,000
6/94           $ 9,915
9/94           $10,400
12/94          $10,398
3/95           $11,411
6/95           $12,500
9/95           $13,493
12/95          $14,305
3/96           $15,073
6/96           $15,750
9/96           $16,237
12/96          $17,590

The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns were higher
due to maintenance of the Fund's expenses. See Financial
Highlights for the Growth and Income Portfolio. 

-------------------------------------------------------------------
DIVERSIFICATION
-------------------------------------------------------------------
---------------------------            Sector breakdown of the
Equity Securities       95%            Portfolio's equity holdings
Cash Equivalents         5%            ---------------------------
                       ----            Financial               21%
                       100%            Manufacturing           17%
                       ====            Consumer Staples        11%
---------------------------            Health                   8%
                                       Energy                   8%
A graph in the form of a pie chart     Durables                 8%
appears here, illustrating the         Communications           7%
exact data points in the table         Utilities                5%
to the right.                          Consumer Discretionary   4%
                                       Other                    6%
                                                              ----
                                                               95%
                                                              ====
Our value approach focused on
cyclicals early in the year
followed by emphasis on
Regional Bells and utilities.
-------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (18% of Portfolio)
-------------------------------------------------------------------
1.  XEROX CORP.
    Leading manufacturer of copiers and duplicators

2.  PHILIP MORRIS COMPANIES INC.
    Tobacco, food products and brewing

3.  STUDENT LOAN MARKETING ASSOCIATION
    Student loan financing programs

4.  TRW INC.
    Defense electronics, automotive parts and systems

5.  UNITED TECHNOLOGIES CORP.
    Manufacturer of aerospace, climate control systems, and elevators

6.  BANKERS TRUST NEW YORK CORP.
    Commercial banking

7.  H.J. HEINZ CO.
    Major manufacturer of processed foods

8.  CHASE MANHATTAN CORP.
    Commercial banking

9.  E.I du PONT DE NEMOURS & CO.
    Chemical producer

10. SHERLING-PLOUGH CORP.
    Pharmaceutical and consumer products


                                                                               9
<PAGE>

CAPITAL GROWTH PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,

     The U.S. stock market completed a second consecutive year of strong
performance, with the S&P 500 climbing 22.96% for the 12-month period ended
December 31, 1996. However, the market environment was punctuated by rapid
sector rotation and increased volatility. In this changing environment, the
Portfolio returned 20.13%. The Portfolio's best performing groups included the
technology, consumer staples, finance, service, and manufacturing sectors.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     As stocks rose over 
     the year, we remained 
     committed to our criteria 
     of individual selection.

     In the technology area we continued to be broadly diversified, emphasizing
high quality market leaders such as Intel. The company's dominance in
microprocessors seems to be unchallenged at this juncture. Applied Materials,
the leading supplier of semiconductor manufacturing equipment, also turned in
good performance, especially during the fourth quarter.

     Consistent with our view of slowing economic growth and little pressure on
interest rates, the Portfolio held a number of finance issues. In a relatively
expensive stock market many of these issues trade at a discount to both the S&P
500 and their growth rates. In this category we include a number of specialty
names such as insurance companies American International Group and Excel Ltd.

     With health care costs rising at the rate of inflation, political pressure
to regulate the industry may have diminished. The Portfolio holds issues of a
number of leading pharmaceutical companies that have strong product pipelines
which we expect should drive sustainable earnings growth. One of our better
performers in this area was Warner Lambert, which rose on news of FDA approval
of two of its new products, troglidazone and atorvastatin.

     Significant exposure to the energy sector was also maintained. We believe
that stock prices in this sector have yet to reflect the increase in oil prices
over the last year, and the more favorable supply and demand environment. Exxon
was among the strongest issues in the Portfolio, with Amoco and Royal Dutch
Petroleum also performing well.

     In view of high consumer debt levels, we have consistently maintained a
relatively modest exposure to consumer discretionary stocks. The few issues in
the Portfolio did not add to performance. J.C. Penney declined, reflecting the
challenging retail environment. Despite inroads overseas, McDonalds has had a
particularly hard time getting its domestic business to show growth.

     Our strategy remains focused on buying stocks with sustainable earnings
growth at reasonable valuations. We intend to maintain a broadly diversified
portfolio with balanced sector representation in the months ahead.

     Sincerely,

     Your Portfolio Management Team


     /s/William F. Gadsden                               /s/Bruce F. Beaty
     William F. Gadsden                                  Bruce F. Beaty
     Lead Portfolio Manager


10
<PAGE>

                                                        CAPITAL GROWTH PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
CAPITAL GROWTH PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $12,013    20.13%    20.13%
5 Year    $17,959    79.59%    12.42%
10 Year   $34,095   240.95%    13.05%

S&P 500 INDEX 
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $12,296    22.96%    22.96%
5 Year    $20,305   103.05%    15.20%
10 Year   $41,485   314.85%    15.26%

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Capital Growth Portfolio 
Year            Amount
----------------------
86             $10,000
87             $10,525
88             $12,273                   
89             $16,162                   
90             $15,660
91             $20,431
92             $21,988
93             $24,204
94             $24,524
95             $33,739
96             $41,485


S&P 500 Index
Year            Amount
----------------------
86             $10,000
87             $ 9,811
88             $11,975
89             $14,699
90             $13,604
91             $18,985
92             $20,204
93             $24,423
94             $22,061
95             $29,381
96             $34,095

The Standard & Poor's (S&P) 500 Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-The-Counter market.
Index returns assume reinvestment of dividends and, unlike Fund returns,
do not reflect any fees or expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some 
periods were higher due to maintenance of the Fund's expenses. See 
Financial Highlights for the Capital Growth Portfolio. 

-------------------------------------------------------------------
DIVERSIFICATION
-------------------------------------------------------------------
---------------------------            Sector breakdown of the
Equity Securities       97%            Portfolio's equity holdings
Cash Equivalents         3%            ---------------------------
                       ----            Financial               18%
                       100%            Technology              16%
                       ====            Health                  14%
---------------------------            Energy                  13%
                                       Manufacturing           12%
A graph in the form of a pie chart     Consumer Discretionary   6%
appears here, illustrating the         Consumer Staples         6%
exact data points in the table         Durables                 5%
to the right.                          Service Industries       4%
                                       Other                    3%
                                                              ----
                                                               97%
                                                              ====
The portfolio's
diversification helped to
mitigate increased
volatility and sector
rotation in 1996

-------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS  (25% of Portfolio)
-------------------------------------------------------------------
1.  FEDERAL NATIONAL MORTGAGE ASSOCIATION
    Insurer and holder of mortgage loans

2.  INTEL CORP.
    Semiconductor memory circuits

3.  CITICORP
    Provider of a broad range of financial services,
    including banking and consumer finance

4.  AMERICAN EXPRESS CREDIT CORP.
    Travel and investment services, insurance, and banking

5.  COLUMBIA/HCA HEALTHCARE CORP.
    Leading hospital management company

6.  ROYAL DUTCH PETROLEUM CO.
    International energy company

7.  WARNER-LAMBERT CO.
    Drugs, toiletries, and food products

8.  AMERICAN INTERNATIONAL GROUP, INC.
    Major international insurance holding company

9.  MBIA, INC.
    Insurer of municipal bonds

10. GENERAL MOTORS CORP. "H"
    Producer of high technology electronics


                                                                              11
<PAGE>

GLOBAL DISCOVERY PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,

     For the eight months from the Portfolio's inception to the end of the
fiscal period May 1 to December 31, 1996, Global Discovery Portfolio provided a
total return of 5.50%. This performance exceeded the total return of the Fund's
benchmark, the unmanaged Salomon Brothers World Equity Extended Market Index,
which returned 1.20% for the same period. With the notable exception of Japan,
performance of the major international equity markets was generally robust. In
the United States, the prolonged expansion of the economy continued as did the
domestic stock market's upward swing, despite periods of volatility brought on
by investor fears of accelerating inflation.

     There were a number of changes in the Portfolio's top holdings of small
company stocks. Notable in their departure were German-based software company
SAP and U.S.-based semiconductor producer Atmel. Both had reached "oversized"
status after contributing significantly to the Portfolio's past performance.
Replacing SAP and Atmel as top portfolio holdings are IHC/Caland NV, the
Netherlands-based manufacturer of dredgers and offshore production platforms for
the oil industry, and the U.S.-based HBO & Co., the leading consolidator in the
booming hospital information systems industry.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     Strong performance was 
     evident in the United 
     States and abroad with 
     the exception of Japan.

     Our approach to portfolio management focuses on individual stock selection.
The country or regional decision is secondary to this "bottom up" emphasis on
companies with good management, solid balance sheets and, above all, excellent
prospects for above average growth. We think this is appropriate because the
domicile of the company headquarters is becoming less relevant to the investment
decision. For example, two of the leading holdings, CETV and Benton Oil, are
classified as "developed" country holdings with corporate headquarters located
in the U.K. and California, respectively. Despite its London base, the major
earnings asset of CETV is a television station in Prague. Benton's profits are
entirely derived from its drilling operations in Venezuela. Both of these
companies, therefore, depend entirely on earnings from "developing" nations.

     Regardless of how the portfolio is constructed, it can be viewed from a
"top down" perspective. From this standpoint, the portfolio is overweighted in
Europe and substantially underweighted in Japan. Moreover, we have restructured
our Japanese holdings so as to concentrate on consumer stocks with strongly
defined niches and good growth prospects.

     In the U.S., health care stocks have been emphasized as the virtual
revolution in this sector of the economy continues unabated. Consolidation will
provide many opportunities in the areas of kidney dialysis services and
physician practice. We believe growth prospects for hospital information
services are excellent.

     While we continue to be cautious regarding the level of markets, we think
that there are many companies already in the Portfolio that have the
characteristics to weather whatever storms arise.

     Sincerely,

     Your Portfolio Management Team


     /s/Gerald J. Moran                              /s/Sewall F. Hodges
     Gerald J. Moran                                 Sewall F. Hodges
     Lead Portfolio Manager


12
<PAGE>

                                                      GLOBAL DISCOVERY PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
GLOBAL DISCOVERY PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/95  $10,000  Cumulative  Annual
--------  -------  ----------  ------
Life of
 Fund*    $10,550      5.5%      --

SALOMON BROTHERS WORLD EQUITY EMI INDEX
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/95  $10,000  Cumulative  Annual
--------  -------  ----------  ------
Life of
 Fund*    $10,120     1.20%      --

*The Fund commenced operations on May 1, 1996.
 Index comparisons begin May 31, 1996.

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

Global Discovery Portfolio 
Year            Amount
----------------------
5/96*          $10,000
6/96           $ 9,857
7/96           $ 9,592
8/96           $ 9,886
9/96           $10,190
10/96          $10,147
11/96          $10,943
12/96          $10,343

Salomon Brothers World Equity EMI Index
Year            Amount
----------------------
5/96*          $10,000
6/96           $ 9,671
7/96           $ 9,337
8/96           $ 9,637
9/96           $ 9,670
10/96          $ 9,626
11/96          $10,136
12/96          $10,120

The Salomon Brothers World Equity EMI Index is an unmanaged small capitalization
universe of 22 countries. Index returns assume reinvestment of dividends and,
unlike Fund Returns, do not reflect any fees or expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some 
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the Global Discovery Portfolio. 


-------------------------------------------------------------------
DIVERSIFICATION
-------------------------------------------------------------------
By Region                        By Sector
(Excluding 6% Cash Equivalents)  (Equity Holdings)
----------------------------     ---------------------------
Europe                   43%     Financial               16%
U.S. & Canada            41%     Health                  16%
Japan                    10%     Service Industries      13%
Latin America             4%     Consumer Staples        11%
Pacific Basin             1%     Technology              10%
Other                     1%     Energy                   9%
                        ----     Manufacturing            7%
                        100%     Consumer Discretionary   5%
                        ====     Durables                 5%
                                 Other                    8%
                                                        ----  
                                                        100%      
                                                        ====

Graphs in the form of pie charts appears here,
illustrating the exact data points in the above table.

-------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (25% of Portfolio)
-------------------------------------------------------------------
1.  IHC CALAND N.V
    Dredging and offshore services in the Netherlands

2.  SERCO GROUP PLC
    Facilities management company in the United Kingdom

3.  MARSCHOLLCK LAUTENSCHLAGER UND PARTNER AG
    Leading independent life insurance company in Germany

4.  BANK OF IRELAND PLC
    Bank in Ireland

5.  CENTRAL EUROPEAN MEDIA ENTERPRISE LTD.
    Owner and operator of national and regional private commercial
    television stations in Central Europe and Germany

6.  AUTOLLV AG.
    Manufacturer of automobile safety bags in Sweden

7.  JERONIMO MARTINS
    Food producer and retailer in Portugal

8.  HBO & COMPANY
    Designer of computerized information systems to the healthcare
    industry in the United States

9.  BILLING INFORMATION CONCEPTS
    Billing and information management services in the United States

10. SHOHKOH FUND & CO., LTD.
    Finance Company for small and medium-sized firms in Japan


                                                                              13
<PAGE>

INTERNATIONAL PORTFOLIO
PORTFOLIO MANAGEMENT DISCUSSION
--------------------------------------------------------------------------------
Dear Shareholders,

     For the 12 months ended December 31, 1996, International Portfolio provided
a total return of 14.78%, comparing very favorably to the performance of the
unmanaged MSCI EAFE and Canada Index, which returned 6.87% for the same period.
The Portfolio's performance was aided by an underweighting in Japan, one of the
worst performing markets over the period, as well as good stock selection in
Europe.

[CALLOUT NEXT TO PRECEDING PARAGRAPH]
     We continue to focus on 
     companies in Europe with 
     sound management 
     strategies.

     Falling interest rates, ongoing corporate restructuring, takeover activity,
and greater management focus on shareholder value propelled European markets
upwards. German equities were particular beneficiaries of corporate
restructuring, including portfolio holdings Hoechst, BASF, and Daimler Benz.
Japan's market faltered over the period, as concerns developed over the feeble
economic recovery and domestic investors remained absent from the market. Korean
equities traded lower as well, troubled by weak corporate earnings, a widening
trade gap, a depreciating currency, and the collapse in semiconductor prices.
The Hong Kong market rallied towards the end of the year as concerns about the
1997 hand-over to China faded. Brazil was a standout among Latin American
markets, driven by continued progress on the privatization front and the
perception that, for the first time since the 1940s, Brazilians are likely to
experience an extended period of low, even single digit, inflation.

     In Europe, we continue to focus on companies with sound management
strategies positioned to benefit from the important changes taking place today
in the region. The drive for growth at any cost has been supplanted at many
companies by the desire to generate returns for shareholders. Though the
restructuring theme is most notable in Germany at present, it is also evident
elsewhere in Europe. Industry consolidation continues to be a successful theme
in the portfolio as well. In Japan, we continue to seek out domestic companies
with a unique franchise (Nichiei) and high quality global blue chip stocks
benefiting from a weaker yen (Canon). Elsewhere in Asia, our strategy is to
identify dominant regional companies, low-cost producers, and companies that
stand to benefit from the region's rising disposable income.

     Looking ahead, while there may be transitional jitters in Europe from time
to time, the potential rewards to investors from the favorable changes underway
there are exciting. In Japan, there is evidence of momentum in selected areas of
the economy: interest rates are at record lows; valuation criteria are
attractive by historical standards; and currency depreciation has boosted
corporate earnings. Our outlook for Japan is tempered, however, by the continued
absence of domestic participation in the market and the slow pace of
deregulation in an economy impeded by structural imbalances. Going forward,
International Portfolio will seek to continue to provide important exposure to
the many opportunities for capital appreciation to be found overseas.

     Sincerely,

     Your Portfolio Management Team


     /s/Carol L. Franklin                            /s/Nicholas Bratt
     Carol L. Franklin                               Nicholas Bratt
     Lead Portfolio Manager


     /s/Joan R. Gregory
     Joan R. Gregory


14
<PAGE>

                                                         INTERNATIONAL PORTFOLIO
                                       PORTFOLIO SUMMARY as of December 31, 1996
--------------------------------------------------------------------------------
-----------------------------------------------------------------
GROWTH OF A $10,000 INVESTMENT
-----------------------------------------------------------------
INTERNATIONAL PORTFOLIO
----------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $11,478    14.78%    14.78%
5 Year    $16,890    68.90%    11.05%
Life of
 Fund*    $24,966   149.86%     9.93%

MSCI EAFE & CANADA INDEX
--------------------------------------
                     Total Return
Period    Growth    --------------
Ended       of                Average
12/31/96  $10,000  Cumulative  Annual
--------  -------  ----------  ------
1 Year    $10,687     6.87%     6.87%
5 Year    $14,817    48.17%     8.17%
Life of
 Fund*    $16,574    65.74%     5.41%

*The Fund commenced operations on May 1, 1987.
 Index comparisons begin May 31, 1987.

A chart in the form of a line graph appears here,
illustrating the Growth of a $10,000 Investment.
The data points from the graph are as follows:

YEARLY PERIODS ENDED DECEMBER 31

International Portfolio 
Year            Amount
----------------------
5/31/87*       $10,000
87             $ 8,997
88             $10,502
89             $14,470
90             $13,363
91             $14,893
92             $14,433
93             $19,891
94             $19,723
95             $21,915
96             $25,154

MSCI EAFE & Canada Index
Year            Amount
----------------------
5/31/87*       $10,000
87             $ 9,138
88             $11,682
89             $12,968
90             $ 9,980
91             $11,186
92             $ 9,824
93             $12,961
94             $13,915
95             $15,509
96             $16,574

The Morgan Stanley Capital International (MSCI) Europe, Australia, the Far
East (EAFE) & Canada Index is an unmanaged capitalization-weighted measure 
of stock markets in Europe, Australia, the Far East and Canada. Index returns
assume dividends reinvested net of witholding tax and, unlike Fund returns,
do not reflect any fees or expenses.

All performance is historical, assumes reinvestment of all dividends and
capital gains, and is not indicative of future results. Investment return
and principal value will fluctuate, so an investor's shares, when redeemed,
may be worth more or less than when purchased. Total returns in some 
periods were higher due to maintenance of the Fund's expenses. See Financial
Highlights for the International Portfolio. 


-------------------------------------------------------------------
DIVERSIFICATION
-------------------------------------------------------------------
By Region                        By Sector
(Excluding Cash Equivalents)     (Equity Holdings)
----------------------------     ---------------------------
Europe                   59%     Manufacturing           23%
Japan                    18%     Financial               11%
Pacific Basin            14%     Durables                 8%
Latin America             6%     Communications           7%
Canada                    3%     Utilities                7%
                        ----     Metals & Minerals        7% 
                        100%     Service Industries       8% 
                        ====     Health                   8% 
                                 Technology               8% 
                                 Other                   22% 
                                                        ---- 
                                                        100% 
                                                        ==== 

Graphs in the form of pie charts appears here,
illustrating the exact data points in the above table.

-------------------------------------------------------------------
TEN LARGEST EQUITY HOLDINGS (13% of Portfolio)
-------------------------------------------------------------------
1.  HOSCHET AG
    Chemical producer in Germany

2.  NOVARTIS AG
    Pharmaceutical company in Switzerland

3.  VEBA AG
    Electric utility and distributor of oil and chemicals in Germany

4.  HUTCHISON WHAMPOA, LTD.
    Container terminal and real estate company in Hong Kong

5.  CARREFOUR HYPERMARKET
    Hypermarket operator and food retailer in France.

6.  AUTOLIV AB
    Manufacturer of automoblie safety bags in Sweden

7.  MANNESMANN AG
    Diversified construction and technology company in Germany

8.  PORTUGAL TELECOM SA
    Telecommunication services

9.  SMITHKLINE BEECHAM PLC
    Manufacturer of drugs and healthcare products in the United Kingdom

10. MATSUSHITA ELECTRICAL INDUSTRIAL CO., LTD.
    Leading manufacturer of consumer electronic products in Japan


                                                                              15
<PAGE>

MONEY MARKET PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of        Principal                                                                   Value ($)
                                 Portfolio    Amount ($)                                                                   (Note A)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>
                                    4.6%                REPURCHASE AGREEMENT

                                               4,355,000    Repurchase Agreement with Donaldson, Lufkin & Jenrette
                                                             dated 12/31/96 at 6.7% to be repurchased at
                                                             $4,356,621 on 1/2/97, collateralized by a $4,284,000
                                                             U.S. Treasury Note, 5.875%, 7/31/97 (Cost $4,355,000) .....   4,355,000
                                                                                                                          ----------

                                   90.3%                COMMERCIAL PAPER


Financial                          82.9%

       Banks                        8.4%       4,000,000    Deutsche Bank Financial Inc., 5.23%, 3/4/97 ................   3,963,698
                                               4,000,000    Prudential Funding Corp., 5.26%, 2/25/97 ...................   3,967,550
                                                                                                                          ----------
                                                                                                                           7,931,248
                                                                                                                          ----------

       Business Finance             6.3%       3,000,000    New Center Asset Trust, 5.21%, 2/19/97 .....................   2,978,440
                                               3,000,000    Norwest Corp., 5.26%, 3/11/97 ..............................   2,969,640
                                                                                                                          ----------
                                                                                                                           5,948,080
                                                                                                                          ----------

       Consumer Finance            23.8%       3,500,000    American Express Credit Corp., 5.11%, 1/23/97 ..............   3,488,600
                                               4,000,000    Bell Atlantic Financial Services Inc., 5.26%, 1/27/97 ......   3,984,284
                                               4,000,000    Beneficial Corp., 5.41%, 6/25/97 ...........................   3,896,945
                                               2,300,000    Ford Motor Credit Corp., 4.65%, 1/8/97 .....................   2,297,625
                                               2,000,000    Ford Motor Credit Corp., 5.19%, 2/4/97 .....................   1,989,951
                                               3,700,000    General Electric Capital Corp., 5.16%, 1/30/97 .............   3,684,143
                                               3,000,000    Household Finance Corp., 4.44%, 1/6/97 .....................   2,997,779
                                                                                                                          ----------
                                                                                                                          22,339,327
                                                                                                                          ----------

       Other Financial
        Companies                  44.4%       4,000,000    Abbey National North America, 5.30%, 3/11/97 ...............   3,959,213
                                               3,000,000    American General Finance Corp., 5.32%, 4/24/97 .............   2,950,280
                                               4,000,000    Ameritech Corp., 5.29%, 3/31/97 ............................   3,947,787
                                               1,600,000    Associates Corp. of North America, 4.94%, 1/14/97 ..........   1,596,932
                                               3,000,000    Associates Corp. of North America, 5.34%, 4/7/97 ...........   2,957,440
                                               3,000,000    Centric Funding Corp., 5.41%, 3/25/97 ......................   2,962,581
                                               3,500,000    Ciesco L.P., 4.96%, 1/15/97 ................................   3,492,786
                                               2,000,000    Dresdner U.S. Finance, 5.19%, 2/4/97 .......................   1,989,951
                                               4,000,000    Matterhorn Capital Corp., 5.17%, 1/16/97 ...................   3,990,833
                                               3,000,000    Preferred Receivables Funding Corp., 4.44%, 1/6/97 .........   2,997,779
                                               4,000,000    Private Export Funding Corp., 5.20%, 2/11/97 ...............   3,975,901
                                               3,000,000    Receivables Capital Corp., 5.32%, 2/28/97 ..................   2,974,093
                                               4,000,000    UBS Finance (DE) INC., 5.30%, 1/21/97 ......................   3,987,667
                                                                                                                          ----------
                                                                                                                          41,783,243
                                                                                                                          ----------

Manufacturing                       4.2%

       Chemicals                               4,000,000    E.I. du Pont de Nemours & Co., 5.13%, 1/23/97 ..............   3,986,922
                                                                                                                          ----------

Utilities                           3.2%

       Electric Utilities                      3,000,000    Virginia Electric & Power Co., 5.26%, 2/13/97 ..............   2,980,829
                                                            Total Commercial Paper (Cost $84,969,649) ..................  84,969,649
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


16
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of        Principal                                                                   Value ($)
                                 Portfolio    Amount ($)                                                                   (Note A)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>
                                    5.1%                SHORT-TERM NOTES

                                               1,000,000    Bank of America Illinois, 5.700%, 5/28/97 ..................     999,569
                                               3,000,000    FCC National Bank Note, 5.590%, 11/7/97 ....................   2,999,145
                                                 750,000    General Electric Capital Corp., 5.290%, 1/13/97 ............     749,983
                                                                                                                          ----------
                                                            Total Short-Term Notes (Cost $4,748,697) ...................   4,748,697
                                                                                                                          ----------

                                             Total Investment Portfolio-- 100.0% (Cost $94,073,346) (a) ................  94,073,346
                                                                                                                          ==========


                                             (a) Cost for federal income tax purposes is $94,073,346.

</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              17
<PAGE>

MONEY MARKET PORTFOLIO
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments securities (cost $94,073,346) (Note A) ........................                   $ 94,073,346
Cash ......................................................................                            526
Interest receivable .......................................................                         72,784
Receivable for Portfolio shares sold ......................................                      4,093,556
                                                                                              ------------
      Total assets ........................................................                     98,240,212

Liabilities
Dividends payable .........................................................    $    407,369
Payable for Portfolio shares redeemed .....................................          17,495
Accrued management fee (Note B) ...........................................          29,722
                                                                               ------------
   Total liabilities ......................................................                        454,586
                                                                                              ------------
Net assets, at value ......................................................                   $ 97,785,626
                                                                                              ============

Net Assets
Net assets consist of:
   Accumulated net realized loss ..........................................                         (2,483)
   Paid-in capital ........................................................                     97,788,109
                                                                                              ------------
Net assets, at value ......................................................                   $ 97,785,626
                                                                                              ============
Net asset value, offering and redemption price per share
   ($97,785,626/97,786,551 outstanding shares of beneficial
   interest, no par value, unlimited number of shares authorized) .........                   $       1.00
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


18
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Investment income
   Interest ...............................................................                   $  4,794,163
   Expenses (Note A):
      Management fee (Note B) .............................................    $    325,791
      Custodian  and accounting fees (Note B) .............................          46,495
      Trustees' fees and expenses  (Note B) ...............................          16,326
      Legal ...............................................................           2,425
      Auditing ............................................................          10,145
   Other ..................................................................           7,026        408,208
                                                                               ------------   ------------
   Net investment income ..................................................                      4,385,955
                                                                                              ------------
   Net realized loss from Investments .....................................                           (917)
                                                                                              ------------
Net increase in net assets resulting from operations ......................                   $  4,385,038
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              19
<PAGE>

MONEY MARKET PORTFOLIO
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
Net investment income ....................................................   $   4,385,955    $   4,571,604
Net realized loss from investment transactions ...........................            (917)            --
                                                                             -------------    -------------
Net increase in net assets resulting from operations .....................       4,385,038        4,571,604
                                                                             -------------    -------------
Distributions to shareholders from net investment income .................      (4,385,955)      (4,571,604)
                                                                             -------------    -------------
Portfolio share transactions at net asset value of $1.00 per share:
   Proceeds from shares sold .............................................     201,403,309      148,542,887
   Net asset value of shares issued to shareholders in
      reinvestment of distributions from net investment income ...........       4,385,955        4,571,604
   Cost of shares redeemed ...............................................    (187,750,612)    (163,864,512)
                                                                             -------------    -------------
   Net increase (decrease) in net assets from Portfolio share transactions      18,038,652      (10,750,021)
                                                                             -------------    -------------
Increase (decrease) in net assets ........................................      18,037,735      (10,750,021)
Net assets at beginning of period ........................................      79,747,891       90,497,912
                                                                             -------------    -------------
Net assets at end of period ..............................................   $  97,785,626    $  79,747,891
                                                                             =============    =============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


20
<PAGE>

                                                            FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                               ------------------------------------------------------------------------------------------------
                                1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of period ......   $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from investment
    operations:
  Net investment
    income .................     .050      .055      .037      .025      .033      .057      .076      .088      .068      .060
Less distributions from
  net investment income ....    (.050)    (.055)    (.037)    (.025)    (.033)    (.057)    (.076)    (.088)    (.068)    (.060)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
end of period ..............   $ 1.00    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000    $1.000
                               ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ...........     5.09      5.65      3.72      2.54      3.33      5.81      7.83      8.84      7.08      5.95
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ......       98        80        90        49        34        28        32        15        11         8
Ratio of operating
  expenses, net to
  average daily net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .72       .75       .75
Ratio of operating expenses
  before expense reductions,
  to average daliy net
  assets (%) ...............      .46       .50       .56       .66       .64       .67       .69       .81      1.04      1.12
Ratio of net
  investment income
  to average daily
  net assets (%) ...........     4.98      5.51      3.80      2.55      3.26      5.67      7.57      8.53      6.99      6.06
</TABLE>


                                                                              21
<PAGE>

BOND PORTFOLIO
INVESTMENT PORTFOLIO as of December 31, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of        Principal                                                                    Market
                                 Portfolio    Amount ($)                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>          <C>                                                           <C>
                                   11.9%               REPURCHASE AGREEMENT

                                             7,959,000    Repurchase Agreement with Donaldson, Lufkin & Jenrette dated
                                                             12/31/96 at 6.7% to be repurchased at $7,961,962
                                                             on 1/2/97 collateralized by a $7,632,000 U.S. Treasury
                                                             Note, 7.75%, 11/30/99 (Cost $7,959,000) ..............        7,959,000
                                                                                                                          ----------

                                   15.8%               U.S. TREASURY OBLIGATIONS

                                             1,000,000    U.S. Treasury Note, 6.125%, 7/31/00 .....................        1,000,000
                                             9,750,000    U.S. Treasury Note, 5.625%, 11/30/00 ....................        9,573,233
                                                                                                                          ----------
                                                            Total U.S. Treasury Obligations (Cost $10,807,479) ....       10,573,233
                                                                                                                          ----------

                                    6.9%               U.S. GOV'T GUARANTEED MORTGAGES

                                             1,444,741    Government National Mortgage Association
                                                             10%, 8/15/20 (a) .....................................        1,589,894
                                             2,928,088    Government National Mortgage Association
                                                             8.5%, 4/15/25 (a) ....................................        3,036,955
                                                                                                                          ----------
                                                            Total U.S. Gov't Guaranteed
                                                              Mortgages (Cost $4,555,736) .........................        4,626,849
                                                                                                                          ----------

                                   20.9%               U.S. GOVERNMENT AGENCY PASS-THRUS

                                               655,216    Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ........          674,564
                                             1,954,508    Federal National Mortgage Association 6.5%, 2/1/26 (a) ..        1,866,555
                                             3,015,599    Federal National Mortgage Association 7%, 7/1/26 (a) ....        2,948,682
                                             1,698,829    Federal National Mortgage Association, 8%, 12/1/09 (a) ..        1,749,913
                                             1,996,810    Federal National Mortgage Association, 6.5%, 3/1/26 (a) .        1,904,458
                                             4,941,162    Federal National Mortgage Association, 7%, 4/1/26 (a) ...        4,831,518
                                                                                                                          ----------
                                                            Total U.S. Government Agency Pass-Thrus
                                                             (Cost $13,914,092) ...................................       13,975,690
                                                                                                                          ----------

                                    0.1%               COLLATERALIZED MORTGAGE OBLIGATIONS

                                                32,214    Federal National Mortgage Association, REMIC,
                                                             8.5%, 4/25/18 (Cost $30,583) .........................           32,153
                                                                                                                          ----------

                                    3.2%               FOREIGN BONDS-U.S. $ DENOMINATED

                                             1,000,000    Korea Development Bank, 9.6%, 12/1/00 ...................        1,101,110
                                             1,000,000    Nippon Telegraph & Telephone Corp., 9.5%, 7/27/98 .......        1,050,980
                                                                                                                          ----------
                                                            Total Foreign Bonds-U.S. $ Denominated
                                                             (Cost $2,118,349) ....................................        2,152,090
                                                                                                                          ----------

                                    7.2%               ASSET-BACKED SECURITIES


       Automobile Receivables       1.5%
                                             1,000,000    Premier Auto Trust Asset Backed Certificate Series 1996-
                                                             A4, 6.75%, 11/6/00 ...................................        1,011,250
                                                                                                                          ----------

       Credit Card Receivables      1.5%
                                             1,000,000    Standard Credit Card Trust, Series 1990-3B, 9.85%,
                                                             7/10/97 ..............................................        1,018,750
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


22
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of        Principal                                                                    Market
                                 Portfolio    Amount ($)                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>          <C>                                                           <C>
       Home Equity Loans            2.7%
                                             1,499,989    Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
                                                             5.58%, 1/15/11 .......................................        1,489,207
                                               307,952    United Companies Financial Corp., Home Equity Loan
                                                             Series 1993-B1, 6.075%, 7/25/14 ......................          302,707
                                                                                                                          ----------
                                                                                                                           1,791,914
                                                                                                                          ----------

       Manufactured Housing
       Receivables                  1.5%
                                               964,749    Green Tree Financial Corp., Securitized NIM Series
                                                             1994-B, 7.85%, 7/15/04 ...............................          973,492
                                                                                                                          ----------
                                                            Total Asset-Backed Securities (Cost $4,894,031) .......        4,795,406
                                                                                                                          ----------

                                   34.0%               CORPORATE BONDS


       Consumer Staples             1.7%
                                             1,000,000    J. Seagram & Sons Inc., 9%, 8/15/21 .....................        1,159,270
                                                                                                                          ----------

       Financial                   14.1%
                                             2,000,000    Associates Corp. of North America, 6.625%, 5/15/01 ......        1,999,160
                                             1,000,000    BankAmerica Corp., 7.125%, 5/1/06 .......................        1,005,450
                                             1,750,000    First Union Capital II, 7.85%, 1/1/27 ...................        1,734,023
                                             1,500,000    Highwoods/Forsyth L.P., 7%, 12/1/06 .....................        1,479,330
                                             1,500,000    Midland Bank PLC, 6.95%, 3/15/11 ........................        1,447,185
                                               750,000    Spieker Properties, Inc., 7.875%, 12/1/16 ...............          744,375
                                             1,000,000    Susa Partnership L.P., 7.125%, 11/1/03 ..................          992,850
                                                                                                                          ----------
                                                                                                                           9,402,373
                                                                                                                          ----------

       Media                        3.1%
                                             1,000,000    Tele-Communications, Inc., 8.65%, 9/15/04 ...............        1,004,910
                                             1,000,000    Time Warner Inc., 9.125%, 1/15/13 .......................        1,091,700
                                                                                                                          ----------
                                                                                                                           2,096,610
                                                                                                                          ----------

       Durables                     3.9%
                                             1,000,000    Lockheed Martin Corp., 9%, 1/15/22 ......................        1,156,540
                                             1,500,000    Northrop Grumman Corp., 7.875%, 3/1/26 ..................        1,503,495
                                                                                                                          ----------
                                                                                                                           2,660,035
                                                                                                                          ----------

       Manufacturing                4.3%
                                             1,000,000    ARCO Chemical Co., 9.375%, 12/15/05 .....................        1,159,110
                                             1,000,000    Monsanto Co., 8.7%, 10/15/21 ............................        1,143,550
                                               500,000    Newport News Shipbuilding Co., 8.625%, 12/1/06 ..........          512,500
                                                                                                                          ----------
                                                                                                                           2,815,160
                                                                                                                          ----------

       Technology                   1.7%
                                             1,000,000    Loral Corp., 8.375%, 6/15/24 ............................        1,107,010
                                                                                                                          ----------

       Energy                       3.4%
                                             1,000,000    Atlantic Richfield Co., 9.125%, 8/1/31 ..................        1,211,550
                                             1,000,000    Enron Corp., 10%, 6/1/98 ................................        1,050,400
                                                                                                                          ----------
                                                                                                                           2,261,950
                                                                                                                          ----------

       Transportation               1.8%
                                               600,000    American Airlines, 8.8%, 9/16/15 ........................          654,894
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              23
<PAGE>


BOND PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                            Market
                                                 Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>          <C>                                                           <C>

                                               575,000    American Airlines, 8.39%, 1/2/17 ........................          608,810
                                                                                                                          ----------
                                                                                                                           1,263,704
                                                                                                                          ----------

                                                            Total Corporate Bonds (Cost $21,685,522) ..............       22,766,112
                                                                                                                          ----------
------------------------------------------------------------------------------------------------------------------------------------

                                                            Total Investment Portfolio -- 100.0%
                                                             (Cost $65,964,792) (b) ...............................       66,880,533
                                                                                                                          ==========
------------------------------------------------------------------------------------------------------------------------------------

   (a) Effective maturities will be shorter due to prepayments.

   (b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal
       income tax purposes of $65,972,685 was as follows:
       Aggregate gross unrealized appreciation for all investments in which there is an excess of market           $    1,414,221
       value over tax cost
       Aggregate gross unrealized depreciation for all investments in which there is an excess of tax                    (506,373)
                                                                                                                   ---------------
           cost over market value
       Net unrealized appreciation                                                                                 $      907,848
                                                                                                                   ==============
------------------------------------------------------------------------------------------------------------------------------------

       Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for the year
       ended December 31, 1996, aggregated $35,306,379 and $18,229,980, respectively. Purchases and sales of U.S. Government
       securities for the year ended December 31, 1996, aggregated $13,912,703 and $60,025,147, respectively.
------------------------------------------------------------------------------------------------------------------------------------

       The aggregate face value of futures contracts opened and closed during the year ended December 31, 1996, for the Bond
       Portfolio, was $227,390,005 and $227,390,005.
</TABLE>

    The accompanying notes are an integral part of the financial statements.


24
<PAGE>

                                                                  BOND PORTFOLIO
                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (including repurchase agreements of
   $7,959,000)(identified cost $65,964,792) (Note A) ......................                   $ 66,880,533
Cash ......................................................................                            779
Receivables:
   Interest ...............................................................                        658,959
   Portfolio shares sold ..................................................                         50,332
                                                                                              ------------
      Total assets ........................................................                     67,590,603
Liabilities
Payables:
   Investments purchased ..................................................    $  1,753,343
   Portfolio shares redeemed ..............................................          25,442
   Accrued management fee (Note B) ........................................          26,968
   Other accrued expenses (Note B) ........................................          15,429
                                                                               ------------
      Total liabilities ...................................................                      1,821,182
                                                                                              ------------
Net assets, at market value ...............................................                   $ 65,769,421
                                                                                              ============
Net Assets
Net assets consist of:
   Undistributed net investment income ....................................                   $  1,075,196
   Net unrealized appreciation on investments .............................                        915,741
   Accumulated net realized gain ..........................................                         89,617
   Paid-in capital ........................................................                     63,688,867
                                                                                              ------------
Net assets, at market value ...............................................                   $ 65,769,421
                                                                                              ============
Net asset value, offering and redemption price per share
   ($65,769,4219,775,320 outstanding shares of beneficial
interest, no par value, unlimited number of shares authorized) ............                   $       6.73
                                                                                              ============
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                                                              25
<PAGE>

BOND PORTFOLIO
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
   Interest ...............................................................                   $  4,183,772
   Expenses (Note A):
      Management fee (Note B) .............................................   $    291,740
      Custodian and accounting fees (Note B) ..............................         53,210
      Trustees' fees (Note B) .............................................         15,916
      Auditing ............................................................          6,818
      Legal ...............................................................          3,046
   Other ..................................................................          6,308         377,038
                                                                              ------------    ------------
   Net investment income ..................................................                      3,806,734
                                                                                              ------------

Net realized and unrealized gain (loss) on investment transactions
   Net realized gain (loss) from:
      Investments .........................................................        199,592
      Futures .............................................................        306,666
      Foreign currency related transactions ...............................         92,728         598,986
                                                                              ------------
   Net unrealized appreciation (depreciation) during the period on:
      Investments .........................................................     (2,534,446)
   Foreign currency related transactions ..................................         20,098      (2,514,348)
                                                                              ------------    ------------
   Net loss on investment transactions ....................................                     (1,915,362)
                                                                                              ------------
Net increase in net assets resulting from operations ......................                   $  1,891,372
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


26
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
   Net investment income ..................................................   $   3,806,734    $   8,707,166
   Net realized gain from investment transactions .........................         598,986        5,636,324
   Net unrealized appreciation (depreciation) on investment
      transactions during the period ......................................      (2,514,348)       8,197,950
Net increase in net assets resulting from operations ......................       1,891,372       22,541,440
                                                                              -------------    -------------
Distributions to shareholders from net investment income ..................      (5,405,378)      (9,011,114)
                                                                              -------------    -------------
Portfolio share transactions:
   Proceeds from shares sold ..............................................      27,555,910       57,366,869
   Net asset value of shares issued to shareholders in
      reinvestment of distributions .......................................       5,405,378        9,011,114
   Cost of shares redeemed ................................................     (36,192,318)    (149,798,464)
                                                                              -------------    -------------
Net decrease in net assets from Portfolio share transactions ..............      (3,231,030)     (83,420,481)
                                                                              -------------    -------------
Decrease in net assets ....................................................      (6,745,036)     (69,890,155)
Net assets at beginning of period .........................................      72,514,457      142,404,612
                                                                              -------------    -------------
Net assets at end of period (including undistributed net investment
   income of $1,075,196 and $2,587,204, respectively) .....................   $  65,769,421    $  72,514,457
                                                                              =============    =============

Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .................................      10,126,562       21,973,579
                                                                              -------------    -------------
   Shares sold ............................................................       4,122,227        8,433,349
   Shares issued to shareholders in reinvestment of distributions .........         806,843        1,343,624
   Shares redeemed ........................................................      (5,280,312)     (21,623,990)
                                                                              -------------    -------------
   Net decrease in Portfolio shares .......................................        (351,242)     (11,847,017)
                                                                              -------------    -------------
Shares outstanding at end of period .......................................       9,775,320       10,126,562
                                                                              =============    =============
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                                                              27
<PAGE>

BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31, (a)
                               ------------------------------------------------------------------------------------------------
                                1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of  period .....   $ 7.16    $ 6.48    $ 7.42    $ 7.19    $ 7.37    $ 6.73    $ 6.72    $ 6.39    $ 6.47    $ 6.67
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Income from
  investment operations:
    Net investment
      income ...............      .41       .44       .43       .48       .49       .52       .53       .54       .54       .49
    Net realized and
      unrealized gain
      (loss) on
      investment
    transactions ...........     (.22)      .69      (.77)      .38      (.02)      .61      (.02)      .18      (.19)     (.40)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total from investment
operations .................      .19      1.13      (.34)      .86       .47      1.13       .51       .72       .35       .09
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Less distributions from:
  Net investment
    income .................     (.62)     (.45)     (.43)     (.48)     (.46)     (.47)     (.50)     (.39)     (.43)     (.29)
  Net realized gains
    on investment
    transactions ...........     --        --        (.17)     (.15)     (.19)     (.02)     --        --        --        --
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Total distributions ........     (.62)     (.45)     (.60)     (.63)     (.65)     (.49)     (.50)     (.39)     (.43)     (.29)
                               ------    ------    ------    ------    ------    ------    ------    ------    ------    ------
Net asset value,
end of period ..............   $ 6.73    $ 7.16    $ 6.48    $ 7.42    $ 7.19    $ 7.37    $ 6.73    $ 6.72    $ 6.39    $ 6.47
                               ======    ======    ======    ======    ======    ======    ======    ======    ======    ======
Total Return (%) ...........     2.82     18.17     (4.79)    12.38      7.01     17.61      8.06     11.65      5.46      1.22
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ......       66        73       142       129       113        74        42        22         3         3
Ratio of operating
  expenses, net to
  average net
  assets (%) ...............      .61       .56       .58       .61       .63       .69       .73       .75       .75       .75
Ratio of operating expenses
  before expense reductions,
  to average daliy net
  assets (%) ...............      .61       .56       .58       .61       .63       .69       .73       .84      1.40      2.01
Ratio of net investment
  income to average
  net assets (%) ...........      6.2      6.29      6.43      6.59      6.89      7.51      8.05      8.04      7.86      7.53
Portfolio turnover
  rate (%) .................    85.11    177.21     96.55    125.15     87.00    115.86     71.02    103.41    245.23    186.05

(a) Based on monthly average shares outstanding during the period.
</TABLE>


28
<PAGE>

                                                              BALANCED PORTFOLIO
                                    INVESTMENT PORTFOLIO as of December 31, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of          Principal                                                                  Market
                                 Portfolio      Amount ($)                                                                 Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>
                                    4.5%               REPURCHASE AGREEMENT

                                               4,003,000    Repurchase Agreement with Donaldson, Lufkin & Jenrette
                                                             dated 12/31/96 at 6.7% to be repurchased at $4,004,490
                                                             on 1/2/97, collateralized by a $3,703,000 U.S. Treasury
                                                             Note, 8.5%, 11/15/00 (Cost $4,003,000) ...............        4,003,000
                                                                                                                          ----------
                                   10.2%               U.S. GOVERNMENT & AGENCIES

                                               1,200,000    U.S. Treasury Bond, 7.25%, 5/15/16 ....................        1,267,128
                                                 300,000    U.S. Treasury Bond, 8.125%, 5/15/21 ...................          348,093
                                               1,850,000    U.S. Treasury Bond, 6.25%, 8/15/23 ....................        1,734,375
                                                 550,000    U.S. Treasury Note, 4.75%, 2/15/97 ....................          549,400
                                                 250,000    U.S. Treasury Note, 6.125%, 5/31/97 ...................          250,703
                                               1,000,000    U.S. Treasury Note, 5.25%, 7/31/98 ....................          991,720
                                               2,000,000    U.S. Treasury Note, 5.75%, 12/31/98 ...................        1,995,320
                                                 500,000    U.S. Treasury Note, 6.125%, 7/31/00 ...................          500,000
                                               1,150,000    U.S. Treasury Note, 5.625%, 11/30/00 ..................        1,129,150
                                                 800,000    U.S. Treasury Separate Trading Registered Interest and
                                                             Principal Securities, 11/15/10 (6.75%)** .............          318,624
                                                                                                                          ----------
                                                            Total U.S. Government & Agencies (Cost $9,081,356) ....        9,084,513
                                                                                                                          ----------
                                    3.1%               U.S. GOV'T GUARANTEED MORTGAGES

                                                 535,318    Government National Mortgage Association, 10%,
                                                             8/15/20 (a) ..........................................          589,101
                                                 528,233    Government National Mortgage Association, 8.75%,
                                                             12/15/24 (a) .........................................          544,739
                                               1,567,723    Government National Mortgage Association, 8.5%,
                                                             with various maturities to 9/15/26 (a) ...............        1,625,742
                                                                                                                          ----------
                                                            Total U.S. Gov't Guaranteed Mortgages (Cost $2,685,721)        2,759,582
                                                                                                                          ----------
                                    9.3%               U.S. GOVERNMENT AGENCY PASS-THRUS

                                               1,092,026    Federal Home Loan Mortgage Corp., 8%, 4/1/08 (a) ......        1,124,273
                                               2,577,568    Federal National Mortgage Association, 6.5%, with
                                                             various maturities to 2/1/26 (a) .....................        2,461,576
                                               2,471,628    Federal National Mortgage Association, 7%, 4/1/26 (a) .        2,416,782
                                               2,259,913    Federal National Mortgage Association, 7%,  9/1/26 (a)         2,209,765
                                                                                                                          ----------
                                                            Total U.S. Government Agency Pass-Thrus
                                                             (Cost $8,177,335) ....................................        8,212,396
                                                                                                                          ----------
                                    0.0%               COLLATERALIZED MORTGAGE OBLIGATIONS

                                                  32,214    Federal National Mortgage Association, REMIC, 8.5%,
                                                             4/25/18 (Cost $30,945) ...............................           32,153
                                                                                                                          ----------
                                    0.5%               FOREIGN BONDS - U.S. $ DENOMINATED

                                                 250,000    ABN-AMRO Bank NV, 7.75%, 5/15/23 ......................          257,010
                                                 250,000    Seagram Co., Ltd., 6.875%, 9/1/23 .....................          230,900
                                                                                                                          ----------
                                                            Total Foreign Bonds - U.S. $ Denominated
                                                            (Cost $461,469) .......................................          487,910
                                                                                                                          ----------
                                    2.8%               ASSET-BACKED SECURITIES


       Automobile Receivables       0.7%          98,937    Premier Auto Trust Asset Backed Certificate Series
                                                             1994-3, 6.8%, 12/2/99                                            99,400
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                                                              29
<PAGE>

BALANCED PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of          Principal                                                                  Market
                                 Portfolio      Amount ($)                                                                 Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>

                                                 500,000    Premier Auto Trust Asset Backed Certificate Series
                                                             1996-3, 6.5%, 3/6/00 .................................          503,435
                                                                                                                          ----------
                                                                                                                             602,835
                                                                                                                          ----------

       Credit Card Receivables      1.3%         850,000    Sears Credit Account Master Trust, Series 1995-4, 6.25%,
                                                             1/15/03 ..............................................          853,451
                                                 250,000    Standard Credit Card Trust, Series 1990-6B, 9.625%,
                                                             9/10/97 ..............................................          255,703
                                                                                                                          ----------
                                                                                                                           1,109,154
                                                                                                                          ----------

       Home Equity Loans            0.7%         499,996    Contimortgage Home Equity Loan Trust, Series 1996-1 A2,
                                                            5.58%, 1/15/11 ........................................          496,402
                                                  76,988    United Companies Financial Corp., Home Equity Loan
                                                             Series 1993-B1, 6.075%, 7/25/14 ......................           75,676
                                                                                                                          ----------
 ..................................................................................................................          572,078
                                                                                                                          ----------

       Manufactured Housing
        Receivables                 0.1%         119,990    Green Tree Financial Corp. Series 1995-7 A1, 6%, 10/15/26        120,027
                                                                                                                          ----------
                                                            Total Asset-Backed Securities (Cost $2,418,966) .......        2,404,094
                                                                                                                          ----------
                                   10.9%               CORPORATE BONDS


       Consumer Discretionary       0.3%         250,000    Price/Costco Inc., 7.125%, 6/15/05 ....................          250,030
                                                                                                                          ----------

       Consumer Staples             0.3%         270,000    J. Seagram & Sons Inc., 7%, 4/15/08 ...................          266,406
                                                                                                                          ----------

       Financial                    5.3%         750,000    Associates Corp. of North America, 6.625%, 5/15/01 ....          749,685
                                               1,000,000    Highwoods/Forsyth L.P., 7%, 12/1/06 ...................          986,220
                                                 500,000    Midland Bank PLC, 6.95%, 3/15/11 ......................          482,395
                                                 250,000    NationsBank Corp., 7.25%, 10/15/25 ....................          240,265
                                               1,000,000    Southern National Corp., 7.05%, 5/23/03 ...............        1,009,060
                                                 750,000    Spieker Properties, Inc., 7.875%, 12/1/16 .............          744,375
                                                 500,000    Wells Fargo & Co., 6.875%, 4/1/06 .....................          491,665
                                                                                                                          ----------
                                                                                                                           4,703,665
                                                                                                                          ----------

       Media                        1.8%         500,000    Tele-Communications, Inc., 8.65%, 9/15/04 .............          502,455
                                               1,000,000    Time Warner Inc., 9.125%, 1/15/13 .....................        1,091,700
                                                                                                                          ----------
                                                                                                                           1,594,155
                                                                                                                          ----------

       Durables                     0.9%         250,000    Lockheed Martin Corp., 9%, 1/15/22 ....................          289,135
                                                 500,000    Northrop Grumman Corp., 7.875%, 3/1/26 ................          501,165
                                                                                                                          ----------
                                                                                                                             790,300
                                                                                                                          ----------

       Manufacturing                0.3%         250,000    Corning Inc., 8.75%, 7/15/99 ..........................          261,308
                                                                                                                          ----------

       Technology                   0.6%         500,000    Loral Corp., 8.375%, 6/15/24 ..........................          553,505
                                                                                                                          ----------

       Energy                       0.9%         500,000    Atlantic Richfield Co., 8.25%, 2/1/22 .................          550,965
                                                 250,000    Enron Corp., 10%, 6/1/98 ..............................          262,600
                                                                                                                          ----------
                                                                                                                             813,565
                                                                                                                          ----------

       Transportation               0.2%         100,000    American Airlines, 8.8%, 9/16/15 ......................          109,149
                                                 100,000    American Airlines, 8.39%, 1/2/17 ......................          105,880
                                                                                                                          ----------
                                                                                                                             215,029
                                                                                                                          ----------

       Utilities                    0.3%         250,000    Commonwealth Edison Co., 9.05%, 10/15/99 ..............          263,093
                                                                                                                          ----------
                                                            Total Corporate Bonds (Cost $9,479,915) ...............        9,711,056
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


30
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio        Shares                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>
                                   58.7%               COMMON STOCKS


Consumer Discretionary              4.8%

       Department &
       Chain Stores                 3.2%          14,200    Federated Department Stores, Inc.* ....................          484,575
                                                  10,300    Home Depot, Inc. ......................................          516,288
                                                  38,900    Price/Costco Inc.* ....................................          977,363
                                                  37,400    Wal-Mart Stores Inc. ..................................          855,525
                                                                                                                          ----------
                                                                                                                           2,833,751
                                                                                                                          ----------

       Hotels & Casinos             0.7%          39,000    Host Marriott Corp. ...................................          624,000
                                                                                                                          ----------

       Specialty Retail             0.9%          26,800    Corporate Express, Inc.* ..............................          788,925
                                                                                                                          ----------

Consumer Staples                   12.1%

       Alcohol & Tobacco            3.6%          27,000    Anheuser-Busch Companies, Inc. ........................        1,080,000
                                                  18,400    Philip Morris Companies Inc. ..........................        2,072,300
                                                                                                                          ----------
                                                                                                                           3,152,300
                                                                                                                          ----------

       Consumer Electronic &
       Photographic Products        0.7%
                                                   8,900    Duracell International Inc. ...........................          621,888
                                                                                                                          ----------

       Food & Beverage              2.2%          37,300    Coca-Cola Co., Inc. ...................................        1,962,913
                                                                                                                          ----------

       Package Goods/
       Cosmetics                    5.6%          19,500    Avon Products Inc. ....................................        1,113,938
                                                  14,500    Colgate-Palmolive Co. .................................        1,337,625
                                                   8,900    Gillette Co. ..........................................          691,975
                                                  12,400    Procter & Gamble Co. ..................................        1,333,000
                                                  18,700    Revlon, Inc. "A"* .....................................          558,662
                                                                                                                          ----------
                                                                                                                           5,035,200
                                                                                                                          ----------

Health                              9.9%

       Biotechnology                0.7%          11,900    Amgen Inc.* ...........................................          647,063
                                                                                                                          ----------

       Health Industry Services     1.3%           9,900    HBO & Company .........................................          587,813
                                                  12,200    United Healthcare Corp. ...............................          549,000
                                                                                                                          ----------
                                                                                                                           1,136,813
                                                                                                                          ----------

       Medical Supply &
       Specialty                    0.9%          11,700    Medtronic Inc. ........................................          795,600
                                                                                                                          ----------

       Pharmaceuticals              7.0%           9,900    American Home Products Corp. ..........................          580,387
                                                   8,058    Eli Lilly & Co. .......................................          588,234
                                                  22,600    Johnson & Johnson .....................................        1,124,350
                                                  17,900    Merck & Co. Inc. ......................................        1,418,575
                                                  10,000    Novartis AG (ADR) .....................................          571,875
                                                  13,100    Pfizer, Inc. ..........................................        1,085,662
                                                  12,700    SmithKline Beecham PLC (ADR) ..........................          863,600
                                                                                                                          ----------
                                                                                                                           6,232,683
                                                                                                                          ----------

Financial                           5.0%

       Banks                        1.5%           5,600    NationsBank Corp. .....................................          547,400
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              31
<PAGE>

BALANCED PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio        Shares                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>

                                                  12,400    State Street Boston Corp. .............................          799,800
                                                                                                                          ----------
                                                                                                                           1,347,200
                                                                                                                          ----------

       Insurance                    2.4%          11,550    American International Group, Inc. ....................        1,250,288
                                                   8,400    MBIA Inc. .............................................          850,500
                                                                                                                          ----------
                                                                                                                           2,100,788
                                                                                                                          ----------

       Consumer Finance             0.5%           9,500    Associates First Capital Corp. ........................          419,188
                                                                                                                          ----------

       Other Financial
       Companies                    0.6%          14,700    Federal National Mortgage Association .................          547,575
                                                                                                                          ----------

Media                               3.0%

       Advertising                  1.2%          21,900    Interpublic Group of Companies Inc. ...................        1,040,250
                                                                                                                          ----------

       Broadcasting &
        Entertainment               1.8%          29,800    Clear Channel Communications, Inc.* ...................        1,076,525
                                                   7,500    Walt Disney Co. .......................................          522,188
                                                                                                                          ----------
                                                                                                                           1,598,713
                                                                                                                          ----------

Service Industries                  5.1%

       Electronic Data
       Processing Services          2.2%          27,700    Electronic Data Systems Corp. .........................        1,198,025
                                                  20,200    First Data Corp. ......................................          737,300
                                                                                                                          ----------
                                                                                                                           1,935,325
                                                                                                                          ----------

       Environmental Services       0.3%          10,000    U.S. Filter Corp.* ....................................          317,500
                                                                                                                          ----------

       Miscellaneous Commercial
       Services                     0.5%          24,800    Sensormatic Electronics Corp. .........................          415,400
                                                                                                                          ----------

       Miscellaneous Consumer
       Services                     1.4%          22,700    CUC International Inc.* ...............................          539,125
                                                  24,100    Service Corp. International ...........................          674,800
                                                                                                                          ----------
                                                                                                                           1,213,925
                                                                                                                          ----------

       Printing/Publishing          0.7%           8,800    Reuters Holdings PLC "B" (ADR) ........................          673,200
                                                                                                                          ----------

Durables                            2.1%

       Telecommunications
       Equipment                                  11,200    Ascend Communications, Inc.* ..........................          695,800
                                                   6,900    Cascade Communications Corp.* .........................          380,363
                                                  12,900    Nokia AB Oy (ADR) .....................................          743,363
                                                                                                                          ----------
                                                                                                                           1,819,526
                                                                                                                          ----------

Manufacturing                       7.2%

       Chemicals                    1.7%          24,300    Monsanto Co. ..........................................          944,663
                                                  12,500    Praxair Inc. ..........................................          576,563
                                                                                                                          ----------
                                                                                                                           1,521,226
                                                                                                                          ----------

       Diversified
       Manufacturing                2.6%          18,100    General Electric Co. ..................................        1,789,638
                                                   8,600    Honeywell, Inc. .......................................          565,450
                                                                                                                          ----------
                                                                                                                           2,355,088
                                                                                                                          ----------

       Electrical Products          1.9%          12,000    Emerson Electric Co. ..................................        1,161,000
                                                  14,900    FORE Systems, Inc.* ...................................          489,838
                                                                                                                          ----------

</TABLE>

    The accompanying notes are an integral part of the financial statements.


32
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio        Shares                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>          <C>                                                           <C>

                                                                                                                           1,650,838
                                                                                                                          ----------

       Office Equipment/
       Supplies                     1.0%          16,800    Xerox Corp. ...........................................          884,100
                                                                                                                          ----------

Technology                          8.6%

       Computer Software            3.3%          11,650    Computer Associates International, Inc. ...............          579,588
                                                  28,600    Informix Corp.* .......................................          582,725
                                                  15,800    Microsoft Corp.* ......................................        1,305,475
                                                  10,200    Oracle Systems Corp.* .................................          425,850
                                                                                                                          ----------
                                                                                                                           2,893,638
                                                                                                                          ----------

       Electronic Data
        Processing                  0.7%          15,300    Ceridian Corp.* .......................................          619,650
                                                                                                                          ----------

       Office/Plant Automation      2.4%           7,400    3Com Corp.* ...........................................          542,975
                                                  23,400    Cabletron Systems Inc.* ...............................          778,050
                                                  13,100    Cisco Systems, Inc.* ..................................          833,488
                                                                                                                          ----------
                                                                                                                           2,154,513
                                                                                                                          ----------

       Semiconductors               2.2%          21,500    Advanced Micro Devices Inc.* ..........................          553,625
                                                  18,600    Atmel Corp.* ..........................................          616,125
                                                   6,100    Intel Corp. ...........................................          798,718
                                                                                                                          ----------
                                                                                                                           1,968,468
                                                                                                                          ----------

Energy                              0.9%

       Oil/Gas Transmission                       17,900    Enron Corp. ...........................................          771,938
                                                                                                                          ----------
                                                            Total Common Stocks (Cost $41,878,330) ................       52,079,185
                                                                                                                          ----------

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

                                                            Total Investment Portfolio -- 100.0%
                                                             (Cost $78,217,037) (b) ...............................       88,773,889
                                                                                                                          ==========
------------------------------------------------------------------------------------------------------------------------------------

      * Non-income producing security.
     ** Yield; bond equivalent yield to maturity; not a coupon rate (unaudited).
    (a) Effective maturities will be shorter due to prepayments.
    (b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
        tax purposes of $78,237,142 was as follows:
        Aggregate gross unrealized appreciation for all investments in which there is an excess of market .........      11,609,029
            value over tax cost
        Aggregate gross unrealized depreciation for all investments in which there is an excess of tax ............      (1,072,282)
                                                                                                                     ---------------
            cost over market value
        Net unrealized appreciation ...............................................................................  $   10,536,747
                                                                                                                     ==============

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

        Purchases and sales of investment securities (excluding short-term investments and U.S. Government securities), for the year
        ended December 31, 1996, aggregated $56,672,487 and $39,756,709, respectively. Purchases and sales of U.S. Government
        securities for the year ended December 31, 1996, aggregated $5,463,914 and $8,207,745, respectively.

</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              33
<PAGE>

BALANCED PORTFOLIO
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (identified cost $78,217,037) (Note A)                                 $ 88,773,889
Cash                                                                                                 1,306
Receivables:
   Dividends and interest                                                                          437,539
   Portfolio shares sold                                                                           340,753
                                                                                              ------------
      Total assets                                                                              89,553,487
Liabilities
Payables:
   Investments purchased                                                       $  1,150,199
   Accrued management fee (Note B)                                                   35,508
   Other accrued expenses (Note B)                                                   24,943
                                                                               ------------
      Total liabilities                                                           1,210,650
                                                                               ------------
Net assets, at market value                                                    $ 88,342,837
                                                                               ============

Net Assets
Net assets consist of:
   Undistributed net investment income                                                        $    672,177
   Net unrealized appreciation on investments                                                   10,556,852
   Accumulated net realized gain                                                                 4,797,576
   Paid-in capital                                                                              72,316,232
                                                                                              ------------
Net assets, at market value                                                                   $ 88,342,837
                                                                                              ============
Net asset value, offering and redemption price per share
   ($88,342,837/7,608,722 outstanding shares of beneficial
   interest, no par value, unlimited number of shares authorized)                             $      11.61
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


34
<PAGE>


                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
   Income:
      Interest ............................................................                   $  2,099,138
      Dividends (net of foreign taxes withheld of $5,019) .................                        580,951
                                                                                              ------------
                                                                                                 2,680,089
   Expenses (Note A):
      Management fee (Note B) .............................................    $    372,176
      Custodian and accounting fees (Note B) ..............................          60,938
      Trustees' fees (Note B) .............................................          16,326
      Auditing ............................................................           9,672
      Legal ...............................................................             388
      Registration fees ...................................................           4,946
      Other ...............................................................           6,896        471,342
                                                                               ------------   ------------
   Net investment income ..................................................                      2,208,747
                                                                                              ------------
Net realized and unrealized gain on investment transactions
   Net realized gain from:
      Investments .........................................................       4,867,034
      Foreign currency related transactions ...............................          32,727      4,899,761
                                                                               ------------
   Net unrealized appreciation during the period on:
      Investments .........................................................       1,629,706
      Foreign currency related transactions ...............................           5,965      1,635,671
                                                                               ------------   ------------
   Net gain on investment transactions ....................................                      6,535,432
                                                                                              ------------
Net increase in net assets resulting from operations ......................                   $  8,744,179
                                                                                              ============
</TABLE>


    The accompanying notes are an integral part of the financial statements.


                                                                              35
<PAGE>

BALANCED PORTFOLIO
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
   Net investment income ..................................................   $  2,208,747    $  1,709,893
   Net realized gain from investment transactions .........................      4,899,761       2,307,029
   Net unrealized appreciation on investment transactions
      during the period ...................................................      1,635,671       9,159,100
                                                                              ------------    ------------
Net increase in net assets resulting from operations ......................      8,744,179      13,176,022
                                                                              ------------    ------------
Distributions to shareholders from:
   Net investment income ..................................................     (2,028,500)     (1,673,390)
                                                                              ------------    ------------
   Net realized gains from investment transactions ........................     (1,925,657)       (316,977)
                                                                              ------------    ------------
Portfolio share transactions:
   Proceeds from shares sold ..............................................     25,991,787      16,676,142
   Net asset value of shares issued to shareholders in
      reinvestment of distributions .......................................      3,954,157       1,990,367
   Cost of shares redeemed ................................................    (14,318,918)     (7,450,950)
                                                                              ------------    ------------
Net increase in net assets from portfolio share transactions ..............     15,627,026      11,215,559
                                                                              ------------    ------------
Increase in net assets ....................................................     20,417,048      22,401,214
Net assets at beginning of period .........................................     67,925,789      45,524,575
                                                                              ------------    ------------
Net assets at end of period (including undistributed net
   investment income of $672,177 and $483,837, respectively) ..............   $ 88,342,837    $ 67,925,789
                                                                              ============    ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .................................      6,206,064       5,076,236
                                                                              ------------    ------------
   Shares sold ............................................................      2,336,334       1,667,336
   Shares issued to shareholders in reinvestment of distributions .........        360,527         204,454
   Shares redeemed ........................................................     (1,294,203)       (741,962)
                                                                              ------------    ------------
   Net increase in Portfolio shares .......................................      1,402,658       1,129,828
                                                                              ------------    ------------
Shares outstanding at end of period .......................................      7,608,722       6,206,064
                                                                              ============    ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


36
<PAGE>

                                                            FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31, (a)
                               ---------------------------------------------------------------------------------------------------
                                  1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                               ---------------------------------------------------------------------------------------------------
<S>                              <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net asset value,
  beginning of period ........   $10.95    $ 8.97    $10.23    $10.02     $ 9.85    $ 8.10    $ 8.75    $ 7.62    $ 6.88    $ 7.35
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Income from
  investment operations:
  Net investment income ......      .31       .30       .29       .30        .29       .35       .42       .40       .33       .34
  Net realized and unrealized
    gain (loss) on investment
    transactions .............      .95      2.04      (.48)      .42        .36      1.77      (.59)     1.06       .64      (.45)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Total from investment
  operations .................     1.26      2.34      (.19)      .72        .65      2.12      (.17)     1.46       .97      (.11)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Less distributions from:
  Net investment income ......     (.30)     (.30)     (.30)     (.28)      (.29)     (.37)     (.43)     (.33)     (.23)     (.23)
  Net realized gains on
    investment transactions ..     (.30)     (.06)     (.77)     (.23)      (.19)     --        (.05)     --        --        (.13)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Total distributions ..........     (.60)     (.36)    (1.07)     (.51)      (.48)     (.37)     (.48)     (.33)     (.23)     (.36)
                                 ------    ------    ------    ------     ------    ------    ------    ------    ------    ------
Net asset value,
  end of period ..............   $11.61    $10.95    $ 8.97    $10.23     $10.02    $ 9.85    $ 8.10    $ 8.75    $ 7.62    $ 6.88
                                 ======    ======    ======    ======     ======    ======    ======    ======    ======    ======
Total Return (%) .............    11.89     26.67     (2.05)     7.45       6.96     26.93     (1.91)    19.50     14.21     (1.68)
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) ........       88        68        46        45         37        25        16        18        11        12
Ratio of operating expenses,
  net to average net
  assets (%) .................      .60       .65       .75       .75        .75       .75       .75       .75       .75       .75
Ratio of operating expense
  before expense reductions,
  to average daily net assets       .60       .65       .75       .75        .75       .81       .75       .89      1.14      1.20
Ratio of net investment income
  to average net assets (%) ..     2.82      3.01      3.19      3.01       3.01      4.00      5.15      4.74      4.48      4.42
Portfolio turnover rate (%) ..    67.56     87.98    101.64    133.95*     51.66     62.03     49.03     77.98    109.95    111.00
Average commission
  rate paid (b) ..............   $.0535    $ --      $ --      $ --       $ --      $ --      $ --      $ --      $ --      $ --

(a)  Based on monthly average shares outstanding during the period.
(b)  Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
     September 1, 1995.
*    On May 1, 1993, the Portfolio adopted its present name and investment objective which is a balance of growth and income, as
     well as long-term preservation of capital, from a diversified portfolio of equity and fixed income securities. Prior to that
     date, the Portfolio was known as the Managed Diversified Portfolio and its investment objective was to realize a high level of
     long-term total rate of return consistent with prudent investment risk. The portfolio turnover rate increased due to
     implementing the present investment objective. Financial highlights for the seven periods ended December 31, 1993 should not be
     considered representative of the present Portfolio.
</TABLE>


                                                                              37
<PAGE>

GROWTH AND INCOME PORTFOLIO
INVESTMENT PORTFOLIO  as of December 31, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                       % of     Principal                                                                  Market
                                     Portfolio Amount ($)                                                                 Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>                                                           <C>
                                        4.6%            REPURCHASE AGREEMENT

                                                4,176,000   Repurchase Agreement with Donaldson, Lufkin & Jenrette
                                                              dated 12/31/96 at 6.7%to be repurchased at $4,177,554
                                                              on 1/2/97, collateralized by a $4,005,000 U.S. Treasury
                                                              Note, 7.75%, 11/30/99 (Cost $4,176,000) ..................   4,176,000
                                                                                                                          ----------

                                        1.2%            CONVERTIBLE BONDS

Health                                  0.2%

        Pharmaceuticals                           140,000   Sandoz Capital BVI Ltd., 2%, 10/6/02 .......................     150,500
                                                                                                                          ----------

Financial                               0.1%

        Other Financial
        Companies                                  40,000   First Financial Management Corp., 5%, 12/15/99 .............      70,300
                                                                                                                          ----------

Service Industries                      0.3%

        Miscellaneous
        Commercial Services                       335,000   ADT Operations Inc. LYON, 7/6/10 ...........................     216,494
                                                   54,000   Jardine Strategic Holdings Ltd., 7.5%, 5/7/49 ..............      64,800
                                                                                                                          ----------
                                                                                                                             281,294
                                                                                                                          ----------

Energy                                  0.6%

        Oil Companies                              25,000   Atlantic Richfield Co. 9% Exchange Note 9/15/97 ............     537,500
                                                                                                                          ----------
                                                            Total Convertible Bonds (Cost $1,078,290) ..................   1,039,594
                                                                                                                          ----------
                                        2.7%            CONVERTIBLE PREFERRED STOCKS
                                                Shares

Consumer Discretionary                  0.4%

        Department & Chain
        Stores                                      7,400   K mart 7.75% ...............................................     360,750
                                                                                                                          ----------

Financial                               0.7%

        Consumer Finance                0.5%       10,400   Advanta Corp. 6.75% ........................................     421,200
                                                                                                                          ----------
        Real Estate                     0.2%        5,000   Security Capital Industrial Trust "B", 7% ..................     136,250
                                                                                                                          ----------

Manufacturing                           1.6%

        Containers & Paper              1.3%       25,600   Boise Cascade Corp. "G", Cum $1.58 .........................     668,800
                                                   10,800   Bowater, Inc. "B", 7% ......................................     329,400
                                                    4,500   International Paper Co. 5.25% ..............................     205,875
                                                                                                                          ----------
                                                                                                                           1,204,075
                                                                                                                          ----------

        Industrial Specialty            0.2%       10,000   Cooper Industries, Inc. 6% .................................     193,750
        Wholesale Distributors          0.1%        1,400   Alco Standard Corp. 6.5% ...................................     133,700
                                                                                                                          ----------
                                                            Total Convertible Preferred Stocks (Cost $2,457,717) .......   2,449,725
                                                                                                                          ----------

                                       91.5%            COMMON STOCKS

Consumer Discretionary                  3.9%

        Department &
        Chain Stores                    3.8%       19,200   J.C. Penney Co., Inc. ......................................     936,000
                                                   11,500   May Department Stores ......................................     537,625
</TABLE>

    The accompanying notes are an integral part of the financial statements.


38
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                       % of                                                                                Market
                                     Portfolio    Shares                                                                  Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>                                                           <C>
                                                   30,600   Rite Aid Corp. .............................................   1,216,350
                                                                                                                          ----------
                                                   16,700   Sears, Roebuck & Co. .......................................     770,288
                                                                                                                          ----------
                                                                                                                           3,460,263

        Hotels & Casinos                0.1%        5,311   Homestead Village, Inc.* ...................................      95,596
                                                    3,563   Homestead Village, Inc. Warrants* (Expires 10/29/97) .......      28,949
                                                                                                                          ----------
                                                                                                                             124,545
                                                                                                                          ----------

Consumer Staples                       10.5%

        Alcohol & Tobacco               3.8%       24,800   Anheuser-Busch Companies, Inc. .............................     992,000
                                                   17,300   Philip Morris Companies Inc. ...............................   1,948,413
                                                   15,080   RJR Nabisco Holdings Corp. .................................     512,720
                                                                                                                          ----------
                                                                                                                           3,453,133
                                                                                                                          ----------
        Consumer Electronic &
        Photographic Products           1.0%       18,900   Whirlpool Corp. ............................................     881,213
        Food & Beverage                 3.6%       13,000   General Mills, Inc. ........................................     823,875
                                                   37,500   H.J. Heinz Co. .............................................   1,340,625
                                                    6,400   Unilever NV (New York shares) ..............................   1,121,600
                                                                                                                          ----------
                                                                                                                           3,286,100
                                                                                                                          ----------
        Package Goods/
        Cosmetics                       2.1%        4,400   Avon Products Inc. .........................................     251,350
                                                   13,100   Kimberly-Clark Corp. .......................................   1,247,775
                                                    9,500   Tambrands Inc. .............................................     388,313
                                                                                                                          ----------
                                                                                                                           1,887,438
                                                                                                                          ----------

Health                                  8.1%

        Pharmaceuticals                            16,500   American Home Products Corp. ...............................     967,313
                                                   29,100   Baxter International Inc. ..................................   1,193,100
                                                   11,300   Bristol-Myers Squibb Co. ...................................   1,228,875
                                                   19,900   Schering-Plough Corp. ......................................   1,288,525
                                                   10,900   SmithKline Beecham PLC (ADR) ...............................     741,200
                                                   16,600   Warner-Lambert Co. .........................................   1,245,000
                                                   18,200   Zeneca Group PLC ...........................................     512,556
                                                    1,300   Zeneca Group PLC (ADR) .....................................     109,200
                                                                                                                          ----------
                                                                                                                           7,285,769
                                                                                                                          ----------

Communications                          7.1%

        Telephone/Communications                   23,800   Alltel Corp. ...............................................     746,725
                                                   16,100   Bell Atlantic Corp. ........................................   1,042,475
                                                   14,000   BellSouth Corp. ............................................     565,250
                                                   21,100   Frontier Corp. .............................................     477,388
                                                   22,100   GTE Corp. ..................................................   1,005,550
                                                   12,300   Koninklijke PTT Nederland ..................................     469,188
                                                   20,900   NYNEX Corp. ................................................   1,005,813
                                                   22,700   Sprint Corp. ...............................................     905,163
                                                   33,000   Telecom Corp. of New Zealand ...............................     168,438
                                                                                                                          ----------
                                                                                                                           6,385,990
                                                                                                                          ----------

Financial                              20.0%

        Banks                           7.9%       14,200   Banc One Corp. .............................................     610,600
                                                   15,800   Bankers Trust New York Corp. ...............................   1,362,750
                                                   15,000   Chase Manhattan Corp. ......................................   1,338,750
                                                   15,900   CoreStates Financial Corp. .................................     824,813
                                                   12,400   First Bank System Inc. .....................................     846,300
                                                   12,400   J.P. Morgan & Co., Inc. ....................................   1,210,550
                                                   18,300   KeyCorp ....................................................     924,150
                                                                                                                          ----------
                                                                                                                           7,117,913
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              39
<PAGE>


GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                       % of                                                                                Market
                                     Portfolio    Shares                                                                  Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>                                                           <C>
        Insurance                       3.3%       20,200   EXEL, Ltd. .................................................     765,075
                                                    6,900   Hartford Steam Boiler Inspection & Insurance Co. ...........     319,988
                                                   21,800   Lincoln National Corp. .....................................   1,144,500
                                                   12,900   Mid Ocean Limited* .........................................     677,250
                                                      900   Transamerica Corp. .........................................      71,100
                                                                                                                          ----------
                                                                                                                           2,977,913
                                                                                                                          ----------
        Other Financial
        Companies                       2.9%       22,200   Federal National Mortgage Association ......................     826,950
                                                   19,200   Student Loan Marketing Association .........................   1,788,000
                                                                                                                          ----------
                                                                                                                           2,614,950
                                                                                                                          ----------
        Real Estate                     5.9%        1,100   Charles E. Smith Residential Realty, Inc. (REIT) ...........      32,175
                                                    3,900   Developers Diversified Realty Corp. ........................     144,788
                                                    8,300   Equity Residential Properties Trust (REIT) .................     342,375
                                                   10,200   General Growth Properties, Inc. (REIT) .....................     328,950
                                                   20,500   Health Care Property Investment Inc. (REIT) ................     717,500
                                                   20,400   Meditrust SBI (REIT) .......................................     816,000
                                                   31,400   Nationwide Health Properties Inc. (REIT) ...................     761,450
                                                    7,800   Omega Healthcare Investors (REIT) ..........................     259,350
                                                   47,900   Security Capital Atlantic Inc. .............................   1,173,550
                                                   16,141   Security Capital Industrial Trust (REIT) ...................     345,014
                                                   15,096   Simon DeBartolo Group, Inc. ................................     467,976
                                                                                                                          ----------
                                                                                                                           5,389,128
                                                                                                                          ----------

Durables                                7.6%

        Aerospace                       4.2%          865   Boeing Co. .................................................      92,014
                                                   10,288   Lockheed Martin Corp. ......................................     941,352
                                                    1,400   Northrop Grumman Corp. .....................................     115,850
                                                   20,600   Rockwell International Corp.(New) ..........................   1,254,025
                                                   21,400   United Technologies Corp. ..................................   1,412,400
                                                                                                                          ----------
                                                                                                                           3,815,641
                                                                                                                          ----------
        Automobiles                     2.7%       21,100   Dana Corp. .................................................     688,388
                                                   10,100   Eaton Corp. ................................................     704,475
                                                   22,300   Ford Motor Co. .............................................     710,813
                                                    8,200   Genuine Parts Co. ..........................................     364,900
                                                                                                                          ----------
                                                                                                                           2,468,576
                                                                                                                          ----------
        Construction/
        Agricultural Equipment          0.7%        9,900   PACCAR, Inc. ...............................................     673,200
                                                                                                                          ----------

Manufacturing                          15.6%

        Chemicals                       5.0%       15,200   DSM NV (ADR) ...............................................     374,300
                                                    8,300   Dow Chemical Co. ...........................................     650,513
                                                   13,800   E.I. du Pont de Nemours & Co. ..............................   1,302,375
                                                   17,700   Eastman Chemical Co. .......................................     977,925
                                                   15,700   Imperial Chemical Industries PLC (ADR) (New) ...............     816,400
                                                   16,200   Lyondell Petrochemical Co. .................................     356,400
                                                                                                                          ----------
                                                                                                                           4,477,913
                                                                                                                          ----------

        Containers & Paper              1.1%       28,800   Stone Container Corp. ......................................     428,400
                                                   19,300   Westvaco Corp. .............................................     554,875
                                                                                                                          ----------
                                                                                                                             983,275
                                                                                                                          ----------

        Diversified
         Manufacturing                  2.8%        6,600   Dresser Industries Inc. ....................................     204,600
                                                   14,400   Olin Corp. .................................................     541,800
                                                   35,600   TRW Inc. ...................................................   1,762,200
                                                                                                                          ----------
                                                                                                                           2,508,600
                                                                                                                          ----------

        Electrical Products             2.2%       29,100   Philips NV (New York shares) ...............................   1,164,000
</TABLE>

    The accompanying notes are an integral part of the financial statements.


40
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                       % of                                                                                Market
                                     Portfolio   Shares                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>                                                           <C>
                                                   18,500   Thomas & Betts Corp. .......................................     820,938
                                                                                                                          ----------
                                                                                                                           1,984,938
                                                                                                                          ----------
        Office Equipment/
        Supplies                        3.2%       54,900   Xerox Corp. ................................................   2,889,113
        Specialty Chemicals             1.3%       14,400   BetzDearborn Inc. ..........................................     842,400
                                                    9,900   Witco Corp. ................................................     301,950
                                                                                                                          ----------
                                                                                                                           1,144,350
                                                                                                                          ----------

Energy                                  7.5%

        Oil & Gas Production            0.2%        5,081   Union Pacific Resources Group ..............................     148,619
        Oil Companies                   7.1%        6,700   Exxon Corp. ................................................     656,600
                                                   15,900   Murphy Oil Corp. ...........................................     884,438
                                                    9,600   Pennzoil Co. ...............................................     542,400
                                                   11,100   Repsol SA (ADR) ............................................     423,188
                                                    5,000   Royal Dutch Petroleum Co. (New York shares) ................     853,750
                                                   19,556   Societe Nationale Elf Aquitaine (ADR) ......................     884,909
                                                    4,300   Texaco Inc. ................................................     421,938
                                                   22,366   Total SA (ADR) .............................................     900,232
                                                   33,300   YPF S.A. "D" (ADR) .........................................     840,825
                                                                                                                          ----------
                                                                                                                           6,408,280
                                                                                                                          ----------

        Oil/Gas Transmission            0.2%        4,500   PanEnergy Corp. ............................................     202,500
                                                                                                                          ----------

Metals & Minerals                       2.6%

        Steel & Metals                             39,152   Allegheny Teledyne Inc. ....................................     900,496
                                                   28,000   Freeport McMoRan Copper & Gold, Inc. "A" ...................     787,500
                                                   13,500   Oregon Steel Mills, Inc. ...................................     226,125
                                                    6,700   Phelps Dodge Corp. .........................................     452,250
                                                                                                                          ----------
                                                                                                                           2,366,371
                                                                                                                          ----------

Construction                            2.2%

        Building Materials              0.3%       10,638   Martin Marietta Materials, Inc. ............................     247,334
        Forest Products                 1.9%       11,100   Georgia Pacific Corp. ......................................     799,200
                                                   25,500   Louisiana-Pacific Corp. ....................................     538,688
                                                    8,700   Weyerhaeuser Co. ...........................................     412,163
                                                                                                                          ----------
                                                                                                                           1,750,051
                                                                                                                          ----------

Transportation                          1.6%

        Railroads                                  10,700   CSX Corp. ..................................................     452,075
                                                   15,700   Canadian National Railway Co. ..............................     597,211
                                                    6,000   Union Pacific Corp. ........................................     360,750
                                                                                                                          ----------
                                                                                                                           1,410,036
                                                                                                                          ----------

Utilities                               4.8%

        Electric Utilities                          3,200   Boston Edison Co. ..........................................      86,000
                                                    9,800   CINergy Corp. ..............................................     327,075
                                                    2,600   Duke Power Co. .............................................     120,250
                                                   22,100   National Power PLC (ADR) ...................................     748,638
                                                   15,400   PacifiCorp .................................................     315,700
                                                   37,100   Pacific Gas & Electric Co. .................................     779,100
                                                   20,800   PowerGen PLC (Sponsored ADR) ...............................     821,600
                                                   13,000   Southern Company ...........................................     294,125
                                                                                                                          ----------
                                                    3,100   Texas Utilities Co., Inc. ..................................     126,325
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              41
<PAGE>

GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                           Market
                                                  Shares                                                                  Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>      <C>         <C>                                                           <C>
                                                   26,900   Unicom Corp. ...............................................     729,652
                                                                                                                          ----------
                                                                                                                           4,348,465
                                                                                                                          ----------

                                                            Total Common Stocks (Cost $67,018,600) .....................  82,691,617
                                                                                                                          ----------

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

                                                            Total Investment Portfolio -- 100.0%
                                                              (Cost $74,730,607) (a) ...................................  90,356,936
                                                                                                                          ==========


       * Non-income producing security.
     (a) At December 31, 1996, the net unrealized  appreciation of investments  based on cost for 
         federal income tax purposes of $74,727,583 was as follows:
         Aggregate gross unrealized appreciation for all investments in which there is an excess 
             of market value over tax cost ........................................................................     $16,326,918
         Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over      
             market value .........................................................................................        (697,565)
                                                                                                                       ------------
         Net unrealized appreciation ..............................................................................     $15,629,353
                                                                                                                        ===========
------------------------------------------------------------------------------------------------------------------------------------

         Purchases and sales of investment securities (excluding short-term investments),  for the year ended December 31, 1996,
         aggregated $47,137,445 and $21,525,631, respectively.
</TABLE>

    The accompanying notes are an integral part of the financial statements.


42
<PAGE>
                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (identified cost $74,730,607) (Note A) ..........                      $ 90,356,936
Cash ...................................................................                               850
Foreign currency, at value (cost $2,214) ...............................                             2,216
Receivables:
    Investments sold ...................................................                           267,502
    Dividends and interest .............................................                           260,160
    Portfolio shares sold ..............................................                           331,847
    Foreign taxes recoverable ..........................................                            20,010
                                                                                              ------------
        Total assets ...................................................                        91,239,521
Liabilities
Payables:
    Investments purchased ..............................................       $     76,620
    Portfolio shares redeemed ..........................................                 99
    Accrued management fee (Note B) ....................................             35,291
    Other accrued expenses (Note B) ....................................             35,964
                                                                               ------------
        Total liabilities ..............................................            147,974
                                                                               ------------
Net assets, at market value ............................................       $ 91,091,547
                                                                               ============
Net Assets
Net assets consist of:
    Undistributed net investment income ................................                      $    713,479
    Net unrealized appreciation on:
        Investments ....................................................                        15,626,329
        Foreign currency related transactions ..........................                                11
    Accumulated net realized gain ......................................                         3,799,669
    Paid-in capital ....................................................                        70,952,059
                                                                                              ------------
Net assets, at market value ............................................                      $ 91,091,547
                                                                                              ============
Net asset value, offering and redemption price per share
    ($91,091,5479,724,734 outstanding shares of beneficial
    interest, no par value, unlimited number of shares authorized) .....                      $       9.37
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              43
<PAGE>

GROWTH AND INCOME PORTFOLIO
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
    Income:
        Dividends (net of foreign taxes withheld of $52,815) ...........                      $  2,451,899
        Interest .......................................................                           154,234
                                                                                              ------------
                                                                                                 2,606,133
    Expenses (Note A):
        Management fee (Note B) ........................................       $    326,033
        Custodian and accounting fees (Note B) .........................             83,934
        Trustees' fees (Note B) ........................................             16,634
        Auditing .......................................................             10,677
        Registration fees ..............................................              9,697
        Legal ..........................................................                203
        Other ..........................................................              3,673        450,851
                                                                               ------------   ------------
    Net investment income ..............................................                         2,155,282
                                                                                              ------------

Net realized and unrealized gain on investment transactions
    Net realized gain from:
        Investments ....................................................          3,798,564
        Foreign currency related transactions ..........................                  3      3,798,567
                                                                               ------------
    Net unrealized appreciation during the period on:
        Investments ....................................................          7,841,863
        Foreign currency related transactions ..........................                 11      7,841,874
                                                                               ------------   ------------
    Net gain on investment transactions ................................                        11,640,441
Net increase in net assets resulting from operations ...................                      $ 13,795,723
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


44
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
    Net investment income ..............................................      $  2,155,282    $  1,140,276
    Net realized gain from investment transactions .....................         3,798,567         685,486
    Net unrealized appreciation on investment
        transactions during the period .................................         7,841,874       8,112,233
                                                                              ------------    ------------
Net increase in net assets resulting from operations ...................        13,795,723       9,937,995
                                                                              ------------    ------------
Distributions to shareholders from:
    Net investment income ..............................................        (1,781,057)       (895,880)
                                                                              ------------    ------------
    Net realized gains from investment transactions ....................          (729,093)       (150,289)
                                                                              ------------    ------------
Portfolio share transactions:
    Proceeds from shares sold ..........................................        48,549,524      29,272,260
    Net asset value of shares issued to shareholders
        in reinvestment of distributions ...............................         2,510,150       1,046,169
    Cost of shares redeemed ............................................       (23,216,134)     (7,322,663)
                                                                              ------------    ------------
Net increase in net assets from Portfolio share transactions ...........        27,843,540      22,995,766
                                                                              ------------    ------------
Increase in net assets .................................................        39,129,113      31,887,592
Net assets at beginning of period ......................................        51,962,434      20,074,842
                                                                              ------------    ------------
Net assets at end of period (including undistributed net
    investment income of $713,479 and $403,970, respectively) ..........      $ 91,091,547    $ 51,962,434
                                                                              ============    ============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ..............................         6,510,714       3,204,882
                                                                              ------------    ------------
    Shares sold ........................................................         5,669,994       4,166,992
    Shares issued to shareholders in reinvestment of distributions .....           301,924         151,454
    Shares redeemed ....................................................        (2,757,898)     (1,012,614)
                                                                              ------------    ------------
    Net increase in Portfolio shares ...................................         3,214,020       3,305,832
                                                                              ------------    ------------
Shares outstanding at end of period ....................................         9,724,734       6,510,714
                                                                              ============    ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              45
<PAGE>

GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period (a) and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
                                                                                                                  For the Period
                                                                                                                    May 2, 1994
                                                                                                                   (commencement
                                                                                    Years Ended December 31,       of operations)
                                                                                    -------------------------      to December 31,
                                                                                      1996             1995             1994
                                                                                    -------------------------     ----------------
<S>                                                                                 <C>              <C>              <C>        
Net asset value, beginning of period ............................................   $   7.98         $   6.26         $   6.00(b)
                                                                                    --------         --------         --------
Income from investment operations:
  Net investment income .........................................................        .27              .23              .13
  Net realized and unrealized gain on investment transactions ...................       1.46             1.72              .17(d)
                                                                                    --------         --------         --------
Total from investment operations ................................................       1.73             1.95              .30
                                                                                    --------         --------         --------
Less distributions from:
  Net investment income .........................................................       (.23)            (.19)            (.04)
  Net realized gains on investment transactions .................................       (.11)            (.04)            --
                                                                                                     --------         --------
Total distributions .............................................................       (.34)            (.23)            (.04)
                                                                                    --------         --------         --------
Net asset value, end of period ..................................................   $   9.37         $   7.98         $   6.26
                                                                                    ========         ========         ========
Total Return (%) ................................................................      22.17            31.74             4.91**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..........................................         91               52               20
Ratio of operating expenses, net to average net assets (%) ......................        .66              .75              .75*
Ratio of operating expenses, before reductions, to average daily net assets (%) .        .66              .75           .1.62*
Ratio of net investment income to average net assets (%) ........................       3.14             3.18             3.63*
Portfolio turnover rate (%) .....................................................      32.18            24.33            28.41*
Average commission rate paid (c) ................................................   $  .0502         $   --           $   --

(a)  Based on monthly average shares outstanding during the period.
(b)  Original capital
(c)  Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
     September 1, 1995.
(d)  The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate gains and
     losses in the portfolio securities during the period because of the timing of sales and purchases of Portfolio shares in
     relation to fluctuating market values during the period.
*    Annualized
**   Not annualized
</TABLE>


46
<PAGE>

                                                        CAPITAL GROWTH PORTFOLIO
                                    INVESTMENT PORTFOLIO as of December 31, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of        Principal                                                                    Market
                                 Portfolio    Amount ($)                                                                   Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                    3.2%               REPURCHASE AGREEMENT

                                              14,154,000    Repurchase Agreement with Donaldson, Lufkin & Jenrette
                                                             dated 12/31/96 at 6.7% to be repurchased at $14,159,268
                                                             on 1/2/97, collateralized by a $14,070,000 U.S. Treasury
                                                             Note, 6.125%, 9/30/00 (Cost $14,154,000)                     14,154,000
                                                                                                                        ------------

                                   96.8%               COMMON STOCKS

                                                Shares
------------------------------------------------------------------------------------------------------------------------------------

Consumer Discretionary              6.0%

       Department &
       Chain Stores                 4.0%          95,000    Home Depot, Inc. ..........................................    4,761,875
                                                  75,000    J.C. Penney Co., Inc. .....................................    3,656,250
                                                  90,000    May Department Stores .....................................    4,207,500
                                                 120,000    Walgreen Co. ..............................................    4,800,000
                                                                                                                          ----------
                                                                                                                          17,425,625
                                                                                                                          ----------

       Restaurants                  1.0%         101,400    McDonald's Corp. ..........................................    4,588,350
                                                                                                                          ----------

       Specialty Retail             1.0%         120,000    Tiffany & Co. .............................................    4,395,000
                                                                                                                          ----------

Consumer Staples                    5.5%

       Alcohol & Tobacco            1.8%         196,400    Anheuser-Busch Companies, Inc. ............................    7,856,000
                                                                                                                          ----------

       Food & Beverage              1.1%         100,000    ConAgra Inc. ..............................................    4,975,000
                                                                                                                          ----------

       Package Goods/
       Cosmetics                    2.6%          60,000    Clorox Co. ................................................    6,022,500
                                                  50,000    Procter & Gamble Co. ......................................    5,375,000
                                                                                                                          ----------
                                                                                                                          11,397,500
                                                                                                                          ----------

Health                             13.6%

       Hospital Management          2.5%         275,600    Columbia/HCA Healthcare Corp. .............................   11,230,700
                                                                                                                          ----------

       Medical Supply &
       Specialty                    2.7%         155,000    Becton, Dickinson & Co. ...................................    6,723,125
                                                 120,000    STERIS Corp.* .............................................    5,220,000
                                                                                                                        ------------
                                                                                                                          11,943,125
                                                                                                                        ------------

       Pharmaceuticals              8.4%
                                                  70,000    American Home Products Corp. ..............................    4,103,750
                                                  90,000    Johnson & Johnson .........................................    4,477,500
                                                  50,000    Merck & Co. Inc. ..........................................    3,962,500
                                                 101,000    Novartis AG (ADR) .........................................    5,775,938
                                                  68,600    Pfizer, Inc. ..............................................    5,685,225
                                                  47,000    Schering-Plough Corp. .....................................    3,043,250
                                                 130,000    Warner-Lambert Co. ........................................    9,750,000
                                                                                                                        ------------
                                                                                                                          36,798,163
                                                                                                                        ------------

Financial                          17.5%

       Banks                        4.5%
                                                 112,500    Citicorp ..................................................   11,587,500
                                                  40,000    J.P. Morgan & Co., Inc. ...................................    3,905,000
                                                 100,000    Norwest Corp. .............................................    4,350,000
                                                                                                                        ------------
                                                                                                                          19,842,500
                                                                                                                        ------------

       Insurance                    6.0%          90,000    American International Group, Inc. ........................    9,742,500
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              47
<PAGE>

CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio      Shares                                                                     Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                                 210,000    EXEL, Ltd. ................................................    7,953,750
                                                  85,000    MBIA Inc. .................................................    8,606,250
                                                                                                                        ------------
                                                                                                                          26,302,500
                                                                                                                        ------------

       Consumer Finance             1.1%         110,100    Associates First Capital Corp. ............................    4,858,163
                                                                                                                          ----------

       Other Financial
       Companies                    5.9%         205,000    American Express Credit Corp. .............................   11,582,500
                                                 384,000    Federal National Mortgage Association .....................   14,304,000
                                                                                                                        ------------
                                                                                                                          25,886,500
                                                                                                                        ------------

Media                               1.0%

       Advertising                                92,500    Omnicom Group, Inc. .......................................    4,231,875
                                                                                                                        ------------

Service Industries                  4.3%

       Investment                   2.7%          92,500    Franklin Resources Inc. ...................................    6,324,688
                                                  70,200    Merrill Lynch & Co., Inc. .................................    5,721,300
                                                                                                                        ------------
                                                                                                                          12,045,988
                                                                                                                        ------------

       Miscellaneous
       Commercial Services          1.6%         148,000    Manpower, Inc. ............................................    4,810,000
                                                  83,100    Sabre Group Holdings Inc.* ................................    2,316,413
                                                                                                                        ------------
                                                                                                                           7,126,413
                                                                                                                        ------------

Durables                            5.4%

       Aerospace                    4.7%          74,414    Lockheed Martin Corp. .....................................    6,808,881
                                                 110,000    Rockwell International Corp. (New)* .......................    6,696,250
                                                 110,000    United Technologies Corp. .................................    7,260,000
                                                                                                                        ------------
                                                                                                                          20,765,131
                                                                                                                        ------------

       Telecommunications
       Equipment                    0.7%          50,000    Ascend Communications, Inc.* ..............................    3,106,250
                                                                                                                        ------------

Manufacturing                      11.6%

       Chemicals                    3.6%          65,000    E.I. du Pont de Nemours & Co. .............................    6,134,375
                                                 103,900    Praxair Inc. ..............................................    4,792,388
                                                  75,000    Sigma-Aldrich Corp. .......................................    4,682,813
                                                                                                                        ------------
                                                                                                                          15,609,576
                                                                                                                        ------------

       Diversified
       Manufacturing                3.5%          35,600    General Electric Co. ......................................    3,519,950
                                                 120,000    TRW Inc. ..................................................    5,940,000
                                                  65,000    Textron, Inc. .............................................    6,126,250
                                                                                                                        ------------
                                                                                                                          15,586,200
                                                                                                                        ------------

       Electrical Products          1.9%          37,500    ABB AB (ADR) ..............................................    4,190,625
                                                  45,000    Emerson Electric Co. ......................................    4,353,750
                                                                                                                        ------------
                                                                                                                           8,544,375
                                                                                                                        ------------

       Machinery/
       Components/ Controls         2.6%         100,000    Ingersoll-Rand Co. ........................................    4,450,000
                                                 176,000    Parker-Hannifin Group .....................................    6,820,000
                                                                                                                        ------------
                                                                                                                          11,270,000
                                                                                                                        ------------

Technology                         16.2%

       Diverse Electronic
       Products                     3.7%         215,000    Applied Materials, Inc.* ..................................    7,726,563
                                                                                                                        ------------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


48
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio      Shares                                                                     Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                                 150,000    General Motors Corp. "H" ..................................    8,437,500
                                                                                                                        ------------
                                                                                                                          16,164,063
                                                                                                                        ------------

       Electronic Data
       Processing                   5.8%         100,000    Compaq Computer Corp.* ....................................    7,425,000
                                                 143,000    Hewlett-Packard Co. .......................................    7,185,750
                                                  25,000    International Business Machines Corp. .....................    3,775,000
                                                 280,000    Sun Microsystems, Inc.* ...................................    7,192,500
                                                                                                                        ------------
                                                                                                                          25,578,250
                                                                                                                        ------------

       Military Electronics         0.8%          75,000    Raytheon Co. ..............................................    3,609,375
                                                                                                                        ------------

       Office/Plant
       Automation                   1.5%          90,000    Cabletron Systems Inc.* ...................................    2,992,500
                                                  53,400    Cisco Systems, Inc.* ......................................    3,397,575
                                                                                                                        ------------
                                                                                                                           6,390,075
                                                                                                                        ------------

       Semiconductors               4.4%         175,000    Atmel Corp.* ..............................................    5,796,875
                                                 105,000    Intel Corp. ...............................................   13,748,438
                                                                                                                        ------------
                                                                                                                          19,545,313
                                                                                                                        ------------

Energy                             12.6%

       Engineering                  0.8%          55,000    Fluor Corp. ...............................................    3,451,250
                                                                                                                          ----------

       Oil & Gas Production         0.6%          58,800    Triton Energy Ltd.* .......................................    2,851,800
                                                                                                                          ----------

       Oil Companies                9.7%          62,800    Amoco Corp. ...............................................    5,055,400
                                                  57,500    Atlantic Richfield Co. ....................................    7,618,750
                                                  77,600    Exxon Corp. ...............................................    7,604,800
                                                  52,600    Mobil Corp. ...............................................    6,430,350
                                                 125,000    Repsol SA (ADR) ...........................................    4,765,625
                                                  65,000    Royal Dutch Petroleum Co. (New York shares) ...............   11,098,750
                                                                                                                        ------------
                                                                                                                          42,573,675
                                                                                                                        ------------

       Oil/Gas Transmission         1.5%         110,000    Enron Corp. ...............................................    4,743,750
                                                  52,500    Williams Companies., Inc. .................................    1,968,750
                                                                                                                        ------------
                                                                                                                           6,712,500
                                                                                                                        ------------

Transportation                      2.0%

       Airlines                     1.2%          60,000    AMR Corp.* ................................................    5,287,500
                                                                                                                        ------------

       Railroads                    0.8%         125,000    Canadian Pacific Ltd. .....................................    3,312,500
                                                                                                                        ------------

Utilities                           1.1%

       Electric Utilities                          9,300    CILCORP, Inc. .............................................      340,613
                                                  50,000    Eastern Utilities Association .............................      868,750
                                                  50,000    National Power PLC ........................................      417,728
                                                 155,000    PowerGen PLC ..............................................    1,517,860
                                                  60,000    Unicom Corp. ..............................................    1,627,495
                                                                                                                        ------------
                                                                                                                           4,772,446
                                                                                                                        ------------
                                                            Total Common Stocks (Cost $354,422,394) ...................  426,033,681
                                                                                                                        ------------

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

                                                            Total Investment Portfolio -- 100.0%
                                                             (Cost $368,576,394) (a) ..................................  440,187,681
                                                                                                                         ===========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              49
<PAGE>

CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>

      * Non-income producing security.
    (a) At December 31, 1996, the net unrealized  appreciation on investments based on cost for federal income
        tax purposes of $368,676,915 was as follows:
        Aggregate  gross  unrealized  appreciation  for all  investments in which there is an excess of market
        value over tax cost .......................................................................................  $   76,489,565
        Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost 
        over market value .........................................................................................      (4,978,799)
                                                                                                                     ---------------
        Net unrealized appreciation ...............................................................................   $   71,510,766
                                                                                                                      ==============
------------------------------------------------------------------------------------------------------------------------------------

        Purchases and sales of investment securities (excluding  short-term  investments),  for the year ended
        December 31, 1996, aggregated $291,221,742 and $248,397,136, respectively.

</TABLE>

    The accompanying notes are an integral part of the financial statements.


50
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (identified cost $368,576,394) (Note A) ............                   $440,187,681
Cash ......................................................................                            839
Foreign currency, at value, (cost $20,844) ................................                         20,838
Receivables:
   Investments sold .......................................................                      1,948,303
   Portfolio shares sold ..................................................                        425,009
   Dividends and interest .................................................                        345,170
   Foreign taxes recoverable ..............................................                          4,910
                                                                                              ------------
      Total assets ........................................................                    442,932,750
Liabilities
Payables:
   Portfolio shares redeemed ..............................................    $  2,229,711
   Accrued management fee (Note B) ........................................         175,385
   Other accrued expenses (Note B) ........................................          46,346
                                                                               ------------
      Total liabilities ...................................................       2,451,442
                                                                               ------------
Net assets, at market value ...............................................    $440,481,308
                                                                               ============
Net Assets
Net assets consist of:
   Undistributed net investment income ....................................                   $  1,565,989
   Net unrealized appreciation on:
      Investments .........................................................                     71,611,287
      Foreign currency related transactions ...............................                             47
   Accumulated net realized gain ..........................................                     33,760,206
   Paid-in capital ........................................................                    333,543,779
                                                                                              ------------
Net assets, at market value ...............................................                   $440,481,308
                                                                                              ============
Net asset value, offering and redemption price per share
   ($440,481,30826,691,077 outstanding shares of beneficial
   interest, no par value, unlimited number of shares authorized) .........                   $      16.50
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              51
<PAGE>

CAPITAL GROWTH PORTFOLIO
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
   Income:
      Dividends (net of foreign taxes withheld of $163,344) ...............                   $  6,354,599
      Interest ............................................................                        723,916
                                                                                              ------------
                                                                                                 7,078,515
   Expenses (Note A):
      Management fee (Note B) .............................................   $  1,870,361
      Custodian and accounting fees (Note B) ..............................        115,868
      Trustees' fees (Note B) .............................................         18,813
      Auditing ............................................................         40,672
      Legal ...............................................................          2,513
      Registration fees ...................................................         19,999
      Other ...............................................................         17,285       2,085,511
                                                                              ------------    ------------
   Net investment income ..................................................                      4,993,004
                                                                                              ------------
Net realized and unrealized gain (loss) on investment transactions
   Net realized gain (loss) from:
      Investments .........................................................     33,866,057
      Foreign currency related transactions ...............................         (8,845)     33,857,212
                                                                              ------------
   Net unrealized appreciation during the period on:
      Investments .........................................................     33,028,791
      Foreign currency related transactions ...............................             26      33,028,817
                                                                              ------------    ------------
   Net gain on investment transactions ....................................                     66,886,029
                                                                                              ------------
Net increase in net assets resulting from operations ......................                   $ 71,879,033
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


52
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
   Net investment income ..................................................   $   4,993,004    $   3,089,532
   Net realized gain from investment transactions .........................      33,857,212       28,439,406
   Net unrealized appreciation on investment
      transactions during the period ......................................      33,028,817       40,615,497
                                                                              -------------    -------------
Net increase in net assets resulting from operations ......................      71,879,033       72,144,435
                                                                              -------------    -------------
Distributions to shareholders from:
   Net investment income ..................................................      (4,669,020)      (2,245,727)
                                                                              -------------    -------------
   Net realized gain from investment transactions .........................     (28,547,850)      (8,804,833)
                                                                              -------------    -------------
Portfolio share transactions:
   Proceeds from shares sold ..............................................     176,019,020      125,834,281
   Net asset value of shares issued to shareholders in
      reinvestment of distributions .......................................      33,216,870       11,050,560
   Cost of shares redeemed ................................................    (145,085,225)    (116,840,991)
                                                                              -------------    -------------
Net increase in net assets from Portfolio share transactions ..............      64,150,665       20,043,850
                                                                              -------------    -------------
Increase in net assets ....................................................     102,812,828       81,137,725
Net assets at beginning of period .........................................     337,668,480      256,530,755
                                                                              -------------    -------------
Net assets at end of period (including undistributed net
   investment income of $1,565,989 and $1,250,850, respectively) ..........   $ 440,481,308    $ 337,668,480
                                                                              =============    =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period .................................      22,392,030       20,979,934
                                                                              -------------    -------------
   Shares sold ............................................................      11,627,337        9,213,682
   Shares issued to shareholders in reinvestment of distributions .........       2,233,815          896,773
   Shares redeemed ........................................................      (9,562,105)      (8,698,359)
                                                                              -------------    -------------
   Net increase in Portfolio shares .......................................       4,299,047        1,412,096
                                                                              -------------    -------------
Shares outstanding at end of period .......................................      26,691,077       22,392,030
                                                                              =============    =============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              53
<PAGE>

CAPITAL GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.


<TABLE>
<CAPTION>
                                                                    Years Ended December 31, (a)
                                ---------------------------------------------------------------------------------------------------
                                   1996      1995      1994      1993      1992      1991      1990      1989      1988      1987
                                ---------------------------------------------------------------------------------------------------
<S>                               <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   

Net asset value,
  beginning of period .........   $15.08    $12.23    $14.95    $12.71    $12.28    $ 8.99    $10.21    $ 8.53    $ 7.06    $ 7.67
Income from
  investment operations:
  Net investment income .......      .19       .14       .06       .06       .11       .16       .25       .35       .16       .15
  Net realized and unrealized
    gain (loss) on investment
    transactions ..............     2.68      3.25     (1.42)     2.52       .66      3.35     (1.00)     1.58      1.40      (.28)
Total from investment
  operations ..................     2.87      3.39     (1.36)     2.58       .77      3.51      (.75)     1.93      1.56      (.13)
Less distributions from:
  Net investment income .......     (.19)     (.11)     (.05)     (.07)     (.11)     (.22)     (.24)     (.25)     (.09)     (.09)
  Net realized gains on
    investment transactions ...    (1.26)     (.43)    (1.31)     (.27)     (.23)     --        (.23)     --        --        (.39)
Total distributions ...........    (1.45)     (.54)    (1.36)     (.34)     (.34)     (.22)     (.47)     (.25)     (.09)     (.48)
Net asset value,
  end of period ...............   $16.50    $15.08    $12.23    $14.95    $12.71    $12.28    $ 8.99    $10.21    $ 8.53    $ 7.06
Total Return (%) ..............    20.13     28.65     (9.67)    20.88      6.42     39.56     (7.45)    22.75     22.07     (1.88)
Ratios and
Supplemental Data
Net assets, end of
  period ($ millions) .........      440       338       257       257       167       108        45        45        17        10
Ratio of operating expenses,
  net to average net
  assets (%) ..................      .53       .57       .58       .60       .63       .71       .72       .75       .75       .75
Ratio of operating expenses
  before expense reductions, to
  average daily net assets (%)       .53       .57       .58       .60       .63       .71       .72       .85      1.11      1.24
Ratio of net investment income
  to average net assets (%) ...     1.27      1.06       .47       .46       .95      1.49      2.71      3.51      2.17      1.68
Portfolio turnover rate (%) ...    65.56    119.41     66.44     95.31     56.29     58.88     61.39     63.96    129.75    113.34
Average commission
  rate paid (b) ...............   $.0585    $ --      $ --      $ --      $ --      $ --      $ --      $ --      $ --      $ --

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is calculated for fiscal years beginning on or after
    September 1, 1995.
</TABLE>


54
<PAGE>

                                                      GLOBAL DISCOVERY PORTFOLIO
                                    INVESTMENT PORTFOLIO as of December 31, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                   % of        Principal                                                                    Market
                                 Portfolio    Amount ($)                                                                  Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>

                                    6.1%               REPURCHASE AGREEMENT

                                              1,031,000     Repurchase Agreement with Donaldson, Lufkin & Jenrette
                                                            dated 12/31/96 at 6.7% to be repurchased at $1,031,384
                                                            on 1/2/97, collateralized by a $1,032,000 U.S. Treasury
                                                            Note, 6.25%, 5/31/00 (Cost $1,031,000) ....................    1,031,000
                                                                                                                          ----------
                                   0.2%                BONDS

Portugal
                                                     591    Jeronimo Martins, 9/15/03 (Cost $30,750) (a) ..............       29,224
                                                                                                                          ----------

                                    4.2%               PREFERRED STOCKS

                                                Shares
------------------------------------------------------------------------------------------------------------------------------------

Germany
                                                     768    Fresenius AG (Manufacturer and distributor of
                                                            pharmaceutical and medical systems products) ..............      158,654
                                                   2,860    Marschollek Lautenschlaeger und Partner AG (Leading
                                                            independent life insurance company) .......................      397,596
                                                   2,300    Moebel Walther AG (Furniture retailer) ....................      150,908
                                                                                                                          ----------
                                                            Total Preferred Stocks (Cost $576,250)                           707,158
                                                                                                                          ----------
                                  89.5%                COMMON STOCKS

Argentina                           0.8%
                                                  48,300    Dalmine Siderca (Steel producer) ..........................       88,164
                                                   6,200    Quilmes Industrial S.A. (Leading beer distributor) ........       49,600
                                                   1,932    Siderar SAIC (Manufacturer of hot and cold rolled sheets
                                                            of steel) .................................................        5,565
                                                                                                                          ----------
                                                                                                                             143,329
                                                                                                                          ----------
Austria                             0.7%
                                                   1,000    VAE Eisenbahnsysteme AG (Manufacturer of electronic
                                                            railroad control systems) .................................      113,465
                                                                                                                          ----------
Bermuda                             0.9%
                                                   7,000    Terra Nova (Bermuda) Holdings Ltd. "A" (Property,
                                                            casualty and marine insurance and reinsurance
                                                            company) ..................................................      150,500
                                                                                                                          ----------
Brazil                              1.0%
                                              13,000,000    Banco Bradesco S.A. (pfd.) (Commercial bank) ..............       94,207
                                               1,500,000    Lojas Renner S.A. (pfd.) (Specialty retailer of apparel,
                                                            cosmetics, electronics, household appliances and
                                                            furniture) ................................................       69,291
                                                                                                                          ----------
                                                                                                                             163,498
                                                                                                                          ----------
Chile                               0.8%
                                                   6,000    Santa Isabel S.A. (Supermarket chain) .....................      135,750
                                                                                                                          ----------
Czech Republic                      2.2%
                                                  11,900    Central European Media Enterprises Ltd. "A"* (Owner
                                                            and operator of national and regional private
                                                            commercial television stations in Central Europe and
                                                            Germany) ..................................................      377,825
                                                                                                                          ----------
Finland                             0.9%
                                                   3,800    Orion-yhtyma Oy "B" (Developer and producer of
                                                            pharmaceuticals, bulk drug substances and other
                                                            health care products) .....................................      146,217
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              55
<PAGE>

GLOBAL DISCOVERY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
France                              2.6%
                                                   3,171    Dassault Systemes SA*(Computer aided design,
                                                            manufacturing and engineering software products) ..........      146,293
                                                     635    Essilor International (Manufacturer of various types of
                                                            lenses, eyeglasses, contact lenses and optical measuring
                                                            instruments) ..............................................      192,814
                                                   7,300    Group AB SA (ADR)* (Producer and distributor of television
                                                            programming) .............................................      104,952
                                                                                                                          ----------
                                                                                                                             444,059
                                                                                                                          ----------
Hong Kong                           0.2%
                                                  29,600    Jinhui Shipping & Transportation Ltd. (ADR) (Operator of
                                                            fleet transporting steel, iron ore and non-ferrous metals,
                                                            agricultural products) ....................................       29,600
                                                                                                                          ----------
Indonesia                           0.4%
                                                   8,000    Modern Photo Film Co.(Foreign registered)
                                                            (Photographic film distributor) ...........................       25,402
                                                  34,500    Mustika Ratu (Foreign registered) (Consumer cosmetics
                                                            producer) (a) .............................................       46,740
                                                                                                                          ----------
                                                                                                                              72,142
                                                                                                                          ----------
Ireland                             4.0%
                                                  42,600    Bank of Ireland PLC (Bank) ................................      388,359
                                                   6,000    Irish Continental Group PLC (Transport of passengers,
                                                            freight and containers between Ireland, the U.K. and the
                                                            continent) ................................................       42,701
                                                  37,700    Irish Life PLC (Provider of life and disability insurance
                                                            and pensions) .............................................     174,719
                                                   8,600    Irish Permanent PLC (Retail financial services group) .....       70,678
                                                                                                                          ----------
                                                                                                                             676,457
                                                                                                                          ----------
Italy                               4.1%
                                                   7,500    Bulgari SpA (Manufacturer and retailer of fine jewelry,
                                                            luxury watches and perfumes) ..............................      152,128
                                                   3,400    Gucci Group (New York Shares) (Designer and producer of
                                                            personal luxury accessories and apparel) ..................      217,175
                                                   1,300    Luxottica Group SpA (ADR)(Manufacturer and marketer of
                                                            eyeglasses) ...............................................       67,600
                                                    6,50    Saes Getters SpA di Risparmio (Manufacturer of getters,
                                                            refined chemicals used in cathode ray tubes and other
                                                            monitors) .................................................       79,278
                                                  39,500    Saipem SpA (International contractor in oil and gas
                                                            exploration and drilling, construction of refineries and
                                                            pipelines) ................................................      181,573
                                                                                                                          ----------
                                                                                                                             697,754
                                                                                                                          ----------
Japan                               9.6%
                                                   9,000    Albis Co Limited (Food wholesaler) (a) ....................      108,022
                                                   4,000    Ariake Japan Co., Ltd. (Leading maker of natural
                                                            seasonings made from meat extracts) (a) ...................      128,486
                                                   2,000    Japan Associated Finance Co. (Venture capital company) ....      158,017
                                                   5,200    Matsumotokiyoshi (Operator of supermarket chain) ..........      170,624
                                                  11,000    Nippon Electric Glass Co., Ltd. (Leading producer of
                                                            cathode-ray tube glass) ...................................      169,070
                                                   2,400    Riso Kagaku Corp. (Manufacturer of copying machines) ......      154,184
                                                   6,000    Sagami Chain Co., Ltd. (Operator of noodle restaurant
                                                            chain) ....................................................      101,546
                                                   1,500    Shohkoh Fund & Co., Ltd. (Finance company for small
                                                            and medium-sized firms) ...................................      326,397
                                                   4,900    Square Co., Ltd. (Producer of software for video games) ...      247,517
                                                   2,000    Sundrug Co., Ltd. (Operator of outlet drug store chain) ...       66,488
                                                                                                                          ----------
                                                                                                                           1,630,351
                                                                                                                          ----------
Luxembourg                          1.1%
                                                   5,900    Millicom International Cellular SA* (Developer and
                                                            operator of cellular telephone networks) .................      189,538
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


56
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
Mexico                              0.8%
                                                   6,800    Grupo Casa Autrey SA (ADR) (Consumer specialty
                                                            manufacturer) .............................................      132,600
                                                                                                                          ----------
Netherlands                         5.9%
                                                  12,500    Boskalis Westminster NV (International contractor
                                                            specializing in dredging activities) ......................      253,241
                                                   2,400    De Telegraaf Holding NV (Leading publisher of
                                                            newspapers, magazines and books) ..........................       50,567
                                                  11,300    IHC Caland NV (Dredging and offshore services) ............      645,583
                                                   1,600    Qiagen NV* (Biopharmaceutical company) ....................       41,200
                                                                                                                          ----------
                                                                                                                             990,591
                                                                                                                          ----------
Portugal                            2.2%
                                                   3,550    Jeronimo Martins (Food producer and retailer) .............      183,098
                                                   3,549    Jeronimo Martins (New) (a) ................................      182,775
                                                     591    Jeronimo Martins Warrants * (Expires 9/15/03) (a) .........        2,032
                                                                                                                          ----------
                                                                                                                             367,905
                                                                                                                          ----------
Singapore                           0.3%
                                             17,500         GP Batteries International, Ltd. (Developer, manufacturer
                                                            and distributor of batteries and battery-related products)
                                             58,275
South Africa                        0.3%
                                             16,000    Metro Cash and Carry Ltd. (Wholesale cash and carry
                                                             distributor) .............................................       53,008
                                                                                                                          ----------
Spain                               0.5%
                                                   1,300    Mapfre Vida Seguros (Life insurance) ......................       90,121
                                                                                                                          ----------
Sweden                              2.2%
                                                   8,500    Autoliv AB (Manufacturer of automobile safety bags) .......      372,684
                                                                                                                          ----------
Switzerland                         1.7%
                                                     327    Phoenix Mecano AG (Bearer) (Manufacturer of housings
                                                            and components for computers) .............................      170,885
                                                     100    Schindler Holdings AG (PC) (Leading elevator and escalator
                                                            manufacturer) .............................................      108,623
                                                                                                                          ----------
                                                                                                                             279,508
                                                                                                                          ----------
United Kingdom                      8.0%
                                                  10,100    Brake Brothers PLC (Specialist supplier of frozen foods
                                                            to the catering industry) .................................       95,275
                                                  14,500    Expro International Group PLC (Provider of oilfield services)    117,914
                                                  32,700    Hardy Oil & Gas PLC (Oil and gas exploration and
                                                            development) ..............................................      167,387
                                                   7,000    Pace Micro Technology PLC* (Develops, manufactures
                                                            and distributes analog and digital receivers) .............       27,563
                                                  32,500    Provident Financial PLC (Personal finance group) ..........      278,756
                                                  35,400    Serco Group PLC (Facilities management company) ...........      407,870
                                                  23,200    Tibbett and Britten Group PLC (Transportation services for
                                                            manufacturing and retail industries) ......................      254,198
                                                                                                                          ----------
                                                                                                                           1,348,963
                                                                                                                          ----------
United States                      38.3%
                                                   3,000    Alaska Air Group Inc.* (Scheduled and charter airline
                                                            services) .................................................       63,000
                                                   6,500    Applied Analytical Industries, Inc.* (Provides product
                                                            development and support services to the worldwide
                                                            pharmaceutical and biotechnology industries) ..............      124,313
                                                   4,700    Aptargroup, Inc. (Manufacturer of packaging equipment
                                                            components) ...............................................      165,675
                                                   4,900    Axogen Ltd. Units* (Future development of therapeutic
                                                            products for treatment of neurological disorders) .........      115,150
                                                   5,400    BE Aerospace * (Airline audio/video control systems) ......      146,475
                                                   3,700    Barrett Resources Corp.* (Oil and gas exploration and
                                                            production) ...............................................      157,713
                                                   4,900    Bell & Howell Holdings Co.* (Information access and
                                                            dissemination services) ...................................      116,375
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              57
<PAGE>

GLOBAL DISCOVERY PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                            Market
                                                 Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                                  10,300    Benton Oil & Gas Co.* (Oil and gas exploration,
                                                            development and production) ...............................      233,038
                                                  11,600    Billing Information Concepts* (Billing and information
                                                            management services) ......................................      333,500
                                                   7,900    CapMAC Holdings Inc. (Provider of financial guaranty
                                                            insurance) ................................................      261,688
                                                   2,800    Cintas Corp. (Uniform rentals) ............................      164,500
                                                   3,900    ContiFinancial Corp.* (Provider of financing for a broad
                                                            range of loans) ...........................................      140,888
                                                   9,100    CytoTherapeutics, Inc.* (Developer of therapeutic products
                                                            for treatment of certain chronic and disabling diseases) ..       81,900
                                                   6,000    Enron Global Power & Pipelines L.L.C. (Owner and
                                                            manager of power plants and a natural gas pipeline
                                                            system) ...................................................      162,000
                                                     500    Factset Research Systems Inc.* (Provides on-line integrated
                                                            financial database services) ..............................       10,500
                                                   6,400    Fiserv Inc.* (Data processing services) ...................      235,200
                                                   5,800    HBO & Company (Designer of computerized information
                                                            systems to the heathcare industry) ........................      344,375
                                                  14,300    IGEN Inc.* (Producer of medical supplies) .................       71,500
                                                   4,700    Karrington Health, Inc.* (Owner and operator of private pay
                                                            assisted living residences) ...............................       58,750
                                                   4,900    Matrix Pharmaceutical, Inc.* (Developer of site-specific
                                                            treatments for cancer and serious skin diseases) ..........       30,013
                                                   3,100    Midwest Express Holding, Inc.* (Operator of passenger
                                                            airline catering to business travelers) ...................      111,600
                                                   3,400    National Processing, Inc.* (Low-cost, high-volume card
                                                            and check transaction processing) .........................       54,400
                                                   6,400    Network Appliance, Inc.* (Designer and manufacturer of
                                                            network data storage devices) .............................      325,600
                                                   4,800    Neurogen Corp.* (Developer of biopharmaceuticals for
                                                            treatment of psychiatric and neurological disorders) ......       92,400
                                                   1,000    Nordson Corp. (Industrial application equipment) ..........       63,750
                                                   6,300    OccuSystems Inc.* (Provider of primary care physician and
                                                            case management services) .................................      170,100
                                                  14,300    Octel Communications Corp.* (Manufacturer of voice
                                                            processing systems) .......................................      250,250
                                                   4,200    PHAMIS, Inc.* (Developer and installer of patient-centered
                                                            healthcare information systems) ...........................       54,075
                                                   3,400    R.P. Scherer Corp.* (Manufacturer of drug delivery system)       170,850
                                                   9,100    Raytel Medical Corp.* (Provider of healthcare services) ...      100,100
                                                   5,300    Ribozyme Pharmaceuticals, Inc.* (Developer of human
                                                            therapeutics) .............................................       58,300
                                                   8,700    Silicon Valley Group Inc.* (Manufacturer of equipment for
                                                            semiconductor industry) ...................................      175,088
                                                   4,700    Somatogen Inc.* (Developer of human blood substitute) .....       51,700
                                                   9,025    Sterling Commerce, Inc.* (Producer of electronic data
                                                            interchange products and services) ........................      318,131
                                                   5,800    Sterling Software Inc. (Computer software products) .......      183,425
                                                   2,300    Sunrise Assisted Living, Inc.* (Provider of assisted living to
                                                            the elderly) ..............................................       64,113
                                                   5,000    Tech Data Corp.* (Distributor of microcomputers, hardware
                                                            and software) .............................................      136,875
                                                   4,000    Thomas Nelson, Inc. (Publisher) ...........................       59,500
                                                   4,400    Tiffany & Co. (Retailer of jewelry and gift items) ........      161,150
                                                   4,000    Total Renal Care Holdings, Inc.* (Dialysis services for
                                                            treatment of chronic kidney failure) ......................      145,000
                                                   3,400    Triton Energy Ltd.* (Independent oil and gas exploration
                                                            and production company) ...................................      164,900
                                                   1,000    Vincam Group Inc.* (Provider of solutions to complexities
                                                            and costs of employment and personnel) ....................       43,875
                                                   2,700    Vitesse Semiconductor Corp.* (Manufacturer of digital
                                                            integrated circuits) ......................................      122,850
                                                   5,500    Vivra, Inc.* (Provider of dialysis services) ..............      151,938
</TABLE>

    The accompanying notes are an integral part of the financial statements.


58
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>

                                                   4,200    Wandel & Goltermann Technologies, Inc.* (Manufacturer
                                                            of test, measurement, diagnostic and monitoring
                                                            products for local and wide area networks) ................      122,850
                                                   2,300    Watson Pharmaceuticals, Inc.* (Producer of medications
                                                            and drug delivery systems) ................................      103,352
                                                                                                                          ----------
                                                                                                                           6,472,725
                                                                                                                          ----------
                                                            Total Common Stocks (Cost $14,606,126) (b) ................   15,136,865
                                                                                                                          ----------

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

                                                            Total Investment Portfolio -- 100.0%
                                                            (Cost $16,244,126) (b) ....................................   16,904,247

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

      * Non-income producing security.
    (a) Securities valued in good faith by the Valuation Committee of the Board of Directors at fair value
        amounted to $497,279 (2.97% of net assets). Their values have been estimated by the Board of
        Directors in the absence of readily ascertainable market values. However, because of the inherent
        uncertainty of valuation, those estimated values may differ significantly from the values that would
        have been used had a ready market for the securities existed, and the difference could be material.
        The cost of these securities at December 31, 1996 aggregated $439,559. These securities may also have
        certain restrictions as to resale.
    (b) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
        tax purposes of $16,282,387 was as follows:
        Aggregate gross unrealized appreciation for all investments in which there is an excess of market            
        value over tax cost                                                                                          $    1,668,712 
        Aggregate gross unrealized depreciation for all investments in which there is an excess of tax              
        cost over market value                                                                                           (1,046,852)
                                                                                                                     --------------
        Net unrealized appreciation                                                                                  $      621,860
                                                                                                                     ==============

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

        Purchases and sales of investment securities (excluding short-term investments), for the year ended December 31, 1996,
        aggregated $19,160,797 and $3,966,432, respectively.

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

        Sector breakdown of the Global Discovery Portfolio's equity securities is noted on the Portfolio Summary.

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

       Forward Currency Exchange Contracts:
       As of December 31, 1996, the Global Discovery Portfolio entered into the following forward foreign currency exchange 
       contracts resulting in net unrealized appreciation of $16,537.
                                                                                                         Net Unrealized
                                                                                                         Appreciation/
                                                                                 Settlement              Depreciation
       Contracts to Deliver              In Exchange For                         Date                    (U.S.$)
       --------------------------------  --------------------------------------  ----------------------  ---------------------------
       Japanese Yen         29,688,000   U.S. Dollars                  273,076          1/8/97                       16,537
                                                                                                                     ======
</TABLE>

    The accompanying notes are an integral part of the financial statements.

                                                                              59
<PAGE>

GLOBAL DISCOVERY PORTFOLIO
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (identified cost $16,244,126)  (Note A) ............                   $ 16,904,247
Cash ......................................................................                            371
Net receivable on closed forward currency exchange contracts (Note A) .....                         11,864
Unrealized appreciation on forward currency exchange contracts (Note A) ...                         16,537
Receivables:
   Investments sold .......................................................                        232,522
   Portfolio shares sold ..................................................                         27,030
   Foreign taxes recoverable ..............................................                            658
   Dividends and interest .................................................                          7,539
                                                                                              ------------
      Total assets ........................................................                     17,200,768
Liabilities
Payables:
   Investments purchased ..................................................    $    363,526
   Portfolio shares redeemed ..............................................          25,328
   Accrued expenses (Note B) ..............................................          54,369
   Other payables .........................................................             281
                                                                               ------------
      Total liabilities ...................................................         443,504
                                                                               ------------
Net assets, at market value ...............................................    $ 16,757,264
                                                                               ============

Net Assets
Net assets consist of:
   Undistributed net investment income ....................................                   $     44,728
   Net unrealized appreciation on:
      Investments .........................................................                        660,121
      Foreign currency related transactions ...............................                         16,667
   Accumulated net realized loss ..........................................                        (18,886)
   Paid-in capital ........................................................                     16,054,634
                                                                                              ------------
Net assets, at market value ...............................................                   $ 16,757,264
                                                                                              ============
Net asset value, offering and redemption price per share
   ($16,757,264/2,647,089 outstanding shares of beneficial
   interest, no par value, unlimited number of shares authorized) .........                   $       6.33
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


60
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
for the period May 1, 1996
(commencement of operations) to December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
   Income:
      Interest ...........................................................................    $     73,358
      Dividends (net of foreign taxes withheld of $3,176) ................................          39,856
                                                                                              ------------
                                                                                                   113,214

   Expenses (Note A):
      Management fee (Note B) .............................................   $     80,681
      Trustees' fees (Note B) .............................................         11,152
      Custodian and accounting fees .......................................         77,659
      Auditing ............................................................          4,312
      Legal ...............................................................          3,643
      Registration fees ...................................................          4,887
      Other ...............................................................         10,100
                                                                              ------------
      Total expenses before reductions ....................................        192,434
      Expense reductions ..................................................        (68,074)
                                                                              ------------
   Expenses, net ..........................................................                        124,360
                                                                                              ------------
   Net investment loss ....................................................                        (11,146)
                                                                                              ------------
Net realized and unrealized gain on investment transactions
   Net realized gain from:
      Investments .........................................................         18,758
      Foreign currency related transactions ...............................         18,229          36,987
                                                                              ------------
   Net unrealized appreciation during the period on:
      Investments .........................................................        660,121
      Foreign currency related transactions ...............................         16,667         676,788
                                                                              ------------    ------------
   Net gain on investment transactions ....................................                        713,775
                                                                                              ------------
Net increase in net assets resulting from operations ......................                   $    702,629
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              61
<PAGE>

GLOBAL DISCOVERY PORTFOLIO
--------------------------------------------------------------------------------

STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                              For the Period
                                                                                May 1, 1996
                                                                               (commencement
                                                                             of operations) to
                                                                                December 31,
Increase (Decrease) in Net Assets                                                  1996 
----------------------------------------------------------------------------------------------
<S>                                                                          <C>                    
Operations:
   Net investment loss ....................................................   $    (11,146)
   Net realized gain from investment transactions .........................         36,987
   Net unrealized appreciation on investment
      transactions during the period ......................................        676,788
                                                                              ------------
Net increase in net assets resulting from operations ......................        702,629
                                                                              ------------
Portfolio share transactions:
   Proceeds from shares sold ..............................................     18,871,561
   Cost of shares redeemed ................................................     (2,817,526)
                                                                              ------------
Net increase in net assets from Portfolio share transactions ..............     16,054,035
                                                                              ------------
Increase in net assets ....................................................     16,756,664
Net assets at beginning of period .........................................            600
                                                                              ------------
Net assets at end of period (including undistributed net investment
   income of $44,728) .....................................................   $ 16,757,264
                                                                              ============
Other Information
Increase (decrease) in Portfolio shares
   Shares outstanding at beginning of period ..............................            100
                                                                              ------------
   Shares sold ............................................................      3,107,414
   Shares redeemed ........................................................       (460,425)
                                                                              ------------
   Net increase in Portfolio shares .......................................      2,646,989
                                                                              ------------
Shares outstanding at end of period .......................................      2,647,089
                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


62
<PAGE>

                                                            FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
the period (a) and other performance information derived from the financial
statements.
                                                                 For the Period
                                                                  May 1, 1996  
                                                                 (commencement 
                                                                 of operations)
                                                                 to December 31,
                                                                      1996      
                                                                 ---------------
Net asset value, beginning of period ............................   $   6.00(c)
                                                                    --------
Income from investment operations:
  Net investment loss ...........................................       (.01)
  Net realized and unrealized gain on investment transactions ...        .34
                                                                    --------
Total from investment operations ................................        .33
                                                                    --------
Net asset value, end of period ..................................   $   6.33
                                                                    ========
Total Return (%) ................................................       5.50**
Ratios and Supplemental Data
Net assets, end of period ($ millions) ..........................         17
Ratio of operating expenses, net to average net assets (%) ......       1.50*
Ratio of operating expenses before expense reductions, to
  average daily net assets (%) ..................................       2.32*
Ratio of net investment loss to average net assets (%) ..........       (.13)*
Portfolio turnover rate (%) .....................................      50.31*
Average commission rate paid (b) ................................   $  .0029

(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred stocks.
(c) Original capital
* Annualized
**Not annualized


                                                                              63
<PAGE>

INTERNATIONAL PORTFOLIO
INVESTMENT PORTFOLIO  as of December 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of        Principal                                                                    Market
                                 Portfolio      Amount                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                    8.4%               REPURCHASE AGREEMENT


                                        U.S.$ 60,487,000    Repurchase Agreement with Donaldson, Lufkin &
                                                            Jenrette dated 12/31/96 at 6.7%, to be repurchased
                                                            at $60,509,515 on 1/2/97, collateralized by a
                                                            $48,029,000 U.S. Treasury Bond, 8.875%, 8/15/17
                                                            (Cost $60,487,000) ........................................   60,487,000
                                                                                                                          ----------

                                    0.5%               CONVERTIBLE BONDS

Japan                               0.4%
                                       JPY   400,000,000    Softbank Corp., 0.5%, 3/29/02 .............................    3,212,158
                                                                                                                          ----------
Malaysia                            0.1%
                                       MYR       420,000    Renong Berhad. (ICUL), 4%, 5/21/01 ........................      176,282
                                                                                                                          ----------
                                                            Total Convertible Bonds (Cost $4,152,237) .................    3,388,440
                                                                                                                          ----------
                                    1.3%               PREFERRED STOCKS

                                                Shares
                                   ------------------------------------------------------------------------------------------------

Germany
                                                 185,000    RWE AG (Producer and marketer of petroleum and
                                                             chemical products) .......................................    6,249,391
                                                  22,500    SAP AG (Computer software manufacturer) ...................    3,142,560
                                                                                                                          ----------
                                                            Total Preferred Stocks (Cost $5,594,617) ..................    9,391,951
                                                                                                                          ----------

                                   89.9%               COMMON STOCKS

Argentina                           0.6%
                                                 170,000    YPF S.A. "D" (ADR) (Petroleum company) ....................    4,292,500
                                                                                                                          ----------
Australia                           0.9%
                                                 342,535    National Australia Bank, Ltd. (Commercial bank) ...........    4,029,506
                                               1,824,340    Normandy Mining Ltd. (Invests in mining and oil
                                                            enterprises in Australia) .................................    2,523,133
                                                                                                                          ----------
                                                                                                                           6,552,639
                                                                                                                          ----------
Brazil                              4.6%
                                               8,578,870    Centrais Eletricas Brasileiras S/A "B" (pfd.) 
                                                            (Electric utility) ........................................    3,186,838
                                               5,086,206    Companhia Cervejaria Brahma (pfd.) (Leading beer
                                                            producer and distributor) .................................    2,780,257
                                             237,000,000    Companhia Energetica de Minas Gerais (pfd.)
                                                            (Electric power utility) ..................................    8,074,103
                                                 124,880    Companhia Vale do Rio Doce (pfd.) (Diverse mining
                                                            and industrial complex) ...................................    2,427,655
                                              30,000,000    Petroleo Brasileiro S/A (pfd.) (Petroleum company) ........    4,778,173
                                              65,040,000    Telecomunicacoes Brasileiras S.A. (pfd.)
                                                            (Telecommunication services) ..............................    5,007,410
                                           6,530,000,000    Usinas Siderurgicas de Minas Gerais S/A (pfd.)
                                                            (Non-coated flat products and electrolytic galvanized
                                                             products) ................................................    6,661,342
                                                                                                                          ----------
                                                                                                                          32,915,778
                                                                                                                          ----------
Canada                              2.9%
                                                 160,000    Barrick Gold Corp. (Gold exploration and production
                                                            in North and South America) ...............................    4,585,113
                                                 296,000    Battle Mountain Canada (Gold and silver mining) ...........    2,053,079
                                                 206,500    Canadian National Railway Co. (Operator of one of
                                                            Canada's two principal railroads) .........................    7,855,036
</TABLE>

    The accompanying notes are an integral part of the financial statements.


64
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                                 255,411    Canadian Pacific Ltd. (Ord.) (Transportation and
                                                            natural resource conglomerate) ............................    6,722,559
                                                                                                                          ----------
                                                                                                                          21,215,787
                                                                                                                          ----------
China                               0.6%
                                                 191,837    Guangshen Railway Co. Ltd. (ADR)* (Operator of only
                                                            railroad in the Pearl River delta) ........................    3,956,638
                                                                                                                          ----------
Finland                             1.3%
                                                 116,000    Nokia AB Oy "A" (Leading manufacturer of
                                                            cellular telephones) ......................................    6,728,000
                                                 132,000    Outokumpu Oy "A" (Metals and minerals) ....................    2,252,609
                                                                                                                          ----------
                                                                                                                           8,980,609
                                                                                                                          ----------
France                              7.9%
                                                  78,857    AXA SA (Insurance group providing insurance,
                                                            finance and real estate services) .........................    5,016,929
                                                  13,950    Carrefour (Hypermarket operator and food retailer) ........    9,079,468
                                                  57,453    Compagnie Financiere de Paribas* (Finance and
                                                            investment company) .......................................    3,886,689
                                                  48,000    Compagnie Generale des Eaux (Water utility) ...............    5,950,260
                                                  12,000    LVMH Moet-Hennessy Louis Vuitton SA (Producer of
                                                            wines, spirits and luxury products) .......................    3,352,227
                                                  55,000    Lafarge SA (Leading producer of cement, concrete and
                                                            aggregates) ...............................................    3,300,848
                                                 128,898    Michelin "B" (Leading tire manufacturer) ..................    6,960,542
                                                  13,128    Pinault-Printemps, SA (Distributor of consumer goods) .....    5,208,680
                                                  20,335    Rhone-Poulenc SA "A" (Medical, agricultural and
                                                            consumer chemicals) .......................................      693,515
                                                 132,055    Schneider SA* (Manufacturer of electronic components
                                                            and automated manufacturing systems) ......................    6,107,576
                                                  74,425    Total SA "B" (International oil and gas exploration,
                                                            development and production) ...............................    6,055,013
                                                  26,872    Valeo SA (Automobile and truck components manufacturer) ...    1,657,806
                                                                                                                          ----------
                                                                                                                          57,269,553
                                                                                                                          ----------
Germany                            11.0%
                                                 214,000    BASF AG (Leading international chemical producer) .........    8,241,089
                                                 190,000    Bayer AG (Leading chemical producer) ......................    7,751,324
                                                 148,000    Bayerische Vereinsbank AG (Commercial bank) ...............    6,076,331
                                                 210,000    Commerzbank AG* (Worldwide multi-service bank) ............    5,334,070
                                                 101,000    Daimler-Benz AG (Automobile and truck manufacturer) .......    6,954,884
                                                  70,744    Deutsche Telekom AG (Telecommunication services) ..........    1,491,307
                                                  94,542    Deutsche Telekom AG (ADR)* (Telecommunication
                                                            services) .................................................    1,926,293
                                                 257,000    Hoechst AG (Chemical producer) ............................   12,137,526
                                                  20,360    Mannesmann AG (Bearer) (Diversified construction
                                                            and technology company) ...................................    8,821,983
                                                  69,000    Schering AG (Pharmaceutical and chemical producer) ........    5,822,652
                                                 101,270    Siemens AG (Leading electrical engineering and
                                                            electronics company) ......................................    4,769,594
                                                 171,200    VEBA AG (Electric utility and distributor of oil and
                                                            chemicals) ................................................    9,898,204
                                                                                                                          ----------
                                                                                                                          79,225,257
                                                                                                                          ----------
Hong Kong                           5.2%
                                               4,341,545    First Pacific Co., Ltd. (International management and
                                                            investment company) .......................................    5,641,286
                                                 217,376    HSBC Holdings Ltd. (Bank) .................................    4,651,332
                                               3,240,181    Hong Kong & China Gas Co., Ltd. (Gas utility) .............    6,283,886
                                                 270,015    Hong Kong & China Gas Co., Ltd. Warrants*
                                                            (Expires 9/30/97) .........................................      150,115
                                               1,182,000    Hutchison Whampoa, Ltd. (Container terminal and real
                                                            estate company) ...........................................    9,283,923
                                               2,013,000    Kerry Properties Ltd.* (Real estate company) ..............    5,517,564
                                               1,510,000    Television Broadcasts, Ltd. (Television broadcasting) .....    6,032,581
                                                                                                                          37,560,687
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              65
<PAGE>

INTERNATIONAL PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
Indonesia                           1.0%
                                                  21,100    Asia Pacific Resources International Holdings Ltd.*
                                                            (Manufacturer of rayon fiber for Asian textile markets,
                                                            owner of world's leading paper pulp mill) .................      118,688
                                                  56,340    Asia Pulp & Paper Co., Ltd. (ADR) (Producer of pulp
                                                            and paper)* ...............................................      640,868
                                                 740,000    HM Sampoerna (Foreign registered) (Tobacco company) .......    3,947,502
                                               1,525,500    Indah Kiat Pulp & Paper (Foreign registered)* (Producer
                                                            of pulp and paper) ........................................    1,114,093
                                                 183,300    Indah Kiat Pulp & Paper Warrants* (Expires 4/13/01) .......       56,263
                                                 400,000    Indocement Tunggal Prakarsa (Foreign Registered)
                                                            (Multi-business group with three major divisions namely
                                                            cement, food and property) ................................      609,653
                                                 924,570    Pabrik Kertas Tjiwi Kimia (Operator of pulp and
                                                            paper factory) ............................................      919,873
                                                                                                                          ----------
                                                                                                                           7,406,940
                                                                                                                          ----------
Italy                               1.6%
                                                  65,000    Luxottica Group SpA (ADR) (Manufacturer and marketer
                                                            of eyeglasses) ............................................    3,380,000
                                               3,310,000    Telecom Italia Mobile SpA (Cellular telecommunication
                                                            services) .................................................    8,359,714
                                                                                                                          ----------
                                                                                                                          11,739,714
                                                                                                                          ----------
Japan                              16.0%
                                                 330,000    Bridgestone Corp. (Leading automobile tire manufacturer) ..    6,268,889
                                                 358,000    Canon Inc. (Leading producer of visual image and
                                                            information equipment) ....................................    7,913,652
                                                     640    DDI Corp. (Long distance telephone and cellular operator) .    4,233,140
                                                 205,000    Fujitsu Ltd. (Leading manufacturer of computers) ..........    1,911,752
                                                 190,000    Hitachi Construction Machinery Co., Ltd. (Leading
                                                            maker of hydraulic shovels) ...............................    2,001,554
                                                 697,000    Hitachi Ltd. (General electronics manufacturer) ...........    6,499,957
                                                 180,000    Honda Motor Co., Ltd. (Leading automobile and
                                                            motorcycle manufacturer) ..................................    5,144,633
                                                  10,000    Horipro Inc. (Growing entertainment production company) ...       95,847
                                                 625,000    Ishikawajima-Harima Heavy Industries Co., Ltd. ............
                                                            (Comprehensive heavy machinery manufacturer in
                                                            aerospace and defense fields) .............................    2,779,337
                                                  20,000    Ito-Yokado Co., Ltd. (Leading supermarket operator) .......      870,391
                                                 465,000    Itochu Corp. (Leading general trading company) ............    2,497,453
                                                  28,000    Japan Associated Finance Co. (Venture capital company) ....    2,212,244
                                                 125,000    Jusco Co., Ltd. (Major supermarket operator) ..............    4,241,862
                                                 250,000    Kajima Corp. (Leading contractor engaged in
                                                            large-scale civil engineering projects) ...................    1,787,410
                                                  53,000    Keyence Corp. (Specialized manufacturer of sensors) .......    6,544,340
                                                 115,000    Kokuyo (Leading manufacturer of paper stationery) .........    2,839,997
                                                 103,000    Kyocera Corp. (Leading ceramic package manufacturer) ......    6,421,380
                                                  37,000    Mabuchi Motor Co., Ltd. (Manufacturer of DC motors) .......    1,862,620
                                                 520,000    Matsushita Electric Industrial Co., Ltd. (Leading
                                                            manufacturer of consumer electronic products) .............    8,486,314
                                                 280,000    Matsushita Electric Works, Inc. (Leading maker of
                                                            building materials and lighting equipment) ................    2,410,500
                                                 620,000    Mitsubishi Heavy Industries, Ltd. (Diversified heavy
                                                            machinery manufacturer and leading shipbuilder) ...........    4,925,309
                                                  47,000    Nichiei Co., Ltd. (Finance company for small and
                                                            medium-sized firms) .......................................    3,469,908
                                                  50,000    Nippon Electric Glass Co., Ltd. (Leading producer of
                                                            cathode-ray tube glass) ...................................      768,500
                                                 200,000    Pioneer Electronics Corp. (Leading manufacturer of
                                                            audio equipment) ..........................................    3,816,596
                                                 390,000    Ricoh Co., Ltd. (Leading maker of copiers and
                                                            information equipment) ....................................    4,478,888
                                                  81,500    SMC Corp. (Leading maker of pneumatic equipment) ..........    5,482,126
                                                  50,000    Secom Co., Ltd. (Electronic security system operator) .....    3,026,509
</TABLE>

    The accompanying notes are an integral part of the financial statements.


66
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
                                                  48,400    Seven-Eleven Japan Co., Ltd. (Leading convenience
                                                            store operator) ...........................................    2,833,538
                                                 250,000    ShinMaywa Industries, Ltd. (Leading maker of dump
                                                            trucks and other specialty vehicles) ......................    1,841,378
                                               1,710,000    Sumitomo Metal Industries, Ltd (Leading integrated crude
                                                            steel producer). ..........................................    4,208,186
                                                 560,000    Sumitomo Metal Mining Co., Ltd. (Leading gold, nickel and
                                                            copper mining company) ....................................    3,776,531
                                                                                                                          ----------
                                                                                                                         115,650,741
                                                                                                                          ----------
Korea                               0.3%
                                                   7,870    Pohang Iron & Steel Co., Ltd. (Leading steel producer) (b)       465,727
                                                  93,400    Pohang Iron & Steel Co., Ltd. (ADR) .......................    1,891,350
                                                       1    Samsung Electronics Co., Ltd. (Major electronics
                                                            manufacturer) .............................................           41
                                                       1    Samsung Electronics Co., Ltd. (1/2 Voting GDR)(New 1)
                                                            (Major electronics manufacturer) ..........................           38
                                                       1    Samsung Electronics Co., Ltd. (Non-voting GDS)(New)
                                                            (Major electronics manufacturer) ..........................           18
                                                                                                                          ----------
                                                                                                                           2,357,174
                                                                                                                          ----------
Malaysia                            1.2%
                                                 275,000    Malayan Banking Berhad (Leading banking and financial
                                                            services group) ...........................................    3,048,901
                                                 723,000    Malaysian Airline System Berhad (Air transportation and
                                                            related services) .........................................    1,875,134
                                               2,100,000    Renong Berhad (Holding company involved in
                                                            engineering, construction, financial services,
                                                            telecommunication and information technology) .............    3,725,203
                                                                                                                          ----------
                                                                                                                           8,649,238
                                                                                                                          ----------
Mexico                              0.7%
                                                 155,000    Telefonos de Mexico S.A. de C.V. "L" (ADR)
                                                            (Telecommunication services) ..............................    5,115,000
                                                                                                                          ----------
Netherlands                         4.9%
                                                 130,000    AEGON Insurance Group NV (Insurance company) ..............    8,284,904
                                                  24,000    Akzo-Nobel NV (Chemical producer) .........................    3,278,537
                                                 204,870    Elsevier NV (International publisher of scientific,
                                                            professional, business, and consumer information books) ...    3,462,725
                                                 186,304    Getronics NV (Provider of computer installation and
                                                            maintenance services) .....................................    5,057,686
                                                  43,750    Heineken Holdings NV "A" (Brewery) ........................    6,837,520
                                                 114,000    Philips Electronics NV (Leading manufacturer of
                                                            electrical equipment) .....................................    4,619,125
                                                  26,935    Wolters Kluwer CVA (Publisher) ............................    3,578,133
                                                                                                                          ----------
                                                                                                                          35,118,630
                                                                                                                          ----------
New Zealand                         0.9%
                                               1,200,000    Telecom Corp. of New Zealand (Telecommunication
                                                            services) .................................................    6,125,016
                                                                                                                          ----------
Norway                              0.6%
                                                 271,889    Saga Petroleum AS "A" (Oil and gas
                                                            exploration and production) ...............................    4,545,640
                                                                                                                          ----------
Philippines                         2.3%
                                               2,700,000    Ayala Land, Inc. "B" (Real estate and land developer) .....    3,079,848
                                               9,312,000    C & P Homes, Inc. (Home construction company) .............    4,779,924
                                                 714,987    Manila Electric Co. "B" (Electric utility) ................    5,844,951
                                                 125,000    Metropolitan Bank and Trust Company (Commercial
                                                            bank and trust company) ...................................    3,089,354
                                                                                                                          ----------
                                                                                                                          16,794,077
                                                                                                                          ----------
Portugal                            1.6%
                                                  30,192    Jeronimo Martins (Food producer and retailer) .............    1,557,210
                                                  30,192    Jeronimo Martins (New)* (a) ...............................    1,554,898
                                                 301,000    Portugal Telecom SA (Telecommunication services) ..........    8,580,587
                                                                                                                          ----------
                                                                                                                          11,692,695
                                                                                                                          ----------
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              67
<PAGE>

INTERNATIONAL PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                   % of                                                                                     Market
                                 Portfolio       Shares                                                                    Value ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>
Spain                               2.5%
                                                  51,140    Acerinox, S.A. (Stainless steel producer) .................    7,389,843
                                                  22,000    Banco Popular Espanol, S.A. (Retail bank) .................    4,321,202
                                                 280,000    Compania Telefonica Nacional de Espana S.A ................
                                                            (Telecommunication services) ..............................    6,502,600
                                                                                                                         -----------
                                                                                                                          18,213,645
                                                                                                                         -----------
Sweden                              4.3%
                                                 211,000    AGA AB "B" (Free) (Producer and distributor of
                                                            industrial and medical gases) .............................    3,155,973
                                                 202,000    Autoliv AB (Manufacturer of automobile safety bags) .......    8,856,726
                                                 256,400    L.M. Ericsson Telephone Co. "B" (ADR) (Leading
                                                            manufacturer of cellular telephone equipment) .............    7,740,075
                                                 144,000    S.K.F. AB "B" (Free) (Manufacturer of roller bearings) ....    3,410,246
                                                 270,000    Skandia Foersaekrings AB (Free) (Financial conglomerate) ..    7,641,379
                                                                                                                         -----------
                                                                                                                          30,804,399
                                                                                                                         -----------
Switzerland                         5.0%
                                                   5,180    ABB AG (Bearer) (Manufacturer of electrical equipment) ....    6,438,746
                                                       5    ABB AG (Registered) .......................................        1,209
                                                  60,000    CS Holdings (Registered) (Provider of bank services,
                                                            management services and life insurance) ...................    6,159,015
                                                  12,671    Clariant AG (Registered)(Manufacturer of color chemicals) .    5,420,293
                                                   5,013    Novartis AG (Bearer) (Pharmaceutical company) .............    5,733,420
                                                   5,000    Novartis AG (Registered) (Pharmaceutical company) .........    5,722,284
                                                   2,610    SGS Holdings SA (Bearer) (Trade inspection company) .......    6,410,526
                                                                                                                         -----------
                                                                                                                          35,885,493
                                                                                                                         -----------
Thailand                            0.0%
                                                  65,652    Thai Farmers Bank PCL Warrants, * (Expire 9/15/02)
                                                            (Commercial bank) .........................................       62,078
                                                                                                                         -----------
United Kingdom                     12.0%
                                                 420,000    BOC Group PLC (Producer of industrial gases) ..............    6,284,411
                                                 622,082    British Petroleum PLC (Major integrated world oil company)     7,455,033
                                                 890,000    Carlton Communications PLC (Television post
                                                            production products and services) .........................    7,795,152
                                               1,100,000    General Electric Co., PLC (Manufacturer of power,
                                                            communications and defense equipment and other
                                                            various electrical components) ............................    7,212,658
                                                 370,000    Glaxo Wellcome PLC (Pharmaceutical company) ...............    6,017,682
                                                 575,000    Pearson PLC (Diversified media and entertainment
                                                            holding company) ..........................................    7,333,782
                                                 655,128    PowerGen PLC (Electric utility) ...........................    6,415,434
                                                 440,059    RTZ Corp., PLC (Mining and finance company) ...............    7,066,716
                                                 489,200    Reuters Holdings PLC (International news agency) ..........    6,285,517
                                                 618,320    SmithKline Beecham PLC (Manufacturer of ethical drugs
                                                            and healthcare products) ..................................    8,553,198
                                               1,890,000    WPP Group PLC (Advertising agency) ........................    8,186,273
                                                 300,000    Zeneca Group PLC (Holding company: manufacturing
                                                            and marketing of pharmaceutical and agrochemical
                                                            products and specialty chemicals) .........................    8,448,712
                                                                                                                         -----------
                                                                                                                          87,054,568
                                                                                                                         -----------
                                                            Total Common Stocks (Cost $517,432,357) ...................  649,184,496

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

                                                            Total Investment Portfolio -- 100.0%
                                                            (Cost $587,666,211) (c) ...................................  722,451,887
                                                                                                                         ===========

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

    The accompanying notes are an integral part of the financial statements.


68
<PAGE>

                                                            INVESTMENT PORTFOLIO
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                                                         <C>

      * Non-income producing security.
    (a) Securities valued in good faith by the Valuation Committee of the Board of Trustees at fair value
        amounted to $1,554,898 (.22% of net assets). Their values have been estimated by the Board of
        Trustees in the absence of readily ascertainable market values. However, because of the inherent
        uncertainty of valuation, those estimated values may differ significantly from the values that would
        have been used had a ready market for the securities existed, and the difference could be material.
        The cost of these securities at December 31, 1996 aggregated $249,296. These securities may also have
        certain restrictions as to resale.
    (b) Securities that have met the foreign-ownership limitation valued at a premium in good faith by the
        Valuation Committee of the Board of Trustees. The cost of these securities at December 31, 1996 was
        $736,139. The aggregate premium ($125,780) over the local share price ($339,947) for these securities
        valued by the Valuation Committee was approximately 0.01% of the Portfolio's net assets at December
        31, 1996.
    (c) At December 31, 1996, the net unrealized appreciation on investments based on cost for federal income
        tax purposes of $587,720,164 was as follows:
        Aggregate gross unrealized appreciation for all investments in which there is an excess of market 
        value over tax cost ....................................................................................     $  152,896,529
        Aggregate gross unrealized depreciation for all investments in which there is an excess of tax               
        cost over market value .................................................................................        (18,164,806)
                                                                                                                     ---------------
        Net unrealized appreciation ............................................................................     $  134,731,723
                                                                                                                     ==============
------------------------------------------------------------------------------------------------------------------------------------

        Purchases and sales of investment securities (excluding short-term investments), for the year ended December 31, 1996,
        aggregated $276,115,066 and $195,075,817, respectively.
------------------------------------------------------------------------------------------------------------------------------------

        Sector breakdown of the International Portfolio's equity securities is noted on the Portfolio Summary.
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              69
<PAGE>

INTERNATIONAL PORTFOLIO
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
Assets
Investments, at market (identified cost $587,666,211) (Note A) ...........                    $722,451,887
Cash .....................................................................                             431
Foreign currency, at value, (cost $4,591,190) ............................                       4,606,023
Net receivable on closed forward currency exchange contracts .............                         642,355
Receivables:
   Investments sold ......................................................                         446,785
   Portfolio shares sold .................................................                         592,374
   Foreign taxes recoverable .............................................                         635,158
   Dividends and interest ................................................                         681,621
                                                                                              ------------
      Total assets .......................................................                     730,056,634
Liabilities
Payables:
   Investments purchased .................................................     $  1,838,662
   Portfolio shares redeemed .............................................        1,376,946
   Accrued management fee (Note B) .......................................          500,960
   Other accrued expenses (Note B) .......................................          265,265
   Other payables ........................................................           36,274
                                                                               ------------
      Total liabilities ..................................................        4,018,107
                                                                               ------------
Net assets, at market value ..............................................     $726,038,527
                                                                               ============

Net Assets
Net assets consist of:
   Undistributed net investment income ...................................                    $ 10,702,948
   Net unrealized appreciation on:
      Investments ........................................................                     134,785,676
      Foreign currency related transactions ..............................                           8,404
   Accumulated net realized gain .........................................                       6,633,433
   Paid-in capital .......................................................                     573,908,066
                                                                                              ------------
Net assets, at market value ..............................................                    $726,038,527
                                                                                              ============
Net asset value, offering and redemption price per share
   ($726,038,527 54,809,210 outstanding shares of beneficial
   interest, no par value, unlimited number of shares authorized) ........                    $      13.25
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


70
<PAGE>

                                                            FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------------------------------------------------------------------------------------
<S>                                                                           <C>            <C>
Investment income
   Income:
      Dividends (net of foreign taxes withheld of $1,429,380) ............                    $ 10,364,446
      Interest (net of foreign taxes withheld of $2,537) .................                       2,548,158
                                                                                              ------------
                                                                                                12,912,604

   Expenses (Note A):
      Management fee (Note B) ............................................    $  5,590,601
      Custodian and accounting fees (Note B) .............................         974,459
      Trustees' fees (Note B) ............................................          21,062
      Auditing ...........................................................          68,095
      Registration fees ..................................................          38,239
      Legal ..............................................................          12,988
      Other ..............................................................          68,398       6,773,842
                                                                              ------------    ------------
   Net investment income .................................................                       6,138,762
                                                                                              ------------
Net realized and unrealized gain (loss) on investment transactions
   Net realized gain from:
      Investments ........................................................      14,588,107
      Foreign currency related transactions ..............................      13,654,103      28,242,210
                                                                              ------------
   Net unrealized appreciation (depreciation) during the period on:
      Investments ........................................................      62,989,856
      Foreign currency related transactions ..............................      (7,755,206)     55,234,650
                                                                              ------------    ------------
   Net gain on investment transactions ...................................                      83,476,860
                                                                                              ------------
Net increase in net assets resulting from operations .....................                    $ 89,615,622
                                                                                              ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                                                              71
<PAGE>

INTERNATIONAL PORTFOLIO
--------------------------------------------------------------------------------

STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31
                                                                                 -----------------------
Increase (Decrease) in Net Assets                                                  1996            1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>              <C>          
Operations:
   Net investment income .................................................    $   6,138,762    $   4,713,698
   Net realized gain (loss) from investment transactions .................       28,242,210       (7,926,588)
   Net unrealized appreciation on investment
      transactions during the period .....................................       55,234,650       56,119,932
                                                                              -------------    -------------
Net increase in net assets resulting from operations .....................       89,615,622       52,907,042
                                                                              -------------    -------------
Distributions to shareholders from:
   Net investment income .................................................      (13,901,339)        (572,293)
                                                                              -------------    -------------
   Net realized gain from investment transactions ........................             --         (1,628,833)
                                                                              -------------    -------------
Portfolio share transactions:
   Proceeds from shares sold .............................................      250,971,681      383,866,201
   Net asset value of shares issued to shareholders in
      reinvestment of distributions ......................................       13,901,339        2,201,126
   Cost of shares redeemed ...............................................     (162,751,269)    (360,607,349)
                                                                              -------------    -------------
Net increase in net assets from Portfolio share transactions .............      102,121,751       25,459,978
                                                                              -------------    -------------
Increase in net assets ...................................................      177,836,034       76,165,894
Net assets at beginning of period ........................................      548,202,493      472,036,599
                                                                              -------------    -------------
Net assets at end of period (including undistributed net
   investment income of $10,702,948 and $5,598,231, respectively) ........    $ 726,038,527    $ 548,202,493
                                                                              =============    =============
Other Information
Increase (decrease) in Portfolio shares
Shares outstanding at beginning of period ................................       46,398,169       44,139,826
                                                                              -------------    -------------
   Shares sold ...........................................................       20,288,490       34,890,301
   Shares issued to shareholders in reinvestment of distributions ........        1,166,953          216,220
   Shares redeemed .......................................................      (13,044,402)     (32,848,178)
                                                                              -------------    -------------
   Net increase in Portfolio shares ......................................        8,411,041        2,258,343
                                                                              -------------    -------------
Shares outstanding at end of period ......................................       54,809,210       46,398,169
                                                                              =============    =============
</TABLE>

    The accompanying notes are an integral part of the financial statements.


72
<PAGE>

                                                            FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------

The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements.

<TABLE>
<CAPTION>
                                                                                                                     For the Period
                                                                                                                      May 1, 1987
                                                                                                                     (commencement
                                                           Years Ended December 31,                                of operations) to
                           ----------------------------------------------------------------------------------------    December 31,
                           1996(a)   1995(a)   1994(a)   1993(a)   1992(a)   1991(a)   1990(a)   1989(a)      1988        1987
                           ----------------------------------------------------------------------------------------    ----------
<S>                        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>         <C>         <C>      
Net asset value,                                                                                                       
  beginning of                                                                                                         
  period ...............   $11.82    $10.69    $10.85    $ 8.12    $ 8.47    $ 7.78    $ 8.46    $ 6.14      $ 5.26      $ 6.00(c)
                           ------    ------    ------    ------    ------    ------    ------    ------      ------      ------   
Income from investment                                                                                                 
  operations:                                                                                                          
  Net investment                                                                                                       
    income .............      .12       .11       .06       .09       .10       .12       .25       .10         .09        --
  Net realized and                                                                                                     
    unrealized gain                                                                                                    
    (loss) on investment                                                                                               
    transactions .......     1.60      1.07      (.15)     2.90      (.36)      .77      (.89)     2.22(d)      .79        (.64)
Total from investment                                                                                                  
  operations ...........     1.72      1.18      (.09)     2.99      (.26)      .89      (.64)     2.32         .88        (.64)
Less distributions:                                                                                                    
  From net investment                                                                                                  
    income .............     (.29)     (.01)     (.07)     (.14)     (.09)     (.20)     (.04)     --          --          --
  In excess of net                                                                                                     
    investment income ..     --        --        --        (.12)     --        --        --        --          --          --
  From net realized                                                                                                    
    gains on investment                                                                                                
    transactions .......     --        (.04)     --        --        --        --        --        --          --          (.10)
  Total distributions ..     (.29)     (.05)     (.07)     (.26)     (.09)     (.20)     (.04)     --          --          (.10)
Net asset value, end                                                                                                   
  of period ............   $13.25    $11.82    $10.69    $10.85    $ 8.12    $ 8.47    $ 7.78    $ 8.46      $ 6.14      $ 5.26
Total Return (%) .......    14.78     11.11      (.85)    37.82     (3.08)    11.45     (7.65)    37.79       16.73      (10.64)**
Ratios and                                                                                                             
Supplemental Data                                                                                                      
Net assets, end of                                                                                                     
  period ($ millions) ..      726       548       472       238        65        41        35        17           3           2
Ratio of operating                                                                                                     
  expenses, net to                                                                                                     
  average net assets                                                                                                   
  (%) ..................     1.05      1.08      1.08      1.20      1.31      1.39      1.38      1.50        1.50        1.50*
Ratio of operating                                                                                                     
  expenses before                                                                                                      
  expense reductions,                                                                                                  
  to average daily net                                                                                                 
  assets (%) ...........     1.05      1.08      1.08      1.20      1.31      1.39      1.38      1.80        4.15        4.06*
Ratio of net investment                                                                                                
  income to average                                                                                                    
  net assets (%) .......      .95       .95       .57       .91      1.23      1.43      2.89      1.30        1.59         .02*
Portfolio turnover                                                                                                     
  rate (%) .............    32.63     45.76     33.52     20.36     34.42     45.01     26.67     57.69      110.42      146.08*
Average commission                                                                                                     
  rate paid (b) ........   $.0002    $ --      $ --      $ --      $ --      $ --      $ --      $ --        $ --        $ --
</TABLE>
(a) Based on monthly average shares outstanding during the period.
(b) Average commission rate paid per share of common and preferred securities is
    calculated for fiscal years beginning on or after September 1, 1995.
(c) Original capital
(d) Includes provision for federal income tax of $.03 per share.
* Annualized
**Not annualized


                                                                              73
<PAGE>

SCUDDER VARIABLE LIFE INVESTMENT FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

A.   Significant Accounting Policies

Scudder Variable Life Investment Fund (the "Fund") is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended, as an open-end, diversified management investment company.
Its shares are divided into seven separate diversified series, called
"Portfolios." The Portfolios are comprised of the Money Market Portfolio, Bond
Portfolio, Balanced Portfolio, Growth and Income Portfolio, Capital Growth
Portfolio, Global Discovery Portfolio (which commenced operations on May 1,
1996), and International Portfolio. Effective May 1, 1996, the Fund offers one
class of shares for the Money Market Portfolio and two classes of shares (Class
A shares and Class B shares) for the other portfolios. Class B shares are
subject to a 12b-1 fee under the Investment Company Act of 1940, equal to an
annual rate of up to 0.25% of the average daily net asset value of the Class B
shares of the applicable portfolio. Class A shares are not subject to such fees.
Expenses are borne pro-rata by the holders of all classes of shares except that
each class bears expenses unique to that class (including the applicable 12b-1
fee). Shares of each class would receive their pro-rata share of net assets if
the Fund were liquidated. As of December 31, 1996, there have been no sales of
class B shares.

The Fund is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies ("Participating Insurance Companies"). As of
December 31, 1996, ownership breakdown of the Portfolios by each Participating
Insurance Company is as follows:

<TABLE>
<CAPTION>
                                                                                  Portfolios
                                           -----------------------------------------------------------------------------------------
                                                                                   Growth         
                   Participating              Money                                 and        Capital    Global      
                Insurance Companies           Market       Bond        Balanced    Income      Growth    Discovery   International
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>         <C>         <C>         <C>         <C>         <C>         <C> 
Aetna Life Insurance & Annuity Co. .....        -- %        -- %        -- %        -- %        -- %        -- %       46.9%
Banner Life Insurance Co. ..............        1.3         2.0         7.1         5.0         2.1         4.4         0.7
Charter National Life Insurance Co. ....       51.7        30.9        57.7        79.3        23.7        83.4        11.8
Companion Life Insurance Co. ...........       --           0.3        --          --          --          --          --
  of New York
Fortis Benefits Insurance Co. ..........       --          --          --          --          --          --           0.4
Intramerica Life Insurance Co. .........        4.4         3.0         4.6         8.7         2.1        12.2         1.3
Lincoln Benefit Life Co. ...............       --           4.1         6.8        --          --          --          --
Mutual of America Life Insurance Co. ...       --          40.3        --          --          55.9        --          23.5
Paragon Life Insurance Co. .............       --           0.2         0.4         0.1         0.2        --           0.1
Providentmutual Life and Annuity .......       --           9.3        --           5.6        --          --           0.8
  Co. of America
Southwestern Life Insurance Co. ........       --          --          --          --           1.5        --          --
Washington National Life Insurance Co. .        0.5         9.3        --           1.3         6.0        --          --
Safeco Life Insurance Co. ..............       --          --          23.4        --          --          --           3.7
Security First Life Insurance Co. ......       --          --          --          --          --          --           0.3
Union Central Life Insurance Co. .......       39.7        --          --          --           6.2        --           8.2
United Companies Life Insurance Co. ....        2.4        --          --          --          --          --           0.2
United of Omaha Life Insurance Co. .....       --           0.6        --          --          --          --           2.1
USAA Life Insurance Co. ................       --          --          --          --           2.3        --          --
                                           -----------------------------------------------------------------------------------------
                                              100.0%      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
                                           ========    ========    ========    ========    ========    ========    ========
</TABLE>

The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which require the use of management estimates.
The policies described below are followed consistently by the Fund in the
preparation of the financial statements for its Portfolios.

Security Valuation. The Money Market Portfolio values all securities utilizing
the amortized cost method permitted in accordance with Rule 2a-7 under the
Investment Company Act of 1940, as amended, and pursuant to which the Portfolio
must adhere to certain conditions. Under this method, which does not take into
account unrealized gains or losses on securities, an instrument is initially


74
<PAGE>

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

valued at its cost and thereafter assumes a constant accretion/amortization to
maturity of any discount/premium.

Securities in each of the remaining Portfolios are valued in the following
manner:

Portfolio securities which are traded on U.S. or foreign stock exchanges are
valued at the most recent sale price reported on the exchange on which the
security is traded most extensively. If no sale occurred, the security is then
valued at the calculated mean between the most recent bid and asked quotations.
If there are no such bid and asked quotations, the most recent bid quotation is
used. Securities quoted on the National Association of Securities Dealers
Automatic Quotation ("NASDAQ") System, for which there have been sales, are
valued at the most recent sale price reported on such system. If there are no
such sales, the value is the high or "inside" bid quotation. Securities which
are not quoted on the NASDAQ System but are traded in another over-the-counter
market are valued at the most recent sale price on such market. If no sale
occurred, the security is then valued at the calculated mean between the most
recent bid and asked quotations. If there are no such bid and asked quotations,
the most recent bid quotation shall be used.

Portfolio debt securities with remaining maturities greater than sixty days are
valued by pricing agents approved by the officers of the Fund, which quotations
reflect broker/dealer-supplied valuations and electronic data processing
techniques. If the pricing agents are unable to provide such quotations, the
most recent bid quotation supplied by a bona fide market maker shall be used.
Short-term investments having a maturity of sixty days or less are valued at
amortized cost.

All other securities are valued at their fair value as determined in good faith
by the Valuation Committee of the Trustees. Their values have been estimated by
the Board of Trustees in the absence of readily ascertainable market values.
However, because of the inherent uncertainty of valuation, those estimated
values may differ significantly from the values that would have been used had a
ready market for the securities existed, and the difference could be material.

Futures Contracts. The non-money market Portfolios may enter into futures
contracts. A futures contract is an agreement between a buyer or seller and an
established futures exchange or its clearinghouse in which the buyer or seller
agrees to take or make a delivery of a specific amount of an item at a specified
price on a specific date (settlement date). During the period, the Bond
Portfolio sold interest rate futures to hedge against declines in the value of
portfolio securities.

Upon entering into a futures contract, the Portfolio is required to deposit with
a financial intermediary an amount ("initial margin") equal to a certain
percentage of the face value indicated in the futures contract. Subsequent
payments ("variation margin") are made or received by the Portfolio each day,
dependent on the daily fluctuations in the value of the underlying security, and
are recorded for financial reporting purposes as unrealized gains or losses by
the Portfolio. When entering into a closing transaction, the Portfolio will
realize a gain or loss equal to the difference between the value of the futures
contract to sell and the futures contract to buy. Futures contracts are valued
at the most recent settlement price.

Certain risks may arise upon entering into futures contracts including the risk
that an illiquid secondary market will limit the Portfolio's ability to close
out a futures contract prior to the settlement date and that a change in the
value of a futures contract may not correlate exactly with changes in the value
of the securities or currencies hedged. When utilizing futures contracts to
hedge, the Portfolio gives up the opportunity to profit from favorable price
movements in the hedged positions during the term of the contract.

Foreign Currency Translations. The books and records of the Portfolios are
maintained in U.S. dollars. Foreign currency transactions are translated into
U.S. dollars on the following basis:

     (i)  market value of investment securities, other assets and liabilities at
          the daily rates of exchange, and

     (ii) purchases and sales of investment securities, dividend and interest
          income and certain expenses at the rates of exchange prevailing on the
          respective dates of such transactions.

The Portfolios do not isolate that portion of gains and losses on investments
which is due to changes in foreign exchange rates from that which is due to
changes in market prices of the investments. Such fluctuations are included with
the net realized and unrealized gains and losses from investments.


                                                                              75
<PAGE>

SCUDDER VARIABLE LIFE INVESTMENT FUND
--------------------------------------------------------------------------------

Net realized and unrealized gain (loss) from foreign currency related
transactions includes gains and losses between trade and settlement dates on
securities transactions, gains and losses arising from the sales of foreign
currency, and gains and losses between the ex and payment dates on dividends,
interest, and foreign withholding taxes.

Forward Foreign Currency Exchange Contracts. A forward foreign currency exchange
contract (forward contract) is a commitment to purchase or sell a foreign
currency at the settlement date at a negotiated rate. During the period, the
non-money market Portfolios utilized forward contracts as a hedge in connection
with portfolio purchases and sales of securities denominated in foreign
currencies and the Global Discovery Portfolio and the International Portfolio
utilized forward contracts as a hedge against changes in exchange rates relating
to foreign currency denominated assets.

Forward contracts are valued at the prevailing forward exchange rate of the
underlying currencies and unrealized gain/loss is recorded daily. Forward
contracts having the same settlement date and broker are offset and any gain
(loss) is realized on the date of offset; otherwise, gain (loss) is realized on
settlement date. Realized and unrealized gains and losses which represent the
difference between the value of the forward contract to buy and the forward
contract to sell are included in net realized and unrealized gain (loss) from
foreign currency related transactions.

Certain risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their contracts. Additionally,
when utilizing forward contracts to hedge, the Fund gives up the opportunity to
profit from favorable exchange rate movements during the term of the contract.

Repurchase Agreements. The Fund on behalf of each Portfolio may enter into
repurchase agreements with U.S. and foreign banks and broker/dealers whereby the
Fund, through its custodian, receives delivery of the underlying securities, the
amount of which at the time of purchase and each subsequent business day is
required to be maintained at such a level that the market value, depending on
the maturity of the repurchase agreement and the underlying collateral, is equal
to at least 100.5% of the resale price.

Federal Income Taxes. Each Portfolio is treated as a single corporate taxpayer
as provided for in the Internal Revenue Code of 1986, as amended. It is each
Portfolio's policy to comply with the requirements of the Internal Revenue Code
which are applicable to regulated investment companies and to distribute all of
its investment company taxable income to the separate accounts of the
Participating Insurance Companies which hold its shares. Accordingly, the
Portfolios paid no federal income taxes and no provision for federal income
taxes was required.

Distribution of Income and Gains. All of the net investment income of the Money
Market Portfolio is declared as a dividend to shareholders of record as of the
close of business each day and is paid to shareholders monthly. Dividends from
the Bond Portfolio, Balanced Portfolio, Growth and Income Portfolio, and the
Capital Growth Portfolio are declared and paid quarterly in April, July, October
and January. All of the net investment income of the Global Discovery Portfolio
and the International Portfolio normally will be declared and distributed as a
dividend annually. During any particular year, net realized gains from
investment transactions for each Portfolio, in excess of available capital loss
carryforwards, would be taxable to the Portfolio if not distributed and,
therefore, will be distributed to the Participating Insurance Companies.

The timing and characterization of certain income and capital gains
distributions are determined annually in accordance with federal tax regulations
which may differ from generally accepted accounting principles. The differences
primarily relate to investments in forward contracts, passive foreign investment
companies, post October loss deferral, non-taxable distributions, and certain
securities sold at a loss. As a result, net investment income (loss) and net
realized gain (loss) on investment transactions for a reporting period may
differ significantly from distributions during such period. Accordingly, the
Portfolios may periodically make reclassifications among certain of its capital
accounts without impacting the net asset value of each Portfolio.

The Portfolios use the specific identification method for determining realized
gain or loss on investments for both financial and federal income tax reporting
purposes.


76
<PAGE>

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

Expenses. Each Portfolio is charged for those expenses which are directly
attributable to it, such as management fees and custodian fees, while other
expenses (reports to shareholders, legal and audit fees) are allocated based on
relative net asset value among the Portfolios.

Other. Investment security transactions are accounted for on a trade date basis.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is recorded on the accrual basis. All original
issue discounts are accreted for both tax and financial reporting purposes. 

B.   Related Parties

Under the Fund's Investment Advisory Agreement (the "Agreement") with Scudder,
Stevens and Clark, Inc. (the "Adviser"), the Fund agrees to pay the Adviser a
fee, based on average daily net assets, equal to an annual rate of 0.37% for the
Money Market Portfolio, 0.475% for the Bond Portfolio, 0.475% for the Balanced
Portfolio, 0.475% for the Growth and Income Portfolio, 0.475% for the Capital
Growth Portfolio, 0.975% for the Global Discovery Portfolio, and 0.875% for the
International Portfolio.

The Trustees authorized the Fund on behalf of each Portfolio to pay Scudder Fund
Accounting Corp., a subsidiary of the Adviser, for determining the daily net
asset value per share and maintaining the portfolio and general accounting
records of the Fund.

Related fees for such services are detailed in each Portfolio's statement of
operations.

Until May 1, 1996, for a period of five years from the date of execution of a
Participation Agreement with the Fund, and from year to year thereafter as
agreed by the Fund and the Participating Insurance Companies, each of the
Participating Insurance Companies had agreed to reimburse the Fund to the extent
that the annual operating expenses of any Portfolio of the Fund, other than the
Global Discovery Portfolio and the International Portfolio, exceeded
three-quarters of one percent (0.75 of 1%) of that Portfolio's average annual
net assets. The Participating Insurance Companies had agreed to reimburse the
Fund to the extent that such expenses of the International Portfolio exceeded
one and one-half percent (1.50 of 1%) of the Portfolio's average annual net
assets. The Trustees of the Fund approved a new form of Participation Agreement
effective May 1, 1996, which no longer requires the Participating Insurance
Companies to reimburse the Fund as described above. Until April 30, 1998, the
Adviser has agreed to waive part or all of its fees for the Global Discovery
Portfolio to the extent that the Portfolio's expenses will be maintained at
1.50% of average annual net assets.

The Fund pays each Trustee not affiliated with the Adviser and not a Trustee of
other Scudder affiliated funds $14,000 annually plus specified amounts for
attended board and committee meetings. The Fund pays each Trustee not affiliated
with the Adviser and who is a Trustee of other Scudder affiliated funds $8,750
annually plus specified amounts for attended board and committee meetings.
Allocated Trustees' fees for each Portfolio for the year ended December 31, 1996
are detailed in each Portfolio's statement of operations.

C.   Lines of Credit

The International Portfolio and several other Funds (the "Participants") share
in a $500 million revolving credit facility for temporary or emergency purposes,
including the meeting of redemption requests that otherwise might require the
untimely disposition of securities. The Participants are charged an annual
commitment fee which is allocated among each of the Participants. Interest is
calculated based on the market rates at the time of the borrowing. The
International Portfolio may borrow up to a maximum of 25 percent of its net
assets under the agreement. In addition, the International Portfolio also
maintains an uncommitted line of credit.


                                                                              77
<PAGE>

SCUDDER VARIABLE LIFE INVESTMENT FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------

To the Trustees and Shareholders of Scudder Variable Life Investment Fund:

We have audited the accompanying statements of assets and liabilities of Scudder
Variable Life Investment Fund (comprised of the seven Portfolios identified in
Note A), including the investment portfolios, as of December 31, 1996, and the
related statements of operations, the statements of changes in net assets, and
the financial highlights for each of the periods indicated herein. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

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

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Scudder Variable Life Investment Fund (comprised of the seven Portfolios
identified in Note A) as of December 31, 1996, the results of their operations,
the changes in their net assets, and their financial highlights for each of the
periods indicated herein conformity with generally accepted accounting
principles.

Boston, Massachusetts                                  COOPERS & LYBRAND L.L.P.
February 7, 1997


78
<PAGE>

                                                                 TAX INFORMATION
--------------------------------------------------------------------------------

The Balanced Portfolio, Capital Growth Portfolio, and Growth and Income
Portfolio paid distributions of $0.125, $0.595, and $0.09 per share,
respectively, from net long-term capital gains during the year ended December
31, 1996.

Pursuant to section 852 of the Internal Revenue Code, the Balanced Portfolio,
Bond Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, and
International Portfolio designate $4,985,685, $201,136, $20,148,284, $3,659,155,
and $5,991,078, respectively, as capital gain dividends for the year ended
December 31, 1996.

Pursuant to section 854 of the Internal Revenue Code, the percentages of income
dividends paid in calendar year 1996 which qualify for the dividends received
deduction for corporations are as follows: Balanced Portfolio 26.7%, Capital
Growth Portfolio 88.7%, and Growth and Income Portfolio 100.0%.


                                                                              79
<PAGE>




                     (This page intentionally left blank.)


80
<PAGE>

Celebrating Over 75 Years of Serving Investors
--------------------------------------------------------------------------------


     Established in 1919 by Theodore Scudder, Sidney Stevens, and F. Haven
Clark, Scudder, Stevens & Clark was the first independent investment counsel
firm in the United States. Since its birth, Scudder's pioneering spirit and
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer 37 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.


     Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped Scudder become one
of the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.


     An investment in the Money Market Portfolio is neither insured nor
guaranteed by the United States Government and there can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share.

     This information must be preceded or accompanied by a current prospectus.

     Portfolio changes should not be considered recommendations for action by
individual investors.
<PAGE>




                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                             Two International Place

                        Boston, Massachusetts 02110-4103


        An open-end management investment company which currently offers
    shares of beneficial interest of seven diversified Portfolios which seek,
         respectively, (i) stability and current income from a portfolio
            of money market instruments, (ii) high income from a high
            quality portfolio of bonds, (iii) a balance of growth and
              income, as well as long-term preservation of capital,
                from a diversified portfolio of equity and fixed
              income securities, (iv) long-term growth of capital,
              current income and growth of income from a portfolio
              consisting primarily of common stocks and securities
              convertible into common stocks, (v) long-term capital
            growth from a a portfolio consisting primarily of equity
                         securities, (vi) above-average
              capital appreciation over the long term by investing
              primarily in the equity securities of small companies
                        located throughout the world, and
              (vii) long-term growth of capital principally from a
               diversified portfolio of foreign equity securities

                                 (A Mutual Fund)





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



                       STATEMENT OF ADDITIONAL INFORMATION

                                   May 1, 1997
   

                      CLASS B SHARES OF BENEFICIAL INTEREST
    



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


   
         This Statement of Additional Information is not a prospectus and should
be read in conjunction  with the prospectus of Scudder  Variable Life Investment
Fund dated May 1, 1997, as may be amended from time to time, a copy of which may
be obtained  without charge by calling a Participating  Insurance  Company or by
writing to  broker/dealers  offering  certain  variable  annuity  contracts  and
variable life  insurance  policies,  or Scudder  Investor  Services,  Inc.,  Two
International Place, Boston, Massachusetts 02110-4103.
    




<PAGE>
<TABLE>
<CAPTION>

                                TABLE OF CONTENTS
                                                                                                                   Page
<S>                                                                                                                 <C>
INVESTMENT OBJECTIVES AND POLICIES....................................................................................1
         Money Market Portfolio.......................................................................................1
         Bond Portfolio...............................................................................................2
         Balanced Portfolio...........................................................................................3
         Growth and Income Portfolio..................................................................................5
         Capital Growth Portfolio.....................................................................................5
         Global Discovery Portfolio...................................................................................6
         Risk Factors Regarding Global Discovery Portfolio............................................................8
         International Portfolio.....................................................................................13

POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS.................................................................14
         Repurchase Agreements.......................................................................................14
         Debt Securities.............................................................................................15
         Illiquid or Restricted Securities...........................................................................15
         Trust Preferred Securities..................................................................................16
         Zero Coupon Securities......................................................................................16
         Real Estate Investment Trusts...............................................................................17
         Mortgage-Backed Securities and Mortgage Pass-Through Securities.............................................17
         Collateralized Mortgage Obligations ("CMOs")................................................................18
         FHLMC Collateralized Mortgage Obligations...................................................................19
         Other Mortgage-Backed Securities............................................................................19
         Other Asset-Backed Securities...............................................................................20
         Municipal Obligations.......................................................................................21
         Convertible Securities......................................................................................21
         Depositary Receipts.........................................................................................22
         Foreign Securities..........................................................................................22
         Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and Income and
              International Portfolios...............................................................................23
         Indexed Securities..........................................................................................23
         When-Issued Securities......................................................................................24
         Loans of Portfolio Securities...............................................................................24
         Borrowing...................................................................................................24
         Options for the Bond, Balanced, Growth and Income and International Portfolios..............................25
         Securities Index Options....................................................................................27
         Futures Contracts...........................................................................................27
         Futures on Debt Securities..................................................................................27
         Limitations on the Use of Futures Contracts and Options on Futures..........................................29
         Foreign Currency Transactions...............................................................................30
         Strategic Transactions and Derivatives Applicable to the Global Discovery Portfolio.........................32
         Debt Securities.............................................................................................39
         High Yield, High Risk Securities............................................................................39
         Combined Transactions.......................................................................................40
         Risks of Specialized Investment Techniques Abroad...........................................................40

INVESTMENT RESTRICTIONS..............................................................................................40

PURCHASES AND REDEMPTIONS............................................................................................42

INVESTMENT ADVISER AND DISTRIBUTOR...................................................................................43
         Investment Adviser..........................................................................................43
         Personal Investments by Employees of the Adviser............................................................46
         Distributor.................................................................................................46

MANAGEMENT OF THE FUND...............................................................................................48
         Trustees and Officers.......................................................................................48

                                       i
<PAGE>

                          TABLE OF CONTENTS (continued)
                                                                                                                   Page

REMUNERATION.........................................................................................................50
         Responsibilities of the Board--Board and Committee Meetings.................................................50
         Compensation of Officers and Trustees.......................................................................50

NET ASSET VALUE......................................................................................................51

TAX STATUS...........................................................................................................52

DIVIDENDS AND DISTRIBUTIONS..........................................................................................56
         Money Market Portfolio......................................................................................56
         Global Discovery Portfolio and International Portfolio......................................................57
         Other Portfolios............................................................................................57

PERFORMANCE INFORMATION..............................................................................................57
         Money Market Portfolio......................................................................................57
         Bond Portfolio..............................................................................................58
         All Portfolios..............................................................................................58
         Comparison of Portfolio Performance.........................................................................60

SHAREHOLDER COMMUNICATIONS...........................................................................................64

ORGANIZATION AND CAPITALIZATION......................................................................................64
         General.....................................................................................................64
         Shareholder and Trustee Liability...........................................................................66

ALLOCATION OF PORTFOLIO BROKERAGE....................................................................................66

PORTFOLIO TURNOVER...................................................................................................68

EXPERTS..............................................................................................................68

COUNSEL..............................................................................................................68

ADDITIONAL INFORMATION...............................................................................................68

FINANCIAL STATEMENTS.................................................................................................69

APPENDIX
</TABLE>
                                       ii
<PAGE>

                       INVESTMENT OBJECTIVES AND POLICIES

                    (See "INVESTMENT CONCEPT OF THE FUND" and
             "INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS"
                           in the Fund's prospectus.)

         Scudder  Variable  Life  Investment  Fund (the  "Fund") is an open-end,
diversified   registered   management   investment  company   established  as  a
Massachusetts  business trust. The Fund is a series fund consisting of the Money
Market  Portfolio,  Bond  Portfolio,   Balanced  Portfolio,  Growth  and  Income
Portfolio,   Capital  Growth   Portfolio,   Global  Discovery   Portfolio,   and
International Portfolio (individually or collectively hereinafter referred to as
a "Portfolio" or the  "Portfolios").  Additional  portfolios may be created from
time to time.  The Fund is  intended  to be the  funding  vehicle  for  variable
annuity  contracts ("VA  contracts") and variable life insurance  policies ("VLI
policies")  to be offered to the  separate  accounts of certain  life  insurance
companies ("Participating Insurance Companies").

   
         Except for the Money Market  Portfolio,  which does not offer  separate
classes  of shares,  two  classes  of shares of each  Portfolio  of the Fund are
currently  offered  by  Participating  Insurance  Companies.  Class A shares are
offered at net asset value and are not subject to a Distribution  Plan.  Class B
shares are offered at net asset value and are  subject to a  Distribution  Plan.
Except for the Money Market Portfolio,  this Statement of Additional Information
pertains to Class B shares ("Shares") only.
    

         Each Portfolio has a different  investment  objective  which it pursues
through  separate  investment  policies,  as described below. The differences in
objectives  and  policies  among the  Portfolios  can be  expected to affect the
degree of market and financial  risk to which each  Portfolio is subject and the
return  of each  Portfolio.  The  investment  objectives  and  policies  of each
Portfolio may, unless otherwise  specifically stated, be changed by the Trustees
of the Fund without a vote of the  shareholders.  There is no assurance that the
objectives of any Portfolio will be achieved.

Money Market Portfolio

         The Money Market  Portfolio  seeks to maintain the stability of capital
and, consistent  therewith,  to maintain the liquidity of capital and to provide
current  income.  The Portfolio  seeks to maintain a constant net asset value of
$1.00 per share,  although there can be no assurance that this will be achieved.
The Portfolio will use the amortized cost method of securities valuation.

         The Money Market  Portfolio  purchases U.S.  Treasury bills,  notes and
bonds;  obligations of agencies and  instrumentalities  of the U.S.  Government;
domestic and foreign bank certificates of deposit; bankers' acceptances; finance
company and corporate commercial paper; and repurchase  agreements and corporate
obligations. Investments are limited to those that are dollar-denominated and at
the time of  purchase  are rated,  or judged by the Fund's  investment  adviser,
Scudder,  Stevens & Clark,  Inc. (the "Adviser"),  subject to the supervision of
the Trustees,  to be equivalent to those rated high quality (i.e.,  rated in the
two highest categories) by any two nationally-recognized rating services such as
Moody's Investors Service,  Inc.  ("Moody's") and Standard & Poor's ("S&P").  In
addition, the Adviser seeks through its own credit analysis to limit investments
to high quality instruments presenting minimal credit risks. Securities eligible
for  investment  by the Money  Market  Portfolio  which are rated in the highest
category by at least two rating services (or by one rating service,  if no other
rating  service has issued a rating with respect to that  security) are known as
"first tier  securities."  Securities  rated in the top two categories which are
not first tier securities are known as "second tier securities."  Investments in
commercial paper and finance company paper will be limited to securities  which,
at the time of  purchase,  will be rated A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's or the  equivalent  by any  nationally-recognized  rating  service or
judged  to be  equivalent  by the  Adviser.  Obligations  which are  subject  to
repurchase agreements will be limited to those of the type and quality described
above.  The Money Market  Portfolio may also hold cash.  Shares of the Portfolio
are not insured by an agency of the U.S. Government.  Securities and instruments
in which the  Portfolio  may  invest may be issued by the U.S.  Government,  its
agencies and instrumentalities,  corporations,  trusts, banks, finance companies
and other business entities.

         The Money Market  Portfolio may invest in  certificates  of deposit and
bankers'  acceptances of large domestic banks (i.e.,  banks which at the time of
their most recent annual financial  statements show total assets in excess of $1
billion)  including  foreign  branches of such  domestic  banks,  which  involve
different  risks than those  associated  with  investments  in  certificates  of

<PAGE>

deposit  of  domestic  banks,  and of  smaller  banks as  described  below.  The
Portfolio  will invest in U.S.  dollar-denominated  certificates  of deposit and
bankers'   acceptances   of  foreign   banks  if  such  banks  meet  the  stated
qualifications.  Although the  Portfolio  recognizes  that the size of a bank is
important,   this   fact   alone   is   not   necessarily   indicative   of  its
creditworthiness. Investment in certificates of deposit and bankers' acceptances
issued  by  foreign  banks and  foreign  branches  of  domestic  banks  involves
investment  risks that are different in some respects from those associated with
investments  in  certificates  of deposit  and  bankers'  acceptances  issued by
domestic  banks.  (See  "Foreign  Securities"  in this  Statement of  Additional
Information for further risks of foreign investment.)

         The Money Market  Portfolio may also invest in  certificates of deposit
issued by banks and savings and loan institutions which had at the time of their
most recent annual  financial  statements  total assets of less than $1 billion,
provided  that (i) the  principal  amounts of such  certificates  of deposit are
insured by an agency of the U.S. Government,  (ii) at no time will the Portfolio
hold more than $100,000  principal  amount of certificates of deposit of any one
such  bank,  and  (iii)  at the  time of  acquisition,  no more  than 10% of the
Portfolio's  assets  (taken at current  value) are invested in  certificates  of
deposit of such banks having total assets not in excess of $1 billion.

         The assets of the Money Market Portfolio consist entirely of cash items
and  investments  having a remaining  maturity date of 397 calendar days or less
from  date of  purchase.  The  Portfolio  will be  managed  so that the  average
maturity of all instruments in the portfolio (on a  dollar-weighted  basis) will
be 90 days or less. The average maturity of the Portfolio's  investments  varies
according to the Adviser's appraisal of money market conditions.

         To ensure  diversity  of the  Portfolio's  investments,  as a matter of
non-fundamental  policy the Portfolio  will not invest more than 5% of its total
assets in the securities of a single issuer, other than the U.S. Government. The
Portfolio  may,  however,  invest more than 5% of its total  assets in the first
tier  securities  of a single  issuer for a period of up to three  business days
after  purchase,  although  the  Portfolio  may not  make  more  than  one  such
investment  at any time.  The Portfolio may not invest more than 5% of its total
assets in  securities  which were second tier  securities  when  acquired by the
Portfolio. Further, the Portfolio may not invest more than the greater of (1) 1%
of its total assets,  or (2) one million dollars,  in the securities of a single
issuer which were second tier securities when acquired by the Portfolio.

         The net investment income of the Portfolio is declared as a dividend to
shareholders  daily and distributed  monthly in cash or reinvested in additional
shares.

Bond Portfolio

         The Bond  Portfolio  pursues a policy of investing  for a high level of
income consistent with a high quality portfolio of debt securities. Under normal
circumstances  the  Portfolio  invests  at  least  65% of its  assets  in  bonds
including  those  of  the  U.S.   Government  and  its  agencies  and  those  of
corporations and other notes and bonds paying high current income. The Portfolio
may also invest in preferred stocks consistent with the Portfolio's  objectives.
It will attempt to moderate the effect of market price  fluctuation  relative to
that of a long-term bond by investing in securities with varying  maturities and
making use of futures  contracts  on debt  securities  and  related  options for
hedging purposes.

   
         The Bond  Portfolio may purchase  corporate  notes and bonds  including
issues  convertible  into common stock and  obligations of  municipalities.  The
Portfolio may purchase securities of real estate investment trusts ("REITs") and
certain mortgage-backed  securities.  It may purchase U.S. Government securities
and  obligations  of federal  agencies that are not backed by the full faith and
credit of the U.S.  Government,  such as obligations of Federal Home Loan Banks,
Farm Credit Banks and the Federal Home Loan Mortgage Corporation.  The Portfolio
may  also  purchase   obligations   of   international   agencies  such  as  the
International  Bank for  Reconstruction  and Development and the  Inter-American
Development  Bank.  Other  eligible   investments  include  foreign  securities,
including   non-U.S.   dollar-denominated   foreign  debt  securities  and  U.S.
dollar-denominated foreign debt securities (such as those issued by the Dominion
of Canada and its provinces), including without limitation, Eurodollar Bonds and
Yankee  Bonds,  mortgage  and other  asset-backed  securities  and money  market
instruments such as commercial  paper and bankers'  acceptances and certificates
of deposit issued by domestic and foreign  branches of U.S. banks. The Portfolio
may  also  enter  into  repurchase  agreements  and may  invest  in zero  coupon
securities. The Portfolio invests in a broad range of short-, intermediate-, and
long-term  securities.  Proportions among maturities and types of securities may
vary  depending  upon the prospects  for income  relative to the outlook for the
economy and the securities markets,  the quality of available  investments,  the
level of interest rates, and other factors.
    

                                       2
<PAGE>

   
         The Bond Portfolio invests primarily in high quality securities.  Under
normal market  conditions,  the Portfolio will invest at least 65% of its assets
in  securities  rated within the three  highest  quality  rating  categories  of
Moody's (Aaa,  Aa and A) or S&P (AAA, AA and A), or if unrated,  in bonds judged
by the Fund's Adviser, to be of comparable quality at the time of purchase.  The
Portfolio may invest up to 20% of its assets in debt securities rated lower than
Baa or BBB or, if unrated,  of equivalent  quality as determined by the Adviser,
but will not  purchase  bonds  rated  below B3 by  Moody's or B- by S&P or their
equivalent.
    

         See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings  organizations and their
respective characteristics.

         Except  for  limitations  imposed  by the Bond  Portfolio's  investment
restrictions, there is no limit as to the proportions of the Portfolio which may
be invested in any of the eligible  investments;  however, it is a policy of the
Portfolio that its  non-governmental  investments will be spread among a variety
of companies and will not be concentrated in any industry.

         The Bond Portfolio may invest in securities of the Government  National
Mortgage Agency, a Government  corporation within the U.S. Department of Housing
and  Urban  Development   ("GNMAs").   GNMAs  are  mortgaged-backed   securities
representing part ownership of a pool of mortgage loans.  These loans, which are
issued by lenders  such as mortgage  bankers,  commercial  banks and savings and
loan  associations,  are either  insured by the Federal  Housing  Administration
(FHA) or guaranteed by the Veterans  Administration (VA). Once approved by GNMA,
the timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.

         The Bond  Portfolio  cannot  guarantee a gain or eliminate  the risk of
loss. The net asset value of the Portfolio's  shares will fluctuate with changes
in the  market  prices  of the  Portfolio's  investments,  which  tend  to  vary
inversely  with changes in prevailing  interest  rates and, to a lesser  extent,
changes in foreign  currency  exchange rates. As interest rates fall, the prices
of debt securities tend to rise and vice versa.

Balanced Portfolio

         The  Balanced  Portfolio  seeks a balance of growth  and income  from a
diversified portfolio of equity and fixed income securities.  The Portfolio also
seeks long-term  preservation of capital through a  quality-oriented  investment
approach that is designed to reduce risk.

         In seeking its objectives of a balance of growth and income, as well as
long-term  preservation  of  capital,  the  Portfolio  invests in a  diversified
portfolio of equity and fixed income securities.  The Portfolio  invests,  under
normal  circumstances,  at least 50%, but no more than 75%, of its net assets in
common stocks and other equity  investments.  The Portfolio's equity investments
consist of common stocks,  preferred stocks, warrants and securities convertible
into common  stocks,  of  companies  that,  in the  Adviser's  judgment,  are of
above-average  financial quality and offer the prospect for above-average growth
in earnings,  cash flow, or assets  relative to the overall market as defined by
the  Standard  and Poor's 500  Composite  Stock  Price Index  ("S&P  500").  The
Portfolio will invest primarily in securities  issued by  medium-to-large  sized
domestic  companies with annual  revenues or market  capitalization  of at least
$600  million,  and which,  in the opinion of the Adviser,  offer  above-average
potential for price  appreciation.  The  Portfolio  seeks to invest in companies
that have relatively  consistent and  above-average  rates of growth;  companies
that  are  in a  strong  financial  position  with  high  credit  standings  and
profitability;  firms with important business franchises,  leading products,  or
dominant marketing and distribution systems; companies guided by experienced and
motivated  managements;  and companies selling at attractive market  valuations.
The Adviser believes that companies with these  characteristics will be rewarded
by the market with higher stock prices over time and provide investment returns,
on average, in excess of the S&P 500.

         At least 65% of the value of the  Portfolio's  common stocks will be of
issuers  which  qualify,  at the time of purchase,  for one of the three highest
equity  earnings and dividends  ranking  categories (A+, A, or A-) of S&P, or if
not ranked by S&P, are judged to be of  comparable  quality by the Adviser.  S&P
assigns  earnings and dividends  rankings to  corporations  based on a number of
factors,  including stability and growth of earnings and dividends.  Rankings by
S&P are not an appraisal of a company's  creditworthiness,  as is true for S&P's
debt security  ratings,  nor are these rankings intended as a forecast of future


                                       3
<PAGE>

stock  market  performance.  In addition to using S&P  rankings of earnings  and
dividends of common stocks, the Adviser conducts its own analysis of a company's
history, current financial position, and earnings prospects.

   
         To enhance income and stability,  the Portfolio's  remaining assets are
allocated to bonds and other fixed income  securities,  including cash reserves.
The Portfolio will normally  invest 25% to 50% of its net assets in fixed income
securities.  However,  at least 25% of the Portfolio's net assets will always be
invested in fixed income  securities.  The Portfolio can invest in a broad range
of corporate bonds and notes,  convertible  bonds, and preferred and convertible
preferred  securities.  It may also  purchase  U.S.  Government  securities  and
obligations of federal agencies and instrumentalities that are not backed by the
full faith and credit of the U.S. Government, such as obligations of the Federal
Home  Loan  Banks,  Farm  Credit  Banks,  and the  Federal  Home  Loan  Mortgage
Corporation.  The  Portfolio  may also invest in  obligations  of  international
agencies,  foreign debt securities (both U.S. and non-U.S.  dollar-denominated),
mortgage-backed  and  other  asset-backed  securities,   municipal  obligations,
restricted  securities issued in private  placements and zero coupon securities.
Zero coupon  securities  are subject to greater market value  fluctuations  from
changing interest rates than debt obligations of comparable maturities that make
current cash  distributions  of interest.  The  Portfolio  may invest in special
purpose trust securities ("Trust Preferred Securities").
    

         For liquidity and defensive purposes,  the Portfolio may invest without
limit in cash and in money market securities such as commercial paper,  bankers'
acceptances, and certificates of deposit issued by domestic and foreign branches
of U.S.  banks.  The Portfolio may also enter into  repurchase  agreements  with
respect to U.S. Government securities.

         Not less than 50% of the  Portfolio's  debt securities will be invested
in debt obligations,  including money market instruments, that (a) are issued or
guaranteed by the U.S. Government,  (b) are rated at the time of purchase within
the two highest ratings categories by any  nationally-recognized  rating service
or (c) if not rated, are judged at the time of purchase, by the Adviser to be of
a quality  comparable to obligations  rated as described in (b) above.  Not less
than 80% of the debt  obligations  in which the  Portfolio  invests will, at the
time of purchase,  be rated within the three highest  ratings  categories of any
such service or, if not rated, will be judged to be of comparable quality by the
Adviser.  Up to 20% of the Portfolio's  debt securities may be invested in bonds
rated  below A but no lower  than B by Moody's  or S&P,  or  unrated  securities
judged by the Adviser to be of comparable  quality.  Debt  securities  which are
rated below  investment-grade  (that is, rated below Baa by Moody's or below BBB
by S&P and  commonly  referred to as "junk  bonds") and  unrated  securities  of
comparable quality, which usually entail greater risk (including the possibility
of default or bankruptcy of the issuers of such  securities),  generally involve
greater  volatility of price and risk of principal  and income,  and may be less
liquid than  securities  in the higher  rating  categories.  Securities  rated B
involve a high degree of  speculation  with  respect to the payment of principal
and  interest.  Should  the  rating of any  security  held by the  Portfolio  be
downgraded after the time of purchase,  the Adviser will determine whether it is
in the best interest of the Portfolio to retain or dispose of the security.

         See the Appendix to this Statement of Additional Information for a more
complete description of the ratings assigned by ratings  organizations and their
respective characteristics.

         The Portfolio  will, on occasion,  adjust its mix of investments  among
equity securities,  bonds, and cash reserves. In reallocating  investments,  the
Adviser weighs the relative values of different  asset classes and  expectations
for future returns.  In doing so, the Adviser  analyzes,  on a global basis, the
level and direction of interest rates,  capital flows,  inflation  expectations,
anticipated growth of corporate profits, monetary and fiscal policies around the
world, and other related factors. The Portfolio does not take extreme investment
positions as part of an effort to "time the market."  Shifts  between stocks and
fixed income  investments  are expected to occur in generally  small  increments
within the guidelines adopted in this Statement of Additional  Information.  The
Portfolio is designed as a conservative long-term investment program.

         While the Portfolio emphasizes U.S. equity and debt securities,  it may
invest a portion  of its  assets in  foreign  securities,  including  depositary
receipts.  The Portfolio's foreign holdings will meet the criteria applicable to
its  domestic  investments.  The  international  component  of  the  Portfolio's
investment program is intended to increase diversification,  thus reducing risk,
while providing the opportunity for higher returns.

                                       4
<PAGE>

         In addition, the Portfolio may invest in securities on a when-issued or
forward  delivery  basis.  The  Portfolio  may, for hedging  purposes,  purchase
forward foreign currency exchange  contracts and foreign  currencies in the form
of bank  deposits.  The Portfolio  may also purchase  other foreign money market
instruments including, but not limited to, bankers' acceptances, certificates of
deposit,  commercial  paper,  short-term  government  obligations and repurchase
agreements.

         The Balanced Portfolio cannot guarantee a gain or eliminate the risk of
loss.  The net asset  value of the  shares of the  Portfolio  will  increase  or
decrease with changes in the market price of the Portfolio's investments and, to
a lesser extent, changes in foreign currency exchange rates.

Growth and Income Portfolio

         The Growth and Income  Portfolio  seeks  long-term  growth of  capital,
current  income and growth of income.  In pursuing these three  objectives,  the
Portfolio invests primarily in common stocks,  preferred stocks,  and securities
convertible  into common stocks of companies which offer the prospect for growth
of earnings  while paying  higher than  average  current  dividends.  Over time,
continued  growth of earnings tends to lead to higher  dividends and enhancement
of capital  value.  The Portfolio  allocates  its  investments  among  different
industries  and companies,  and changes its portfolio  securities for investment
considerations  and  not for  trading  purposes.  The  Adviser  believes  that a
portfolio  investing  in these kinds of  securities  can perform  well whether a
growth or value investment  style is in favor and that the Portfolio's  dividend
strategy can improve its performance in down markets. The Adviser believes these
characteristics  can  help a  shareholder  feel  comfortable  holding  onto  the
Portfolio  for the  long  run,  despite  short-term  changes  in the  investment
climate.

   
         The  Portfolio  attempts  to  achieve  its  investment   objectives  by
investing  primarily in dividend  paying  common  stocks,  preferred  stocks and
securities  convertible into common stocks. The Portfolio may also purchase such
securities  which do not pay current  dividends  but which offer  prospects  for
growth of  capital  and  future  income.  Convertible  securities  (which may be
current  coupon  or  zero  coupon  securities)  are  bonds,  notes,  debentures,
preferred  stocks and other  securities which may be converted or exchanged at a
stated or determinable  exchange ratio into  underlying  shares of common stock.
The Portfolio may also invest in nonconvertible preferred stocks consistent with
the Portfolio's objectives. From time to time, for temporary defensive purposes,
when the  Adviser  feels such a position  is  advisable  in light of economic or
market conditions,  the Portfolio may invest a portion of its assets in cash and
cash  equivalents.  The  Portfolio  may  invest  in  foreign  securities  and in
repurchase  agreements.  The  Portfolio  may purchase  securities of real estate
investment trusts ("REITs") and certain mortgage-backed securities.
    

         When  evaluating  a security  for  purchase  or sale,  the  Adviser may
consider a security's  dividend yield relative to the average  dividend yield of
the S&P 500.

         The  Portfolio  may, for hedging  purposes,  purchase  forward  foreign
currency exchange contracts and foreign currencies in the form of bank deposits.
The  Portfolio  may  also  purchase  other  foreign  money  market  instruments,
including,  but not limited to, bankers'  acceptances,  certificates of deposit,
commercial paper, short-term government obligations and repurchase agreements.

         The Growth and Income  Portfolio  cannot  guarantee a gain or eliminate
the risk of loss. The net asset value of the Portfolio's shares will increase or
decrease with changes in the market prices of the Portfolio's  investments  and,
to a lesser extent, changes in foreign currency exchange rates.

Capital Growth Portfolio

         The Capital Growth Portfolio seeks to maximize long-term capital growth
through a broad and  flexible  investment  program.  The  Portfolio  invests  in
marketable  securities,  principally  common  stocks  and,  consistent  with its
objective of long-term capital growth,  preferred stocks.  However,  in order to
reduce  risk,  as  market  or  economic  conditions  periodically  warrant,  the
Portfolio  may  also  invest  up  to  25%  of  its  assets  in  short-term  debt
instruments.

                                       5
<PAGE>

         Important considerations to the Adviser in its examination of potential
investments  include  certain  qualitative  considerations  such as a  company's
financial strength,  management  reputation,  absolute size and overall industry
position.

         Equity investments can have diverse financial characteristics,  and the
Trustees  believe that the  opportunity  for capital growth may be found in many
different  sectors of the market at any  particular  time.  In  contrast  to the
specialized   investment  policies  of  some  capital  appreciation  funds,  the
Portfolio is therefore  free to invest in a wide range of marketable  securities
offering  the  potential  for  growth.  This  enables  the  Portfolio  to pursue
investment values in various sectors of the stock market, including:

         1.       Companies  that  generate or apply new  technologies,  new and
                  improved  distribution  techniques,  or new services,  such as
                  those  in  the  business  equipment,  electronics,   specialty
                  merchandising, and health service industries.

         2.       Companies  that  own or  develop  natural  resources,  such as
                  energy exploration or precious metals companies.

         3.       Companies that may benefit from changing  consumer demands and
                  lifestyles,   such  as  financial  service  organizations  and
                  telecommunications companies.

         4.       Foreign companies.

         While emphasizing  investments in companies with  above-average  growth
prospects,  the  Portfolio  may also  purchase  and hold  equity  securities  of
companies that may have only average growth prospects,  but seem undervalued due
to factors thought to be of a temporary  nature which may cause their securities
to be out of favor and to trade at a price below their potential value.

         The Portfolio,  as a matter of nonfundamental  policy, may invest up to
20% of its net  assets in  intermediate  to longer  term  debt  securities  when
management  anticipates  that the total return on debt  securities  is likely to
equal or exceed the total  return on common  stocks  over a  selected  period of
time. The Portfolio may purchase  investment-grade  debt  securities,  which are
those rated Aaa,  Aa, A or Baa by Moody's,  or AAA,  AA, A or BBB by S&P, or, if
unrated,  of equivalent  quality as  determined  by the Adviser.  Bonds that are
rated Baa by Moody's or BBB by S&P have some  speculative  characteristics.  The
Portfolio's  intermediate  to longer term debt securities may also include those
which are  rated  below  investment  grade as long as no more than 5% of its net
assets are  invested in such  securities.  As interest  rates fall the prices of
debt securities  tend to rise and vice versa.  Should the rating of any security
held by the Portfolio be downgraded after the time of purchase, the Adviser will
determine  whether  it is in the best  interest  of the  Portfolio  to retain or
dispose of the security. (See "High Yield, High Risk Securities.")

         The Capital Growth  Portfolio  cannot guarantee a gain or eliminate the
risk of loss.  The net asset value of the shares of the Portfolio  will increase
or decrease with changes in the market price of the Portfolio's investments and,
to a lesser extent, changes in foreign currency exchange rates.

Global Discovery Portfolio

         The Global Discovery Portfolio seeks above-average capital appreciation
over the long term by  investing  primarily  in the equity  securities  of small
companies located  throughout the world. The Portfolio is designed for investors
looking for above-average appreciation potential (when compared with the overall
domestic  stock  market as reflected  by Standard & Poor's 500  Composite  Price
Index) and the  benefits of  investing  globally,  but who are willing to accept
above-average  stock market risk, the impact of currency  fluctuation and little
or no current income.

         In pursuit of its objective,  the Portfolio generally invests in small,
rapidly  growing  companies that offer the potential for  above-average  returns
relative to larger companies, yet are frequently overlooked and thus undervalued
by the market.  The Portfolio has the flexibility to invest in any region of the
world.  It can invest in companies based in emerging  markets,  typically in the
Far East, Latin America and lesser developed  countries in Europe, as well as in
firms  operating in  developed  economies,  such as those of the United  States,
Japan and Western Europe.

                                       6
<PAGE>

         The Adviser  invests the  Portfolio's  assets in  companies it believes
offer  above-average  earnings,  cash flow or asset  growth  potential.  It also
invests in companies that may receive greater market  recognition over time. The
Adviser  believes  these factors  offer  significant  opportunity  for long-term
capital  appreciation.  The Adviser evaluates investments for the Portfolio from
both a macroeconomic and microeconomic perspective,  using fundamental analysis,
including field research. The Adviser analyzes the growth potential and relative
value of possible  investments.  When  evaluating  an  individual  company,  the
Adviser  takes into  consideration  numerous  factors,  including  the depth and
quality  of  management;   a  company's  product  line,  business  strategy  and
competitive  position;  research and development  efforts;  financial  strength,
including  degree of  leverage;  cost  structure;  revenue and  earnings  growth
potential;   price-earnings   ratios  and  other   stock   valuation   measures.
Secondarily,  the Adviser weighs the attractiveness of the country and region in
which a company is located.

         Under normal  circumstances  the Portfolio  invests at least 65% of its
total  assets in the  equity  securities  of small  issuers.  While the  Adviser
believes that smaller, lesser-known companies can offer greater growth potential
than larger,  more  established  firms, the former also involve greater risk and
price volatility. To help reduce risk, the Portfolio expects, under usual market
conditions,  to diversify its portfolio widely by company, industry and country.
The Portfolio intends to allocate  investments among at least three countries at
all times, including the United States.

         The  Portfolio  may  invest  up to 35% of its  total  assets  in equity
securities of larger  companies  throughout the world and in debt  securities if
the Adviser  determines  that the capital  appreciation  of debt  securities  is
likely to exceed the capital  appreciation of equity  securities.  The Portfolio
may purchase investment-grade bonds, those rated Aaa, Aa, A or Baa by Moody's or
AAA, AA, A or BBB by S&P or, if unrated,  of equivalent quality as determined by
the Adviser.  The  Portfolio  may also invest up to 5% of its net assets in debt
securities  rated below  investment-grade.  Securities  rated below  Baa/BBB are
commonly  referred  to as "junk  bonds."  The  lower  the  ratings  of such debt
securities,  the greater  their risks  render them like equity  securities.  The
Portfolio may invest in securities rated D by S&P at the time of purchase, which
may be in default with respect to payment of principal or interest.

         The  Portfolio  selects  its  portfolio   investments   primarily  from
companies whose individual equity market capitalizations would place them in the
same  size  range  as  companies  in  approximately  the  lowest  20% of  market
capitalization  as  represented by the Salomon  Brothers Broad Market Index,  an
index  comprised of global equity  securities of companies with total  available
market  capitalization  greater than $100  million.  Based on this  policy,  the
companies  held by the Portfolio  typically will have  individual  equity market
capitalizations  of between  approximately  $50 million and $2 billion (although
the  Portfolio  will be free to invest in  smaller  capitalization  issues  that
satisfy  the  Portfolio's  size  standard).   Furthermore,   the  median  market
capitalization of the Portfolio will not exceed $750 million.

         Because the Portfolio applies a U.S. size standard on a global basis, a
small  company  investment  outside the U.S.  might rank above the lowest 20% by
market  capitalization  in local markets and, in fact,  might in some  countries
rank among the largest companies in terms of capitalization.

         The equity  securities  in which the  Portfolio  may invest  consist of
common stocks,  preferred stocks (either convertible or nonconvertible),  rights
and warrants.  These securities may be listed on the U.S. or foreign  securities
exchanges or traded  over-the-counter.  For capital appreciation  purposes,  the
Portfolio may purchase notes, bonds, debentures,  government securities and zero
coupon bonds (any of which may be convertible or nonconvertible).  The Portfolio
may invest in foreign securities and American  Depositary  Receipts which may be
sponsored or unsponsored. The Portfolio may also invest in closed-end investment
companies holding foreign securities,  and engage in strategic transactions.  In
addition,  the Portfolio may invest in illiquid or  restricted  securities.  For
temporary  defensive  purposes,  the  Portfolio  may,  during  periods  in which
conditions in securities markets warrant,  invest without limit in cash and cash
equivalents.

         The Global Discovery Portfolio cannot guarantee a gain or eliminate the
risk of loss.  The net asset value of the shares of the Portfolio  will increase
or decrease with changes in the market price of the Portfolio's  investments and
changes in  foreign  currency  exchange  rates.  The  investment  objective  and
policies of the Portfolio may, unless otherwise  specifically stated, be changed
by the  Trustees  of the Fund  without a vote of the  Shareholders.  There is no
assurance that the objective of the Portfolio will be achieved.

                                       7
<PAGE>

Risk Factors Regarding Global Discovery Portfolio

Small Company Risk. The Adviser  believes that small  companies often have sales
and earnings growth rates which exceed those of larger companies,  and that such
growth  rates may in turn be  reflected  in more rapid share price  appreciation
over time.  However,  investing in smaller company stocks involves  greater risk
than is  customarily  associated  with  investing  in larger,  more  established
companies.  For  example,  smaller  companies  can have limited  product  lines,
markets,  or financial and managerial  resources.  Smaller companies may also be
dependent on one or a few key persons, and may be more susceptible to losses and
risks of bankruptcy.  Also,  the  securities of smaller  companies may be thinly
traded (and  therefore  have to be sold at a discount from current market prices
or sold in small lots over an  extended  period of time).  Transaction  costs in
smaller company stocks may be higher than those of larger companies.

Foreign  Securities.  The  Portfolio  is intended to provide  investors  with an
opportunity  to invest a portion of their assets in a  diversified  portfolio of
securities of U.S. and foreign  companies  located worldwide and is designed for
long-term investors who can accept international  investment risk. The Portfolio
is  designed  for  investors  who  can  accept   currency  and  other  forms  of
international  investment  risk.  The Adviser  believes  that  allocation of the
Portfolio's assets on a global basis decreases the degree to which events in any
one country,  including the U.S.,  will affect an investor's  entire  investment
holdings.  In the period since World War II, many leading foreign economies have
grown more rapidly than the U.S. economy and from time to time have had interest
rate  levels  that  had  a  higher  real  return  than  the  U.S.  bond  market.
Consequently, the securities of foreign issuers have provided attractive returns
relative to the returns  provided by the  securities of U.S.  issuers,  although
there can be no assurance that this will be true in the future.

         Investors  should  recognize  that  investing  in  foreign   securities
involves certain special considerations,  including those set forth below, which
are not typically  associated  with  investing in U.S.  securities and which may
affect  the  Portfolio's  performance  favorably  or  unfavorably.   As  foreign
companies  are  not  generally  subject  to  uniform  accounting,  auditing  and
financial reporting  standards,  practices and requirements  comparable to those
applicable  to  domestic  companies,   there  may  be  less  publicly  available
information about a foreign company than about a domestic company.  Many foreign
stock markets,  while growing in volume of trading activity,  have substantially
less volume than that of the New York Stock  Exchange,  and  securities  of some
foreign  issuers are less liquid and more volatile  than  securities of domestic
issuers.  Similarly,  volume and  liquidity in most foreign bond markets is less
than that in the U.S.  market and at times,  volatility  of price can be greater
than  in  the  U.S.  Further,  foreign  markets  have  different  clearance  and
settlement  procedures  and in  certain  markets  there  have  been  times  when
settlements  have  been  unable  to keep  pace  with the  volume  of  securities
transactions,  making it  difficult  to  conduct  such  transactions.  Delays in
settlement  could result in temporary  periods when assets of the  Portfolio are
uninvested  and no return is earned  thereon.  The inability of the Portfolio to
make intended  security  purchases due to  settlement  problems  could cause the
Portfolio to miss attractive investment  opportunities.  Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolio due to subsequent  declines in value of the portfolio security or,
if the Portfolio has entered into a contract to sell the security,  could result
in possible  liability  to the  purchaser.  Fixed  commissions  on some  foreign
securities  exchanges are generally  higher than negotiated  commissions on U.S.
exchanges,  although the Adviser will endeavor to achieve the most favorable net
results on the Portfolio's  portfolio  transactions.  Further, the Portfolio may
encounter difficulties or be unable to pursue legal remedies and obtain judgment
in foreign courts. There is generally less government supervision and regulation
of business and industry  practices,  securities  exchanges,  brokers and listed
companies than in the U.S. It may be more difficult for the  Portfolio's  agents
to keep currently  informed about  corporate  actions such as stock dividends or
other   matters   which  may  affect  the   prices  of   portfolio   securities.
Communications  between the U.S. and foreign countries may be less reliable than
within the U.S.,  thus  increasing the risk of delayed  settlements of portfolio
transactions or loss of certificates for portfolio securities. In addition, with
respect  to   certain   foreign   countries,   there  is  the   possibility   of
nationalization,  expropriation,  the imposition of  confiscatory or withholding
taxation,  political, social or economic instability, or diplomatic developments
which could affect U.S.  investments in those countries.  Investments in foreign
securities may also entail certain risks, such as possible currency blockages or
transfer  restrictions,   and  the  difficulty  of  enforcing  rights  in  other
countries.  Moreover,  individual  foreign  economies  may differ  favorably  or
unfavorably  from the U.S.  economy in such respects as growth of gross national
product, rate of inflation, capital reinvestment,  resource self-sufficiency and
balance of payments  position.  The Adviser  seeks to mitigate  the risks to the
Portfolio  associated  with  the  foregoing  considerations  through  investment
variation and continuous professional management.

                                       8
<PAGE>

Limitations on Holdings of Foreign Securities.  The Portfolio shall invest in no
less than five  foreign  countries;  provided  that,  (i) if foreign  securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries;  (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall  invest  in no  less  than  three  foreign  countries;  (iii)  if  foreign
securities  comprise less than 40% of the value of the  Portfolio's  net assets,
the Portfolio  shall invest in no less than two foreign  countries;  and (iv) if
foreign  securities  comprise less than 20% of the value of the  Portfolio's net
assets the Portfolio may invest in a single foreign country.

         The  Portfolio  shall  invest  no more than 20% of the value of its net
assets in  securities  of issuers  located in any one country;  provided that an
additional  15% of the value of the  Portfolio's  net assets may be  invested in
securities of issuers located in any one of the following countries:  Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of the Portfolio's  assets may be invested in securities of issuers located
in the United States.

Eastern Europe. Investments in companies domiciled in Eastern European countries
may be subject to potentially greater risks than those of other foreign issuers.
These  risks  include  (i)  potentially  less  social,  political  and  economic
stability;  (ii) the small current size of the markets for such  securities  and
the low volume of trading,  which result in less  liquidity and in greater price
volatility;  (iii) certain national  policies which may restrict the Portfolio's
investment  opportunities,  including  restrictions  on investment in issuers or
industries deemed sensitive to national  interests;  (iv) foreign taxation;  (v)
the  absence  of  developed  legal  structures   governing  private  or  foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries,  of a capital
market  structure or  market-oriented  economy;  and (vii) the possibility  that
recent  favorable  economic  developments  in  Eastern  Europe  may be slowed or
reversed by  unanticipated  political or social events in such countries,  or in
the countries of the former  Soviet Union.  The Portfolio may invest up to 5% of
its total assets in the  securities  of issuers  domiciled  in Eastern  European
countries.

         Investments  in  such  countries  involve  risks  of   nationalization,
expropriation and confiscatory  taxation.  The Communist governments of a number
of East European countries expropriated large amounts of private property in the
past, in many cases without adequate compensation, and there may be no assurance
that  such  expropriation  will not  occur in the  future.  In the event of such
expropriation,  the Fund could lose a substantial  portion of any investments it
has made in the affected countries.  Further,  no accounting  standards exist in
East European countries.  Finally,  even though certain East European currencies
may be convertible into U.S. dollars,  the conversion rates may be artificial to
the actual market values and may be adverse to the Portfolio's shareholders.

Foreign  Currencies.  Investments  in foreign  securities  usually  will involve
currencies of foreign countries.  Moreover,  the Portfolio  temporarily may hold
funds in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency  contracts,  foreign currency
futures contracts and options on such contracts.  Because of these factors,  the
value of the assets of the Portfolio as measured in U.S. dollars may be affected
favorably  or  unfavorably  by changes in foreign  currency  exchange  rates and
exchange  control  regulations,  and the Portfolio may incur costs in connection
with conversions between various currencies.  Although the Portfolio's custodian
values  each Fund's  assets  daily in terms of U.S.  dollars,  none of the Funds
intends to convert its  holdings of foreign  currencies  into U.S.  dollars on a
daily basis. The Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion.  Although foreign exchange dealers do
not  charge  a fee for  conversion,  they  do  realize  a  profit  based  on the
difference  (the  "spread")  between  the  prices at which  they are  buying and
selling various currencies.  Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate,  while  offering a lesser rate of exchange  should
the Portfolio  desire to resell that currency to the dealer.  The Portfolio will
conduct its foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency  exchange  market,  or
through  entering into forward or futures  contracts to purchase or sell foreign
currencies.

         Because  the  Portfolio  normally  will be  invested  in both U.S.  and
foreign  securities  markets,  changes in the Portfolio's share price may have a
low correlation with movements in the U.S. markets.  The Portfolio's share price
will reflect the movements of both the different stock and bond markets in which
it is invested and of the currencies in which the investments  are  denominated;
the  strength or weakness of the U.S.  dollar  against  foreign  currencies  may
account for part of the  Portfolio's  investment  performance.  U.S. and foreign
securities  markets do not always  move in step with each  other,  and the total


                                       9
<PAGE>

returns from different markets may vary significantly.  The Portfolio invests in
many  securities  markets  around the world in an attempt to take  advantage  of
opportunities wherever they may arise.

Investing  in  Emerging  Markets.  Most  emerging  securities  markets  may have
substantially  less volume and are subject to less government  supervision  than
U.S. securities  markets.  Securities of many issuers in emerging markets may be
less liquid and more volatile than securities of comparable domestic issuers. In
addition, there is less regulation of securities exchanges,  securities dealers,
and listed and unlisted companies in emerging markets than in the United States.

         Emerging   markets  also  have   different   clearance  and  settlement
procedures,  and in certain markets there have been times when  settlements have
been unable to keep pace with the volume of securities  transactions.  Delays in
settlement could result in temporary periods when a portion of the assets of the
Portfolio is  uninvested  and no cash is earned  thereon.  The  inability of the
Portfolio to make intended security  purchases due to settlement  problems could
cause the Portfolio to miss attractive  investment  opportunities.  Inability to
dispose of portfolio  securities due to settlement  problems could result either
in losses to the Portfolio due to subsequent  declines in value of the portfolio
security or, if the Fund has entered into a contract to sell the security, could
result  in  possible   liability  to  the  purchaser.   Costs   associated  with
transactions in foreign  securities are generally  higher than costs  associated
with transactions in U.S. securities.  Such transactions also involve additional
costs for the purchase or sale of foreign currency.

         Foreign  investment  in certain  emerging  market debt  obligations  is
restricted or controlled to varying degrees.  These restrictions or controls may
at times limit or preclude  foreign  investment in certain emerging markets debt
obligations  and  increase  the costs and  expenses  of the  Portfolio.  Certain
emerging markets require prior  governmental  approval of investments by foreign
persons,  limit the  amount of  investment  by foreign  persons in a  particular
company,  limit the  investment by foreign  persons only to a specific  class of
securities of a company that may have less advantageous  rights than the classes
available  for  purchase  by   domiciliaries  of  the  countries  and/or  impose
additional  taxes  on  foreign  investors.  Certain  emerging  markets  may also
restrict  investment  opportunities in issuers in industries deemed important to
national interest.

         Certain  emerging  markets may require  governmental  approval  for the
repatriation  of  investment  income,  capital  or  the  proceeds  of  sales  of
securities by foreign investors.  In addition,  if a deterioration  occurs in an
emerging  market's  balance of payments or for other  reasons,  a country  could
impose  temporary  restrictions  on foreign capital  remittances.  The Portfolio
could be  adversely  affected by delays in, or a refusal to grant,  any required
governmental approval for repatriation of capital, as well as by the application
to the Portfolio of any restrictions on investments.

         Many emerging markets have experienced substantial, and in some periods
extremely  high  rates  of  inflation  for  many  years.   Inflation  and  rapid
fluctuations  in  inflation  rates  have had and may  continue  to have  adverse
effects on the  economies  and  securities  markets of certain  emerging  market
countries. In an attempt to control inflation, wage and price controls have been
imposed in certain  countries.  Of these countries,  some, in recent years, have
begun to control inflation through prudent economic policies.

Investing in Latin America.  Investing in securities of Latin  American  issuers
may entail risks relating to the potential political and economic instability of
certain   Latin   American   countries   and   the   risks   of   expropriation,
nationalization,  confiscation  or the  imposition  of  restrictions  on foreign
investment  and  on   repatriation  of  capital   invested.   In  the  event  of
expropriation,  nationalization  or  other  confiscation  by  any  country,  the
Portfolio could lose its entire investment in any such country.

         The securities  markets of Latin American  countries are  substantially
smaller, less developed, less liquid and more volatile than the major securities
markets in the U.S.  Disclosure  and  regulatory  standards are in many respects
less  stringent  than U.S.  standards.  Furthermore,  there is a lower  level of
monitoring and regulation of the markets and the activities of investors in such
markets.

         The limited size of many Latin American  securities markets and limited
trading volume in the securities of Latin American issuers compared to volume of
trading in the  securities of U.S.  issuers could cause prices to be erratic for
reasons apart from factors that affect the soundness and  competitiveness of the
securities  issuers.  For  example,  limited  market size may cause prices to be
unduly influenced by traders who control large positions.  Adverse publicity and


                                       10
<PAGE>

investors'  perceptions,  whether or not based on in-depth fundamental analysis,
may decrease the value and liquidity of portfolio securities.

         The  Portfolio  may  invest  a  portion  of its  assets  in  securities
denominated in currencies of Latin American countries.  Accordingly,  changes in
the  value  of  these   currencies   against  the  U.S.  dollar  may  result  in
corresponding  changes  in the  U.S.  dollar  value  of the  Portfolio's  assets
denominated in those currencies.

         Some Latin American countries also may have managed  currencies,  which
are not free floating against the U.S. dollar.  In addition,  there is risk that
certain  Latin  American  countries  may restrict the free  conversion  of their
currencies into other currencies. Further, certain Latin American currencies may
not be  internationally  traded.  Certain of these currencies have experienced a
steep  devaluation  relative  to  the  U.S.  dollar.  Any  devaluations  in  the
currencies  in  which  the  Portfolio  securities  are  denominated  may  have a
detrimental impact on the Portfolio's net asset value.

         The  economies  of  individual  Latin  American  countries  may  differ
favorably or unfavorably  from the U.S.  economy in such respects as the rate of
growth of gross domestic product, the rate of inflation,  capital  reinvestment,
resource  self-sufficiency  and  balance of  payments  position.  Certain  Latin
American  countries have  experienced  high levels of inflation which can have a
debilitating effect on an economy, although some have begun to control inflation
in recent years through prudent economic  policies.  Furthermore,  certain Latin
American  countries  may impose  withholding  taxes on dividends  payable to the
Portfolio at a higher rate than those imposed by other foreign  countries.  This
may reduce the  Portfolio's  investment  income  available for  distribution  to
shareholders.

         Certain Latin American  countries such as Argentina,  Brazil and Mexico
are  among  the  world's  largest  debtors  to  commercial   banks  and  foreign
governments.  At times, certain Latin American countries have declared moratoria
on the payment of principal and/or interest on outstanding debt.

         Latin  America  is a  region  rich in  natural  resources  such as oil,
copper, tin, silver, iron ore, forestry, fishing, livestock and agriculture. The
region  has a  large  population  (roughly  300  million)  representing  a large
domestic  market.  Economic growth was strong in the 1960s and 1970s, but slowed
dramatically  (and in some  instances  was negative) in the 1980s as a result of
poor economic policies,  higher international  interest rates, and the denial of
access to new foreign capital. Although a number of Latin American countries are
currently  experiencing lower rates of inflation and higher rates of real growth
in gross  domestic  product  than they have in the past,  other  Latin  American
countries continue to experience significant problems,  including high inflation
rates and high interest  rates.  Capital flight has proven a persistent  problem
and  external  debt has been  forcibly  restructured.  Political  turmoil,  high
inflation,  capital repatriation restrictions,  and nationalization have further
exacerbated conditions.

         Governments  of  many  Latin  American  countries  have  exercised  and
continue  to exercise  substantial  influence  over many  aspects of the private
sector through the ownership or control of many companies, including some of the
largest in those countries. As a result,  government actions in the future could
have a significant  effect on economic  conditions  which may  adversely  affect
prices of certain portfolio securities.  Expropriation,  confiscatory  taxation,
nationalization,  political,  economic or social  instability  or other  similar
developments,  such as military coups,  have occurred in the past and could also
adversely affect the Fund's investments in this region.

         Changes in political leadership,  the implementation of market oriented
economic policies,  such as privatization,  trade reform and fiscal and monetary
reform are among the recent steps taken to renew economic growth.  External debt
is being  restructured and flight capital  (domestic  capital that has left home
country)  has  begun  to  return.  Inflation  control  efforts  have  also  been
implemented.  Free Trade Zones are being  discussed in various  areas around the
region, the most notable being a free zone among Mexico, the U.S. and Canada and
another zone among four  countries in the  southernmost  point of Latin America.
Currencies are typically weak, but most are now relatively free floating, and it
is not unusual for the  currencies  to undergo wide  fluctuations  in value over
short periods of time due to changes in the market.

Investing in the Pacific Basin.  Economies of individual Pacific Basin countries
may differ  favorably or unfavorably  from the U.S.  economy in such respects as
growth of gross  national  product,  rate of  inflation,  capital  reinvestment,
resource  self-sufficiency,  interest  rate  levels,  and  balance  of  payments
position. Of particular importance,  most of the economies in this region of the
world are heavily dependent upon exports,  particularly to developed  countries,
and,  accordingly,  have been and may continue to be adversely affected by trade


                                       11
<PAGE>

barriers,   managed   adjustments  in  relative   currency  values,   and  other
protectionist  measures  imposed or negotiated  by the U.S. and other  countries
with which they trade.  These  economies  also have been and may  continue to be
negatively  impacted  by  economic  conditions  in the U.S.  and  other  trading
partners, which can lower the demand for goods produced in the Pacific Basin.

         With  respect to the  Peoples  Republic  of China and other  markets in
which the Fund may  participate,  there is the  possibility of  nationalization,
expropriation   or  confiscatory   taxation,   political   changes,   government
regulation,  social instability or diplomatic  developments that could adversely
impact a Pacific Basin country or the Portfolio's investment in the debt of that
country.

         Foreign companies, including Pacific Basin companies, are not generally
subject to uniform  accounting,  auditing  and  financial  reporting  standards,
practices and  disclosure  requirements  comparable to those  applicable to U.S.
companies.  Consequently, there may be less publicly available information about
such  companies  than about U.S.  companies.  Moreover,  there is generally less
government supervision and regulation in the Pacific Basin than in the U.S.

Investing in Europe. Most Eastern European nations,  including Hungary,  Poland,
Czechoslovakia,  and Romania have had  centrally  planned,  socialist  economies
since shortly after World War II. A number of their governments, including those
of  Hungary,  the Czech  Republic,  and Poland  are  currently  implementing  or
considering reforms directed at political and economic liberalization, including
efforts to foster multi-party political systems, decentralize economic planning,
and move toward free market economies.  At present,  no Eastern European country
has a developed stock market, but Poland,  Hungary,  and the Czech Republic have
small securities markets in operation.  Ethnic and civil conflict currently rage
through the former Yugoslavia. The outcome is uncertain.

         Both the European  Community (the "EC") and Japan,  among others,  have
made  overtures to  establish  trading  arrangements  and assist in the economic
development  of the Eastern  European  nations.  A great deal of  interest  also
surrounds  opportunities  created by the reunification of East and West Germany.
Following reunification, the Federal Republic of Germany has remained a firm and
reliable  member  of the EC  and  numerous  other  international  alliances  and
organizations.  To reduce  inflation  caused by the unification of East and West
Germany,  Germany has adopted a tight monetary  policy which has led to weakened
exports and a reduced  domestic demand for goods and services.  However,  in the
long-term,   reunification  could  prove  to  be  an  engine  for  domestic  and
international growth.

         The  conditions  that  have  given  rise  to  these   developments  are
changeable,  and there is no assurance  that reforms will continue or that their
goals will be achieved.

         Portugal is a genuinely  emerging  market which has  experienced  rapid
growth  since  the  mid-1980s,  except  for a brief  period of  stagnation  over
1990-91.  Portugal's  government  remains  committed  to  privatization  of  the
financial  system  away from one  dependent  upon the  banking  system to a more
balanced  structure  appropriate  for  the  requirements  of a  modern  economy.
Inflation continues to be about three times the EC average.

         Economic  reforms  launched in the 1980s  continue to benefit Turkey in
the 1990s.  Turkey's economy has grown steadily since the early 1980s, with real
growth in per capita Gross Domestic Product (the "GDP")  increasing more than 6%
annually.  Agriculture  remains the most important  economic  sector,  employing
approximately  55% of the labor force,  and accounting for nearly 20% of GDP and
20% of exports.  Inflation  and interest  rates remain high,  and a large budget
deficit   will   continue  to  cause   difficulties   in  Turkey's   substantial
transformation to a dynamic free market economy.

         Like many other Western  economies,  Greece suffered  severely from the
global oil price hikes of the 1970s,  with annual GDP growth plunging from 8% to
2% in the  1980s,  and  inflation,  unemployment,  and  budget  deficits  rising
sharply.  The fall of the socialist  government in 1989 and the inability of the
conservative  opposition  to  obtain  a  clear  majority  have  led to  business
uncertainty  and the continued  prospects for flat  economic  performance.  Once
Greece  has  sorted  out  its  political  situation,  it will  have to face  the
challenges posed by the steadily increasing integration of the EC, including the
progressive  lowering of trade and investment  barriers.  Tourism continues as a
major industry, providing a vital offset to a sizable commodity trade deficit.

                                       12
<PAGE>

         Securities traded in certain emerging European  securities  markets may
be subject to risks due to the  inexperience  of financial  intermediaries,  the
lack of modern  technology  and the lack of a sufficient  capital base to expand
business  operations.  Additionally,  former  Communist  regimes  of a number of
Eastern  European  countries had  expropriated  a large amount of property,  the
claims of which have not been entirely  settled.  There can be no assurance that
the  Portfolio's  investments in Eastern Europe would not also be  expropriated,
nationalized  or otherwise  confiscated.  Finally,  any change in  leadership or
policies of Eastern European countries, or countries that exercise a significant
influence  over  those  countries,  may halt the  expansion  of or  reverse  the
liberalization of foreign investment policies now occurring and adversely affect
existing investment opportunities.

Investing in Africa.  Africa is a continent of roughly 50 countries with a total
population of approximately  840 million people.  Literacy rates (the percentage
of  people  who are  over 15  years  of age and who  can  read  and  write)  are
relatively low,  ranging from 20% to 60%. The primary  industries  include crude
oil, natural gas, manganese ore,  phosphate,  bauxite,  copper,  iron,  diamond,
cotton, coffee, cocoa, timber, tobacco, sugar, tourism, and cattle.

         Many of the countries are fraught with political instability.  However,
there has been a trend over the past five  years  toward  democratization.  Many
countries are moving from a military style,  Marxist, or single party government
to a multi-party  system.  Still, there remain many countries that do not have a
stable political process.
Other countries have been enmeshed in civil wars and border clashes.

         Economically, the Northern Rim countries (including Morocco, Egypt, and
Algeria) and Nigeria,  Zimbabwe and South Africa are the wealthier  countries on
the continent.  The market  capitalization  of these  countries has been growing
recently as more international companies invest in Africa and as local companies
start to list on the exchanges.  However, religious and ethnic strife has been a
significant source of instability.

         On the  other  end of the  economic  spectrum  are  countries,  such as
Burkinafaso, Madagascar, and Malawi, that are considered to be among the poorest
or least  developed in the world.  These  countries are generally  landlocked or
have poor natural resources. The economies of many African countries are heavily
dependent on international  oil prices. Of all the African  industries,  oil has
been the  most  lucrative,  accounting  for 40% to 60% of many  countries'  GDP.
However,  general  decline  in oil  prices  has had an  adverse  impact  on many
economies.

         Foreign  securities  such as those  purchased by the  Portfolio  may be
subject  to  foreign  government  taxes  which  could  reduce  the yield on such
securities,  although a  shareholder  of the Portfolio  may,  subject to certain
limitations,  be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her  proportionate  share of such foreign  taxes paid by
the Portfolio. (See "TAX STATUS.")

International Portfolio

         The International Portfolio seeks long-term growth of capital primarily
through  diversified  holdings of marketable  foreign  equity  investments.  The
Portfolio invests in companies,  wherever organized, which do business primarily
outside the United  States.  The Fund,  on behalf of the  Portfolio,  intends to
diversify  investments  among several  countries and to have  represented in the
program  business  activities in not less than three  different  countries.  The
management considers it consistent with this policy for the Portfolio to acquire
securities  of  companies  incorporated  in the United  States and having  their
principal  activities  and  interests  outside  of the United  States,  and such
investments may be included in the program.

         It is not the policy of the Portfolio to concentrate its investments in
any particular industry,  and the Portfolio's management does not intend to make
acquisitions in particular industries which would increase the percentage of the
market  value of the  Portfolio's  assets  above 25% for any one  industry.  The
Portfolio  does not invest for the  purpose of  controlling  or  managing  other
companies.

         The  major  portion  of  the  Portfolio's  assets  consists  of  equity
securities of established companies listed on recognized exchanges;  the Adviser
expects this  condition to continue,  although the Portfolio may invest in other
securities.  Investments may also be made in fixed income  securities of foreign
governments  and  companies  with a view  toward  total  investment  return.  In
determining the location of the principal activities and interests of a company,
the Adviser  takes into account  such  factors as the location of the  company's
assets,  personnel,   sales  and  earnings.  In  selecting  securities  for  the


                                       13
<PAGE>

Portfolio,  the Adviser seeks to identify  companies whose securities  prices do
not adequately reflect their established positions in their fields. In analyzing
companies for investment,  the Adviser  ordinarily  looks for one or more of the
following characteristics:  above-average earnings growth per share, high return
on invested  capital,  healthy  balance sheets and overall  financial  strength,
strong  competitive  advantages,  strength of management  and general  operating
characteristics which will enable the companies to compete successfully in their
marketplace.  Investment decisions are made without regard to arbitrary criteria
such as minimum asset size,  debt-equity ratios or dividend history of Portfolio
companies.

         The  Portfolio  may invest in any type of security  including,  but not
limited  to  shares,   preferred  or  common,   bonds  and  other  evidences  of
indebtedness,  and other  securities  of  issuers  wherever  organized,  and not
excluding   evidences  of   indebtedness  of  governments  and  their  political
subdivisions.  Although  no  particular  proportion  of  stocks,  bonds or other
securities is required to be  maintained,  the Fund, on behalf of the Portfolio,
in view of the Portfolio's investment objective, intends under normal conditions
to  maintain  holdings  consisting  primarily  of a  diversified  list of equity
securities.

         Under exceptional  economic or market conditions  abroad, the Portfolio
may temporarily,  until normal conditions return,  invest all or a major portion
of its assets in Canadian  or U.S.  Government  obligations  or  currencies,  or
securities of companies incorporated in and having their principal activities in
Canada or the United States.

         Foreign  securities  such as those  purchased by the  Portfolio  may be
subject  to  foreign  government  taxes  which  could  reduce  the yield on such
securities,  although a  shareholder  of the Portfolio  may,  subject to certain
limitations,  be entitled to claim a credit or deduction for U.S. federal income
tax purposes for his or her  proportionate  share of such foreign  taxes paid by
the Portfolio. (See "TAXES.")

         The Portfolio is intended to provide  investors  with an opportunity to
invest a portion of their assets in a diversified group of securities of foreign
companies  and   governments.   Management   of  the  Portfolio   believes  that
diversification  of assets on an  international  basis  decreases  the degree to
which events in any one country,  including  the United  States,  will affect an
investor's  entire investment  holdings.  In the period since World War II, many
leading  foreign  economies  and foreign  stock  market  indexes have grown more
rapidly than the United States  economy and leading U.S.  stock market  indexes,
although there can be no assurance that this will be true in the future. Because
of the Portfolio's investment policy, the Portfolio is not intended to provide a
complete investment program for an investor.

         Because the Portfolio  normally will be invested in foreign  securities
markets,  changes in the Portfolio's share price may have a low correlation with
movements  in the U.S.  markets.  The  Portfolio's  share price will reflect the
movements of both the  different  stock and bond markets in which it is invested
and of the currencies in which the investments are denominated;  the strength or
weakness of the U.S. dollar against  foreign  currencies may account for part of
the Portfolio's investment  performance.  U.S. and foreign securities markets do
not always move in step with each other,  and the total  returns from  different
markets may vary significantly. The Portfolio invests in many foreign securities
markets in an attempt  to take  advantage  of  opportunities  wherever  they may
arise.

              POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS

           (See "POLICIES AND TECHNIQUES APPLICABLE TO THE PORTFOLIOS"
                           in the Fund's prospectus.)

         Except  as  otherwise  noted  below,   the  following   description  of
additional  investment  policies  and  techniques  is  applicable  to all of the
Portfolios.

Repurchase Agreements

         On behalf of a Portfolio, the Fund may enter into repurchase agreements
with  member  banks of the Federal  Reserve  System,  any  foreign  bank and any
broker-dealer which is recognized as a reporting government securities dealer if
the  creditworthiness  of the bank or  broker-dealer  has been determined by the
Adviser to be at least equal to that of issuers of commercial paper rated within
the two highest  categories  assigned by Moody's or S&P. A repurchase  agreement


                                       14
<PAGE>

with a member bank of the Federal Reserve System, which provides a means for the
Portfolio  to earn  income on funds for  periods  as short as  overnight,  is an
arrangement through which the Portfolio acquires a U.S. Government or other high
quality  short-term debt obligation (the "Obligation") and the seller agrees, at
the time of sale, to repurchase  the Obligation at a specified time and price. A
repurchase  agreement  with  foreign  banks may be  available  with  respect  to
government  securities of the particular  foreign  jurisdiction.  The repurchase
price may be higher than the purchase price,  the difference being income to the
Portfolio,  or the purchase and repurchase prices may be the same, with interest
at a stated rate due to the  Portfolio  together  with the  repurchase  price on
repurchase.  In either  case,  the income to the  Portfolio  is unrelated to the
interest  rate  on the  Obligation  subject  to the  repurchase  agreement.  For
purposes of the  Investment  Company Act of 1940, as amended (the "1940 Act"), a
repurchase  agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation  subject to the repurchase  agreement and is therefore subject to
the  Portfolio's  investment  restriction  applicable to loans.  It is not clear
whether a court would consider the Obligation purchased by the Portfolio subject
to a repurchase agreement as being owned by the Portfolio or as being collateral
for a loan by the Portfolio to the seller.  In the event of the  commencement of
bankruptcy  or insolvency  proceedings  of the seller of the  Obligation  before
repurchase of the  Obligation  under a repurchase  agreement,  the Portfolio may
encounter  delay and incur costs before being able to sell the security.  Delays
may involve loss of interest or decline in price of the Obligation. If the court
characterizes  the  transaction  as a loan and the Portfolio has not perfected a
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured  creditor,  the Portfolio would be at the risk of losing
some or all of the principal and income involved in the transaction. As with any
unsecured  debt  instrument  purchased  for the  Portfolio,  the  Fund  seeks to
minimize  the  risk of loss  through  repurchase  agreements  by  analyzing  the
creditworthiness  of the  obligor,  in this case the  seller of the  Obligation.
Apart from the risk of bankruptcy or insolvency  proceedings,  there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation  subject to the repurchase  agreement  becomes less than
the repurchase price (including interest),  the Portfolio will direct the seller
of the Obligation to deliver  additional  securities so that the market value of
all  securities  subject to the  repurchase  agreement  will equal or exceed the
repurchase  price.  It is possible that the Portfolio  will be  unsuccessful  in
seeking to impose on the seller a contractual  obligation to deliver  additional
securities.

Debt Securities

   
         The Bond, Balanced,  Capital Growth and Global Discovery Portfolios may
each invest in debt securities rated below  investment-grade  (those rated below
Baa or BBB). These  securities are commonly  referred to as "junk bonds" and can
entail greater price  volatility and involve a higher degree of speculation with
respect  to  the  payment  of  principal  and  interest   than  higher   quality
fixed-income  securities.  The market prices of such lower rated debt securities
may decline significantly in periods of general economic difficulty. The trading
market for these  securities  is  generally  less liquid  than for higher  rated
securities, and a Portfolio may have difficulty disposing of these securities at
the time it wishes to do so. The lack of a liquid  secondary  market for certain
securities  may also make it more  difficult for a Portfolio to obtain  accurate
market  quotations for purposes of valuing its portfolio and calculating its net
asset value.  The lower the ratings of such debt  securities,  the greater their
risks render them like equity securities.  In addition,  as interest rates fall,
the prices of debt securities tend to rise and vice versa.  Should the rating of
any security held by a Portfolio be downgraded  after the time of purchase,  the
Adviser will  determine  whether it is in the best  interest of the Portfolio to
retain or dispose of the security.

Illiquid or Restricted Securities

         The Portfolios may each occasionally  purchase securities other than in
the open market.  While such purchases may often offer attractive  opportunities
for  investment  not otherwise  available on the open market,  the securities so
purchased are often "restricted  securities" or "not readily  marketable," i.e.,
securities  which cannot be sold to the public  without  registration  under the
Securities Act of 1933 (the "1933 Act") or the availability of an exemption from
registration  (such as Rules 144 or 144A) or because  they are  subject to other
legal or contractual delays in or restrictions on resale.

         Generally speaking, restricted securities may be sold only to qualified
institutional  buyers,  or in a privately  negotiated  transaction  to a limited
number of purchasers,  or in limited  quantities after they have been held for a
specified  period of time and other  conditions are met pursuant to an exemption
from registration, or in a public offering for which a registration statement is
in effect under the 1933 Act. A Portfolio  may be deemed to be an  "underwriter"
    


                                       15
<PAGE>

for purposes of the 1933 Act when selling  restricted  securities to the public,
and in such event the Portfolio  may be liable to purchasers of such  securities
if the registration  statement prepared by the issuer, or the prospectus forming
a part of it, is materially inaccurate or misleading.

   
Trust Preferred Securities

         The Bond  Portfolio  and  Balanced  Portfolio  may each invest in Trust
Preferred  Securities,  which are hybrid instruments issued by a special purpose
trust (the "Special  Trust"),  the entire equity interest of which is owned by a
single issuer. The proceeds of the issuance to the Portfolios of Trust Preferred
Securities are typically used to purchase a junior subordinated  debenture,  and
distributions from the Special Trust are funded by the payments of principal and
interest on the subordinated debenture.

         If payments on the underlying  junior  subordinated  debentures held by
the Special Trust are deferred by the debenture issuer,  the debentures would be
treated as original  issue  discount  ("OID")  obligations  for the remainder of
their term.  As a result,  holders of Trust  Preferred  Securities,  such as the
Portfolios,  would be required to accrue daily for Federal  income tax purposes,
their  share of the stated  interest  and the de minimis  OID on the  debentures
(regardless  of whether a Portfolio  receives  any cash  distributions  from the
Special  Trust),  and the value of Trust  Preferred  Securities  would likely be
negatively  affected.  Interest payments on the underlying  junior  subordinated
debentures  typically  may only be deferred if dividends  are  suspended on both
common and preferred  stock of the issuer.  The underlying  junior  subordinated
debentures generally rank slightly higher in terms of payment priority than both
common and preferred securities of the issuer, but rank below other subordinated
debentures and debt  securities.  Trust  Preferred  Securities may be subject to
mandatory  prepayment  under certain  circumstances.  The market values of Trust
Preferred  Securities  may be more  volatile  than  those of  conventional  debt
securities.  Trust  Preferred  Securities may be issued in reliance on Rule 144A
under the Securities Act of 1933, as amended,  and, unless and until registered,
are  restricted  securities;  there can be no assurance  as to the  liquidity of
Trust  Preferred  Securities  and the  ability  of  holders  of Trust  Preferred
Securities, such as the Portfolios, to sell their holdings.
    

Zero Coupon Securities

   
         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in zero coupon securities which pay
no cash  income  and are  sold at  substantial  discounts  from  their  value at
maturity.  When  held to  maturity,  their  entire  income,  which  consists  of
accretion of  discount,  comes from the  difference  between the issue price and
their value at maturity.  Zero coupon  securities  are subject to greater market
value  fluctuations  from  changing  interest  rates  than debt  obligations  of
comparable  maturities which make current distributions of interest (cash). Zero
coupon convertible securities offer the opportunity for capital appreciation (or
depreciation)  as increases (or  decreases)  in market value of such  securities
closely follow the movements in the market value of the underlying common stock.
Zero coupon  convertible  securities  generally are expected to be less volatile
than the underlying common stocks because zero coupon convertible securities are
usually  issued  with  shorter  maturities  (15 years or less) and with  options
and/or redemption features exercisable by the holder of the obligation entitling
the holder to redeem the obligation and receive a defined cash payment.
    

         Zero coupon securities  include  securities issued directly by the U.S.
Treasury,  and U.S. Treasury bonds or notes and their unmatured interest coupons
and  receipts  for  their  underlying  principal  ("coupons")  which  have  been
separated by their holder,  typically a custodian  bank or investment  brokerage
firm. A holder will separate the interest coupons from the underlying  principal
(the "corpus") of the U.S. Treasury  security.  A number of securities firms and
banks have  stripped the  interest  coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income  Growth  Receipts"  ("TIGRS")  and  Certificate  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.  Counsel  to the
underwriters  of these  certificates or other evidences of ownership of the U.S.
Treasury securities has stated that for federal tax and securities purposes,  in
their opinion  purchasers of such  certificates,  such as the  Portfolios,  most
likely will be deemed the beneficial  holders of the underlying U.S.  government
securities.

                                       16
<PAGE>

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

         When U.S.  Treasury  obligations  have been stripped of their unmatured
interest  coupons  by the  holder,  the  principal  or  corpus is sold at a deep
discount  because the buyer  receives  only the right to receive a future  fixed
payment on the  security  and does not receive  any rights to periodic  interest
(cash) 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  that the Treasury  sells
itself.

   
Real Estate Investment Trusts

         The Bond Portfolio and the Growth and Income  Portfolio may each invest
in REITs. REITs are sometimes informally characterized as equity REITs, mortgage
REITs and hybrid  REITs.  Investment  in REITs may subject a Portfolio  to risks
associated with the direct  ownership of real estate,  such as decreases in real
estate values,  overbuilding,  increased  competition and other risks related to
local or general economic conditions,  increases in operating costs and property
taxes,  changes  in zoning  laws,  casualty  or  condemnation  losses,  possible
environmental  liabilities,  regulatory  limitations on rent and fluctuations in
rental income.  Equity REITs generally  experience  these risks directly through
fee or leasehold  interests,  whereas mortgage REITs generally  experience these
risks indirectly through mortgage interests, unless the mortgage REIT forecloses
on the  underlying  real estate.  Changes in interest  rates may also affect the
value of a Portfolio's  investment in REITs.  For  instance,  during  periods of
declining  interest  rates,  certain  mortgage REITs may hold mortgages that the
mortgagors  elect  to  prepay,  which  prepayment  may  diminish  the  yield  on
securities issued by those REITs.

         Certain REITs have relatively  small market  capitalization,  which may
tend to  increase  the  volatility  of the  market  price of  their  securities.
Furthermore,  REITs are  dependent  upon  specialized  management  skills,  have
limited  diversification  and  are,  therefore,  subject  to risks  inherent  in
operating and financing a limited number of projects.  REITs are also subject to
heavy cash flow dependency, defaults by borrowers and the possibility of failing
to qualify for tax-free  pass-through of income under the Internal  Revenue Code
of 1986, as amended and to maintain exemption from the registration requirements
of the 1940  Act.  By  investing  in REITs  indirectly  through a  Portfolio,  a
shareholder will bear not only his or her proportionate share of the expenses of
the Portfolio, but also, indirectly, similar expenses of the REITs. In addition,
REITs  depend  generally  on  their  ability  to  generate  cash  flow  to  make
distributions to shareholders.
    

Mortgage-Backed Securities and Mortgage Pass-Through Securities

   
         The Bond, Balanced, and Growth and Income Portfolios may also invest in
mortgage-backed  securities,  which are  interests  in pools of mortgage  loans,
including  mortgage  loans  made by  savings  and  loan  institutions,  mortgage
bankers,  commercial banks, and others. Pools of mortgage loans are assembled as
securities  for sale to investors by various  governmental,  government-related,
and private  organizations  as further  described below. The Portfolios may also
invest in debt  securities  which are  secured  with  collateral  consisting  of
mortgage-backed  securities (see "Collateralized Mortgage Obligations"),  and in
other types of mortgage-related securities.
    

         A decline in interest  rates may lead to a faster rate of  repayment of
the  underlying  mortgages,  and expose the Portfolios to a lower rate of return
upon reinvestment.  To the extent that such mortgage-backed  securities are held
by the  Portfolios,  the prepayment  right will tend to limit to some degree the
increase  in net  asset  value  of  the  Portfolios  because  the  value  of the
mortgage-backed  securities held by the Portfolios may not appreciate as rapidly
as the price of non-callable debt securities.

                                       17
<PAGE>

         Interests  in pools of  mortgage-backed  securities  differ  from other
forms of debt  securities,  which  normally  provide  for  periodic  payment  of
interest in fixed amounts with principal  payments at maturity or specified call
dates.  Instead,  these  securities  provide a monthly payment which consists of
both  interest  and  principal  payments.   In  effect,  these  payments  are  a
"pass-through" of the monthly payments made by the individual borrowers on their
mortgage  loans,  net of any  fees  paid  to the  issuer  or  guarantor  of such
securities.  Additional payments are caused by repayments of principal resulting
from the sale of the underlying property,  refinancing,  or foreclosure,  net of
fees or costs which may be incurred.  Some  mortgage-related  securities such as
securities issued by the Government National Mortgage  Association  ("GNMA") are
described as "modified  pass-through."  These  securities  entitle the holder to
receive all interest and principal  payments owed on the mortgage  pool,  net of
certain fees, at the  scheduled  payment dates  regardless of whether or not the
mortgagor actually makes the payment.

         The principal governmental guarantor of mortgage-related  securities is
GNMA. GNMA is a wholly-owned U.S.  Government  corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee, with the full
faith and credit of the U.S.  Government,  the timely  payment of principal  and
interest on securities issued by institutions  approved by GNMA (such as savings
and loan  institutions,  commercial  banks, and mortgage  bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages.  These guarantees,  however, do
not apply to the market value or yield of  mortgage-backed  securities or to the
value of  Portfolio  shares.  Also,  GNMA  securities  often are  purchased at a
premium over the maturity value of the underlying mortgages. This premium is not
guaranteed and will be lost if prepayment occurs.

         Government-related  guarantors  (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan  Mortgage  Corporation  ("FHLMC").  FNMA is a
government-sponsored  corporation owned entirely by private stockholders.  It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases  conventional  (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved  seller/servicers  which include state
and  federally-chartered  savings and loan  associations,  mutual savings banks,
commercial banks, credit unions, and mortgage bankers.  Pass-through  securities
issued by FNMA are  guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S. Government.

         FHLMC is a corporate  instrumentality  of the U.S.  Government  and was
created by Congress in 1970 for the purpose of increasing  the  availability  of
mortgage  credit  for  residential  housing.  Its  stock is owned by the  twelve
Federal Home Loan Banks. FHLMC issues  Participation  Certificates ("PCs") which
represent  interests in conventional  mortgages from FHLMC's national portfolio.
FHLMC  guarantees  the timely  payment of interest  and ultimate  collection  of
principal,  but PCs are not  backed  by the full  faith  and  credit of the U.S.
Government.

         Commercial  banks,  savings  and loan  institutions,  private  mortgage
insurance  companies,  mortgage bankers, and other secondary market issuers also
create  pass-through pools of conventional  mortgage loans. Such issuers may, in
addition,  be the originators and/or servicers of the underlying  mortgage loans
as well as the guarantors of the mortgage-related  securities.  Pools created by
such  non-governmental  issuers  generally  offer a higher rate of interest than
government and government-related  pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and  principal of these pools may be supported by various  forms of insurance or
guarantees,  including  individual loan, title,  pool and hazard insurance,  and
letters of credit.  The  insurance  and  guarantees  are issued by  governmental
entities,  private  insurers,  and the  mortgage  poolers.  Such  insurance  and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Portfolios' investment
quality  standards.  There can be no  assurance  that the  private  insurers  or
guarantors can meet their obligations under the insurance  policies or guarantee
arrangements.   The  Portfolios  may  buy  mortgage-related  securities  without
insurance or guarantees,  if through an  examination of the loan  experience and
practices of the  originators/servicers and poolers, the Adviser determines that
the securities meet the Portfolios'  quality standards.  Although the market for
such securities is becoming  increasingly  liquid,  securities issued by certain
private organizations may not be readily marketable.

Collateralized Mortgage Obligations ("CMOs")

         A CMO  is a  hybrid  between  a  mortgage-backed  bond  and a  mortgage
pass-through  security.  Similar to a bond,  interest and prepaid  principal are
paid, in most cases, semiannually.  CMOs may be collateralized by whole mortgage


                                       18
<PAGE>

loans  but  are  more  typically   collateralized   by  portfolios  of  mortgage
pass-through  securities  guaranteed by GNMA,  FHLMC,  or FNMA, and their income
streams.

         CMOs are  structured  into multiple  classes,  each bearing a different
stated  maturity.  Actual  maturity  and  average  life  will  depend  upon  the
prepayment  experience  of the  collateral.  CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according  to how  quickly the loans are repaid.  Monthly  payment of  principal
received from the pool of underlying mortgages,  including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity  classes  receive  principal only after the first class has been
retired.  An investor is partially  guarded against a sooner than desired return
of principal because of the sequential payments.

         In a typical CMO  transaction,  a corporation  issues multiple  series,
(e.g.,  A, B, C, Z) of CMO bonds  ("Bonds").  Proceeds of the Bond  offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The  Collateral  is pledged to a third party  trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest.  Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond  currently  being
paid  off.  When the  Series A, B, and C Bonds  are paid in full,  interest  and
principal on the Series Z Bond begins to be paid currently.  With some CMOs, the
issuer  serves as a conduit to allow loan  originators  (primarily  builders  or
savings and loan associations) to borrow against their loan portfolios.

FHLMC Collateralized Mortgage Obligations

         FHLMC CMOs are debt  obligations  of FHLMC  issued in multiple  classes
having  different  maturity  dates  which are secured by the pledge of a pool of
conventional  mortgage loans purchased by FHLMC.  Unlike FHLMC PCs,  payments of
principal and interest on the CMOs are made semiannually, as opposed to monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance  with FHLMC's  mandatory  sinking fund schedule,  which,  in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral  pool.  All sinking  fund  payments in the CMOs are  allocated to the
retirement  of the  individual  classes  of bonds in the  order of their  stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's  minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as  additional  sinking fund  payments.
Because of the  "pass-through"  nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement,  the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.

         If  collection  of principal  (including  prepayments)  on the mortgage
loans during any  semiannual  payment  period is not  sufficient to meet FHLMC's
minimum  sinking fund  obligation on the next sinking fund payment  date,  FHLMC
agrees to make up the deficiency from its general funds.

         Criteria  for the  mortgage  loans  in the  pool  backing  the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.

Other Mortgage-Backed Securities

         The Adviser expects that governmental,  government-related,  or private
entities may create  mortgage loan pools and other  mortgage-related  securities
offering  mortgage  pass-through  and  mortgage-collateralized   investments  in
addition to those described above. The mortgages underlying these securities may
include alternative  mortgage  instruments,  that is, mortgage instruments whose
principal  or interest  payments  may vary or whose terms to maturity may differ
from  customary  long-term  fixed rate  mortgages.  The Bond  Portfolio  and the
Balanced  Portfolio  will not purchase  mortgage-backed  securities or any other
assets which, in the opinion of the Adviser,  are illiquid if, as a result, more
than 10% of the value of the Portfolio's  total assets will be illiquid.  As new
types of mortgage-related securities are developed and offered to investors, the
Adviser will, consistent with the Portfolio's investment  objectives,  policies,
and  quality  standards,  consider  making  investments  in such  new  types  of
mortgage-related securities.

                                       19
<PAGE>

Other Asset-Backed Securities

         The   securitization   techniques  used  to  develop   mortgaged-backed
securities are now being applied to a broad range of assets.  Through the use of
trusts and special  purpose  corporations,  various  types of assets,  including
automobile  loans,  computer  leases  and  credit  card  receivables,  are being
securitized  in  pass-through  structures  similar to the mortgage  pass-through
structures  described  above or in a  structure  similar  to the CMO  structure.
Consistent  with the Bond  Portfolio's and the Balanced  Portfolio's  investment
objectives  and policies,  the Portfolios may invest in these and other types of
asset-backed  securities  that may be developed in the future.  In general,  the
collateral  supporting  these  securities  is of shorter  maturity than mortgage
loans and is less likely to  experience  substantial  prepayments  with interest
rate fluctuations.

         Several types of  asset-backed  securities have already been offered to
investors,  including  Certificates  for  Automobile  ReceivablesSM  ("CARSSM").
CARSSM  represent  undivided  fractional  interests in a trust  ("Trust")  whose
assets consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARSSM are passed through  monthly to certificate  holders,  and
are  guaranteed up to certain  amounts and for a certain time period by a letter
of credit  issued by a financial  institution  unaffiliated  with the trustee or
originator of the Trust. An investor's return on CARSSM may be affected by early
prepayment of principal on the underlying vehicle sales contracts. If the letter
of credit is  exhausted,  the Trust may be  prevented  from  realizing  the full
amount  due  on  a  sales  contract   because  of  state  law  requirements  and
restrictions  relating to  foreclosure  sales of vehicles  and the  obtaining of
deficiency judgments following such sales or because of depreciation,  damage to
or loss of a vehicle,  the  application  of  federal  and state  bankruptcy  and
insolvency  laws,  or  other  factors.  As a  result,  certificate  holders  may
experience delays in payments or losses if the letter of credit is exhausted.

         Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security  interest in the related  assets.  Credit card  receivables  are
generally  unsecured and the debtors are entitled to the  protection of a number
of state and federal  consumer  credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards,  thereby reducing the
balance due. There is the possibility that recoveries on repossessed  collateral
may not, in some cases, be available to support payments on these securities.

         Asset-backed   securities   are  often  backed  by  a  pool  of  assets
representing  the  obligations of a number of different  parties.  To lessen the
effect of  failures  by  obligors on  underlying  assets to make  payments,  the
securities  may  contain   elements  of  credit  support  which  fall  into  two
categories:  (i)  liquidity  protection,  and  (ii)  protection  against  losses
resulting  from  ultimate  default  by an  obligor  on  the  underlying  assets.
Liquidity  protection  refers to the  provision  of  advances,  generally by the
entity  administering the pool of assets, to ensure that the receipt of payments
on the underlying  pool occurs in a timely  fashion.  Protection  against losses
results from payment of the insurance  obligations  on at least a portion of the
assets in the pool. This protection may be provided through guarantees, policies
or letters of credit  obtained  by the  issuer or  sponsor  from third  parties,
through various means of structuring the transaction or through a combination of
such approaches.  The Bond Portfolio and the Balanced Portfolio will not pay any
additional or separate  fees for credit  support.  The degree of credit  support
provided for each issue is generally based on historical  information respecting
the level of credit risk associated with the underlying  assets.  Delinquency or
loss in excess of that  anticipated,  or  failure of the  credit  support  could
adversely affect the return on an investment in such a security.

         The Bond  Portfolio  and the  Balanced  Portfolio  may also  invest  in
residual  interests  in  asset-backed  securities.  In the case of  asset-backed
securities  issued in a pass-through  structure,  the cash flow generated by the
underlying  assets is applied to make required payments on the securities and to
pay related  administrative  expenses.  The residual in an asset-backed security
pass-through structure represents the interest in any excess cash flow remaining
after making the foregoing payments.  The amount of residual cash flow resulting
from a particular  issue of asset-backed  securities will depend on, among other
things,  the  characteristics  of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses and
the actual prepayment experience on the underlying assets. Asset-backed security
residuals  not  registered  under the  Securities  Act of 1933 may be subject to
certain  restrictions on  transferability.  In addition,  there may be no liquid
market for such securities.

                                       20
<PAGE>

         The  availability  of  asset-backed   securities  may  be  affected  by
legislative or regulatory  developments.  It is possible that such  developments
may require the Bond Portfolio and the Balanced Portfolio to dispose of any then
existing holdings of such securities.

Municipal Obligations

         The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in
municipal obligations,  which are issued by or on behalf of states, territories,
and possessions of the U.S., and their  political  subdivisions,  agencies,  and
instrumentalities,  and the  District of  Columbia  to obtain  funds for various
public  purposes.  The interest on these  obligations  is generally  exempt from
federal  income  tax  in  the  hands  of  most  investors.   The  two  principal
classifications of municipal  obligations are "notes" and "bonds." The return on
municipal obligations is ordinarily lower than that of taxable obligations.  The
Bond Portfolio and the Balanced Portfolio may each acquire municipal obligations
when, due to disparities in the debt securities  markets,  the anticipated total
return on such obligations is higher than that on taxable obligations.  The Bond
Portfolio  and the Balanced  Portfolio  have no current  intention of purchasing
tax-exempt  municipal  obligations  that would  amount to greater than 5% of the
Portfolio's total assets.

Convertible Securities

         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios may each invest in convertible securities; that is,
bonds,  notes,  debentures,  preferred  stocks  and other  securities  which are
convertible into common stock. Investments in convertible securities can provide
an  opportunity  for capital  appreciation  and/or income  through  interest and
dividend payments by virtue of their conversion or exchange features.

   
         The  convertible  securities in which the Portfolios may invest include
fixed-income or zero coupon debt securities  which may be converted or exchanged
at a stated or  determinable  exchange  ratio into  underlying  shares of common
stock.  The  exchange  ratio  for any  particular  convertible  security  may be
adjusted  from time to time due to stock  splits,  dividends,  spin-offs,  other
corporate distributions or scheduled changes in the exchange ratio.  Convertible
securities and  convertible  preferred  stocks,  until  converted,  have general
characteristics similar to both debt and equity securities. Although to a lesser
extent than with debt  securities  generally,  the market  value of  convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest  rates decline.  In addition,  because of the conversion or
exchange feature,  the market value of convertible  securities typically changes
as the market value of the underlying  common stocks  changes,  and,  therefore,
also tends to follow  movements in the general market for equity  securities.  A
unique  feature of  convertible  securities  is that as the market  price of the
underlying  common  stock  declines,   convertible   securities  tend  to  trade
increasingly on a yield basis,  and so may not experience  market value declines
to the same extent as the underlying  common stock. When the market price of the
underlying common stock increases, the prices of the convertible securities tend
to rise as a reflection of the value of the  underlying  common stock,  although
typically  not as much as the  underlying  common  stock.  While  no  securities
investments are without risk,  investments in convertible  securities  generally
entail less risk than investments in common stock of the same issuer.
    

         As fixed income  securities,  convertible  securities  are  investments
which provide for a stream of income (or in the case of zero coupon  securities,
accretion of income) with generally higher yields than common stocks. Of course,
like all  fixed  income  securities,  there  can be no  assurance  of  income or
principal payments because the issuers of the convertible securities may default
on their obligations.  Convertible  securities generally offer lower yields than
non-convertible  securities of similar  quality  because of their  conversion or
exchange features.

         Convertible  securities are generally subordinated to other similar but
non-convertible  securities of the same issuer,  although  convertible bonds, as
corporate debt  obligations,  enjoy  seniority in right of payment to all equity
securities,  and  convertible  preferred stock is senior to common stock, of the
same issuer.  However,  because of the subordination feature,  convertible bonds
and  convertible  preferred  stock  typically  have lower  ratings  than similar
non-convertible securities.

         Convertible  securities may be issued as fixed income  obligations that
pay current  income or as zero coupon  notes and bonds,  including  Liquid Yield
Option Notes ("LYONs").  Zero coupon  securities pay no cash income and are sold
at substantial  discounts  from their value at maturity.  When held to maturity,
their entire  income,  which  consists of accretion of discount,  comes from the


                                       21
<PAGE>

difference  between the purchase price and their value at maturity.  Zero coupon
convertible  securities  offer  the  opportunity  for  capital  appreciation  as
increases (or decreases) in market value of such securities  closely follows the
movements  in the market  value of the  underlying  common  stock.  Zero  coupon
convertible  securities  are  generally  expected to be less  volatile  than the
underlying  common stocks as they are usually issued with short to medium length
maturities  (15 years or less) and are issued  with  options  and/or  redemption
features  exercisable  by the holder of the  obligation  entitling the holder to
redeem the obligation and receive a defined cash payment.

Depositary Receipts

         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International  Portfolios  may each invest  indirectly  in securities of foreign
issuers through sponsored or unsponsored  American Depositary Receipts ("ADRs"),
Global Depositary Receipts ("GDRs"),  International Depositary Receipts ("IDRs")
and other types of Depositary Receipts (which, together with ADRs, GDRs and IDRs
are hereinafter referred to as "Depositary  Receipts").  Depositary Receipts may
not necessarily be denominated in the same currency as the underlying securities
into which  they may be  converted.  In  addition,  the  issuers of the stock of
unsponsored   Depositary   Receipts  are  not  obligated  to  disclose  material
information in the United States and, therefore,  there may not be a correlation
between such information and the market value of the Depositary  Receipts.  ADRs
are typically  issued by a United  States bank or trust  company which  evidence
ownership of underlying  securities  issued by a foreign  corporation.  GDRs are
typically issued by foreign banks or trust companies,  although they also may be
issued by United  States banks or trust  companies,  and  evidence  ownership of
underlying securities issued by either a foreign or a United States corporation.
Generally,  Depositary  Receipts in registered  form are designed for use in the
United  States  securities  markets and  Depositary  Receipts in bearer form are
designed for use in securities  markets outside the United States.  For purposes
of the Balanced, Growth and Income, Capital Growth and International Portfolios'
investment policies,  the Portfolios'  investments in ADRs, GDRs and other types
of  Depositary  Receipts  will be deemed  to be  investments  in the  underlying
securities.  Depositary  Receipts other than those  denominated in U.S.  dollars
will be subject to  foreign  currency  exchange  rate risk.  Certain  Depositary
Receipts  may  not be  listed  on an  exchange  and  therefore  may be  illiquid
securities.

Foreign Securities

         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and International Portfolios  (collectively,  the "Non-Money Market Portfolios")
may  each  invest,  without  limit,  except  as  applicable  to debt  securities
generally, in U.S.  dollar-denominated  foreign debt securities (including those
issued by the  Dominion of Canada and its  provinces  and other debt  securities
which meet the criteria applicable to the Portfolio's domestic investments), and
in  certificates  of deposit  issued by foreign  banks and  foreign  branches of
United States banks, to any extent deemed  appropriate by the Adviser.  The Bond
Portfolio  may  invest up to 20% of its  assets in  non-U.S.  dollar-denominated
foreign debt securities. The Balanced Portfolio may invest up to 20% of its debt
securities  in non-U.S.  dollar-denominated  foreign  debt  securities,  and may
invest up to 25% of its equity securities in non-U.S. dollar-denominated foreign
equity  securities.  The Growth and Income Portfolio may invest up to 25% of its
assets in non-U.S.  dollar denominated equity securities of foreign issuers. The
Capital  Growth  Portfolio  may  invest  up  to  25%  of  its  assets,  and  the
International Portfolio may invest without limit, in non-U.S. dollar-denominated
equity securities of foreign issuers.

         Investors  should  recognize  that  investing  in  foreign   securities
involves certain special considerations,  including those set forth below, which
are not typically  associated  with  investing in U.S.  securities and which may
favorably or unfavorably affect the Non-Money Market Portfolios' performance. As
foreign companies are not generally  subject to uniform  accounting and auditing
and financial  reporting  standards,  practices and  requirements  comparable to
those  applicable to domestic  companies,  there may be less publicly  available
information about a foreign company than about a domestic company.  Many foreign
stock markets,  while growing in volume of trading activity,  have substantially
less volume than the New York Stock Exchange (the "Exchange"), and securities of
some foreign  companies  are less liquid and more  volatile  than  securities of
domestic companies. Similarly, volume and liquidity in most foreign bond markets
are less than the volume and  liquidity in the U.S. and at times,  volatility of
price can be greater than in the U.S.  Further,  foreign  markets have different
clearance and settlement procedures and in certain markets there have been times
when  settlements  have been  unable to keep pace with the volume of  securities
transactions  making  it  difficult  to  conduct  such  transactions.  Delays in
settlement  could result in temporary  periods when assets of the Portfolios are
uninvested and no return is earned  thereon.  The inability of the Portfolios to
make intended  security  purchases due to  settlement  problems  could cause the


                                       22
<PAGE>

Portfolios to miss attractive investment opportunities.  Inability to dispose of
portfolio securities due to settlement problems either could result in losses to
the Portfolios due to subsequent declines in value of the portfolio security or,
if the  Portfolios  have  entered  into a contract to sell the  security,  could
result in possible liability to the purchaser. Fixed commissions on some foreign
stock  exchanges  are  generally  higher  than  negotiated  commissions  on U.S.
exchanges,  although the Portfolios  will endeavor to achieve the most favorable
net results on its portfolio transactions. Further, the Portfolios may encounter
difficulties  or be unable to pursue  legal  remedies  and obtain  judgments  in
foreign courts. There is generally less government supervision and regulation of
business and industry practices,  stock exchanges,  brokers and listed companies
than in the U.S. It may be more  difficult  for the  Portfolios'  agents to keep
currently  informed  about  corporate  actions such as stock  dividends or other
matters  which may  affect the prices of  portfolio  securities.  Communications
between the U.S.  and foreign  countries  may be less  reliable  than within the
U.S., thus increasing the risk of delayed settlements of portfolio  transactions
or loss of certificates for portfolio securities.  In addition,  with respect to
certain  foreign  countries,   there  is  the  possibility  of  nationalization,
expropriation,  the imposition of withholding or confiscatory taxes,  political,
social,  or economic  instability,  devaluations  in the  currencies  in which a
Portfolio's securities are denominated,  or diplomatic  developments which could
affect U.S.  investments in those countries.  Investments in foreign  securities
may also entail certain risks, such as possible  currency  blockages or transfer
restrictions,  and the  difficulty  of  enforcing  rights  in  other  countries.
Moreover,  individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national  product,  rate of
inflation,  capital  reinvestment,  resource  self-sufficiency  and  balance  of
payments position.

         These  considerations  generally  are more of a concern  in  developing
countries.  For example,  the  possibility  of revolution  and the dependence on
foreign  economic  assistance  generally is greater in these  countries  than in
developed countries.  The management of the Non-Money Market Portfolios seeks to
mitigate the risks associated with these considerations through  diversification
and active professional management.  Although investments in companies domiciled
in  developing  countries  may be  subject  to  potentially  greater  risks than
investments  in  developed  countries,  the  Portfolios  will not  invest in any
securities of issuers located in developing countries if the securities,  in the
judgment of the Adviser, are speculative.

         To the extent that the Non-Money  Market  Portfolios  invest in foreign
securities,  the Portfolios' share price could reflect the movements of both the
different  stock and bond markets in which it is invested and the  currencies in
which the  investments  are  denominated;  the  strength or weakness of the U.S.
dollar  against  foreign  currencies  could account for part of the  Portfolios'
investment performance.

Limitations on Holdings of Foreign Securities for the Bond, Balanced, Growth and
Income and International Portfolios

         Each  Portfolio that invests in foreign  securities  shall invest in no
less than five  foreign  countries;  provided  that,  (i) if foreign  securities
comprise less than 80% of the value of the Portfolio's net assets, the Portfolio
shall invest in no less than four foreign countries;  (ii) if foreign securities
comprise less than 60% of the value of the Portfolio's net assets, the Portfolio
shall  invest  in no  less  than  three  foreign  countries;  (iii)  if  foreign
securities  comprise less than 40% of the value of the  Portfolio's  net assets,
the Portfolio  shall invest in no less than two foreign  countries;  and (iv) if
foreign  securities  comprise less than 20% of the value of the  Portfolio's net
assets the Portfolio may invest in a single foreign country.

         Each  Portfolio  shall  invest no more than 20% of the value of its net
assets in  securities  of issuers  located in any one country;  provided that an
additional  15% of the value of each  Portfolio's  net assets may be invested in
securities of issuers located in any one of the following countries:  Australia,
Canada, France, Japan, the United Kingdom and Germany; and provided further that
100% of a Portfolio's assets may be invested in securities of issuers located in
the United States.

Indexed Securities

         The Bond  Portfolio  and the  Balanced  Portfolio  may each  invest  in
indexed securities, the value of which is linked to currencies,  interest rates,
commodities, indices or other financial indicators ("reference instruments").
Most indexed securities have maturities of three years or less.

                                       23
<PAGE>

         Indexed  securities differ from other types of debt securities in which
the Fund may invest in several  respects.  First,  the interest  rate or, unlike
other debt  securities,  the principal  amount payable at maturity of an indexed
security  may  vary  based  on  changes  in  one  or  more  specified  reference
instruments, such as an interest rate compared with a fixed interest rate or the
currency  exchange  rates between two  currencies  (neither of which need be the
currency in which the instrument is denominated).  The reference instrument need
not be related to the terms of the indexed security.  For example, the principal
amount of a U.S.  dollar  denominated  indexed  security  may vary  based on the
exchange rate of two foreign  currencies.  An indexed security may be positively
or negatively indexed;  that is, its value may increase or decrease if the value
of the  reference  instrument  increases.  Further,  the change in the principal
amount payable or the interest rate of an indexed  security may be a multiple of
the  percentage  change  (positive or  negative) in the value of the  underlying
reference instrument(s).

         Investment in indexed securities involves certain risks. In addition to
the credit risk of the  security's  issuer and the normal risks of price changes
in  response  to changes in  interest  rates,  the  principal  amount of indexed
securities  may  decrease  as a result  of  changes  in the  value of  reference
instruments.  Further,  in the case of certain  indexed  securities in which the
interest  rate is linked to a reference  instrument,  the  interest  rate may be
reduced to zero, and any further  declines in the value of the security may then
reduce the principal amount payable on maturity. Finally, indexed securities may
be more volatile than the reference instruments underlying indexed securities.

When-Issued Securities

         A  Portfolio   may  from  time  to  time   purchase   securities  on  a
"when-issued" or "forward  delivery" 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 or forward  delivery  securities take place at a later date.
During the period  between  purchase and  settlement,  no payment is made by the
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;  however,  it is the Fund's  intention that
each Portfolio will be fully invested to the extent  practicable  and subject to
the policies stated above. While when-issued or forward delivery  securities may
be sold prior to the  settlement  date,  the Portfolio  intends to purchase such
securities  with the purpose of actually  acquiring  them unless a sale  appears
desirable for investment  reasons.  At the time the Fund makes the commitment on
behalf of a  Portfolio  to  purchase  a  security  on a  when-issued  or forward
delivery  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 or forward  delivery  securities may be more or
less than the  purchase  price  payable at  settlement  date.  The Fund does not
believe that a Portfolio's net asset value or income will be adversely  affected
by the purchase of securities on a when-issued or forward  delivery basis.  Each
Portfolio  will  establish a segregated  account in which it will maintain cash,
U.S. Government  securities and other high-grade debt obligations at least equal
in value to commitments for  when-issued or forward  delivery  securities.  Such
segregated securities either will mature or, if necessary,  be sold on or before
the settlement date.

Loans of Portfolio Securities

         The Fund may lend the portfolio securities of any Portfolio (other than
the Money Market Portfolio)  provided:  (1) 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; (2) the Fund may at any time call the loan and regain
the securities  loaned; (3) the Portfolio will receive any interest or dividends
paid on the loaned securities;  and (4) the aggregate market value of securities
loaned  will  not at any  time  exceed  one-third  of the  total  assets  of the
Portfolio.  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,
the  Adviser  considers  all  relevant  facts and  circumstances  including  the
creditworthiness of the borrower.

Borrowing

         The Board of Trustees has adopted a policy  whereby  each  Portfolio of
the Fund may borrow up to 10% of its total assets; provided,  however, that each
Portfolio  may  borrow  up to 25% of  its  total  assets  for  extraordinary  or
emergency purposes,  including the facilitation of redemptions.  A Portfolio may
only  borrow  money from  banks as a  temporary  measure  for  extraordinary  or


                                       24
<PAGE>

emergency  purposes  (each  Portfolio  is required to  maintain  asset  coverage
(including  borrowings)  of  300%  for  all  borrowings)  and  no  purchases  of
securities  for a  Portfolio  will be made while  borrowings  of that  Portfolio
exceed 5% of the Portfolio's assets. Borrowings by the Fund increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that may
offset or exceed the return earned on investment of such funds.

Options for the Bond, Balanced, Growth and Income and International Portfolios

         The Fund  may,  on behalf of each of the  Bond,  Balanced,  Growth  and
Income, Capital Growth and International Portfolios,  write covered call options
on  the  portfolio  securities  of  such  Portfolio  in an  attempt  to  enhance
investment performance.  A call option is a contract generally having a duration
of nine months or less which gives the purchaser of the option,  in return for a
premium  paid,  the right to buy,  and the writer the  obligation  to sell,  the
underlying  security at the exercise price at any time upon the assignment of an
exercise notice prior to the expiration of the option,  regardless of the market
price of the  security  during the option  period.  A covered  call option is an
option written on a security which is owned by the writer  throughout the option
period.

         The Fund will write,  on behalf of a  Portfolio,  covered  call options
both to reduce  the risks  associated  with  certain of its  investments  and to
increase  total  investment  return.  In  return  for the  premium  income,  the
Portfolio will give up the  opportunity to profit from an increase in the market
price  of the  underlying  security  above  the  exercise  price  so long as its
obligations  under  the  contract  continue,   except  insofar  as  the  premium
represents a profit.  Moreover, in writing the option, the Portfolio will retain
the risk of loss  should  the  price of the  security  decline,  which  loss the
premium is intended to offset in whole or in part. Unlike the situation in which
the Fund owns securities not subject to a call option, the Fund, in writing call
options,  must  assume that the call may be  exercised  at any time prior to the
expiration of its obligations as a writer,  and that in such  circumstances  the
net proceeds realized from the sale of the underlying securities pursuant to the
call may be substantially below the prevailing market price. The Fund may forego
the benefit of  appreciation  in its  Portfolios on securities  sold pursuant to
call options.

         When the Portfolio writes a covered call option, it gives the purchaser
of the option the right to buy the underlying security at the price specified in
the option (the  "exercise  price") by exercising  the option at any time during
the option  period,  generally  ranging up to nine  months.  Some of the options
which the Fund  writes  may be of the  European  type  which  means  they may be
exercised  only at a specified  time.  If the option  expires  unexercised,  the
Portfolio will realize income in an amount equal to the premium received for the
written option. If the option is exercised,  a decision over which the Portfolio
has no control,  the Portfolio must sell the  underlying  security to the option
holder at the exercise  price.  By writing a covered call option,  the Portfolio
forgoes,  in exchange for the premium less the commission ("net  premium"),  the
opportunity  to profit  during the option  period from an increase in the market
value of the underlying security above the exercise price.

   
         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International  Portfolios  may each  write  covered  call and put  options  to a
limited  extent in an attempt  to earn  additional  income on their  portfolios,
consistent  with their  investment  objectives.  The  Portfolios  may forego the
benefits of  appreciation  on  securities  sold or  depreciation  on  securities
acquired  pursuant  to call and put  options  written  by the  Portfolios.  Each
Portfolio has no current intention of writing options on more than 5% of its net
assets.
    

         When the Fund,  on behalf of the Balanced,  Growth and Income,  Capital
Growth, Global Discovery and International  Portfolios,  writes a put option, it
gives the purchaser of the option the right to sell the  underlying  security to
the  Portfolio  at the  specified  exercise  price at any time during the option
period. Some of the European type options which the Fund writes may be exercised
only at a specified time. If the option expires unexercised,  the Portfolio will
realize income in the amount of the premium received for writing the option.  If
the put option is exercised, a decision over which the Portfolio has no control,
the Portfolio  must purchase the  underlying  security from the option holder at
the exercise price. By writing a put option, the Portfolio,  in exchange for the
net premium  received,  accepts the risk of a decline in the market value of the
underlying security below the exercise price. With respect to each put option it
writes,  the  Portfolio  will have  deposited  in a  separate  account  with its
custodian U.S. Treasury obligations, high-grade debt securities or cash equal in
value to the exercise price of the put option,  will have purchased a put option
with a higher  exercise  price that will  expire no earlier  than the put option
written or will have used some  combination  of these two  methods.  The Fund on


                                       25
<PAGE>

behalf of each Portfolio,  will only write put options involving  securities for
which a  determination  is made that it wishes to acquire the  securities at the
exercise price at the time the option is written.

         A Portfolio may  terminate its  obligation as a writer of a call or put
option by purchasing an option with the same exercise price and expiration  date
as the option previously written. This transaction is called a "closing purchase
transaction."

         When a Portfolio  writes an option,  an amount equal to the net premium
received by the Portfolio is included in the liability  section of the Portfolio
Statement  of Assets and  Liabilities  as a deferred  credit.  The amount of the
deferred  credit  will be  subsequently  marked to market to reflect the current
market value of the option written.  The current market value of a traded option
is the last sale  price or,  in the  absence  of a sale,  the mean  between  the
closing bid and asked price.  If an option expires on its stipulated  expiration
date  or if the  Portfolio  enters  into a  closing  purchase  transaction,  the
Portfolio  will  realize  a gain  (or  loss if the  cost of a  closing  purchase
transaction  exceeds the  premium  received  when the option was sold),  and the
deferred  credit related to such option will be eliminated.  If a call option is
exercised,  the  Portfolio  will  realize  a gain or loss  from  the sale of the
underlying  security  and the  proceeds  of the sale  will be  increased  by the
premium originally  received.  The writing of covered call options may be deemed
to  involve  the  pledge of the  securities  against  which the  option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.

         The Portfolio  may purchase call options on any  securities in which it
may  invest  in  anticipation  of an  increase  in  the  market  value  of  such
securities.  The  purchase of a call option  would  entitle  the  Portfolio,  in
exchange  for the premium  paid,  to  purchase a security  at a specified  price
during the option  period.  The Portfolio  would  ordinarily  have a gain if the
value of the securities increased above the exercise price sufficiently to cover
the premium and would have a loss if the value of the securities  remained at or
below the exercise price during the option period.

         The Balanced,  Growth and Income,  Capital Growth, Global Discovery and
International Portfolios will normally purchase put options in anticipation of a
decline in the  market  value of  securities  in their  portfolios  ("protective
puts") or  securities  of the type in which they are  permitted  to invest.  The
purchase of a put option  would  entitle  the  Portfolio,  in  exchange  for the
premium paid, to sell a security, which may or may not be held by the Portfolio,
at a specified  price during the option period.  The purchase of protective puts
is designed  merely to offset or hedge  against a decline in the market value of
the Portfolio's portfolio  securities.  Put options may also be purchased by the
Portfolio  for the  purpose of  affirmatively  benefiting  from a decline in the
price of  securities  which the  Portfolio  does not own.  The  Portfolio  would
ordinarily  recognize a gain if the value of the securities  decreased below the
exercise price  sufficiently  to cover the premium and would recognize a loss if
the value of the securities  remained at or above the exercise price.  Gains and
losses on the  purchase of  protective  put  options  would tend to be offset by
countervailing changes in the value of underlying portfolio securities.

         The hours of trading for options on  securities  may not conform to the
hours during which the underlying  securities are traded. To the extent that the
option  markets  close  before  the  markets  for  the  underlying   securities,
significant price and rate movements can take place in the underlying securities
markets  that cannot be  reflected in the option  markets.  Exchange  markets in
securities  options are a relatively new and untested concept.  It is impossible
to predict the volume of trading that may exist in such  options,  and there can
be no assurance that viable exchange markets will develop or continue.

         The Fund may  engage  in  over-the-counter  options  transactions  with
broker-dealers  who make  markets in these  options.  At present,  approximately
thirty  broker-dealers  make these  markets and the Adviser will  consider  risk
factors such as their  creditworthiness  when  determining a broker-dealer  with
which  to  engage  in   options   transactions.   The   ability   to   terminate
over-the-counter  option  positions is more  limited  than with  exchange-traded
option  positions  because the  predominant  market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers  participating in
such transactions will not fulfill their obligations.  Written  over-the-counter
options  purchased by the Fund and portfolio  securities  "covering"  the Fund's
obligation pursuant to an  over-the-counter  option may be deemed to be illiquid
and may not be readily marketable. The Adviser will monitor the creditworthiness
of dealers  with whom the Fund enters into such options  transactions  under the
general supervision of the Fund's Trustees.

                                       26
<PAGE>

Securities Index Options

   
         The Bond, Balanced, Growth and Income, Capital Growth, Global Discovery
and  International  Portfolios  may  each  purchase  call  and  put  options  on
securities  indexes for the purpose of hedging  against the risk of  unfavorable
price  movements  adversely  affecting  the value of a  Portfolio's  securities.
Options on  securities  indexes are similar to options on stock  except that the
settlement is made in cash.
    

         Unlike a  securities  option,  which  gives  the  holder  the  right to
purchase or sell a  specified  security  at a  specified  price,  an option on a
securities  index  gives  the  holder  the  right to  receive  a cash  "exercise
settlement amount" equal to (i) the difference between the exercise price of the
option and the value of the  underlying  securities  index on the exercise date,
multiplied by (ii) a fixed "index  multiplier."  In exchange for undertaking the
obligation to make such cash payment,  the writer of the securities index option
receives a premium.

         A securities  index fluctuates with changes in the market values of the
securities  so  included.  Some  securities  index  options are based on a broad
market  index  such as the S&P 500 or the NYSE  Composite  Index,  or a narrower
market  index  such as the S&P 100.  Indices  are also based on an  industry  or
market  segment  such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on securities indexes are currently traded on exchanges
including the Chicago Board Options Exchange,  Philadelphia  Exchange,  New York
Stock Exchange, and American Stock Exchange.

         The  effectiveness  of hedging through the purchase of securities index
options  will depend upon the extent to which price  movements in the portion of
the securities  portfolio  being hedged  correlate  with price  movements in the
selected  securities  index.  Perfect  correlation  is not possible  because the
securities holdings of a Portfolio will not exactly match the composition of the
securities  indexes on which options are written.  In addition,  the purchase of
securities index options involves  essentially the same risks as the purchase of
options  on  futures  contracts.  The  principal  risk is that the  premium  and
transactions costs paid by a Portfolio in purchasing an option will be lost as a
result of  unanticipated  movements in prices of the  securities  comprising the
securities index on which the option is written.  Options on securities  indexes
also entail the risk that a liquid secondary market to close out the option will
not exist,  although a Portfolio  will  generally only purchase or write such an
option if the Adviser believes the option can be closed out.

Futures Contracts

         The Fund  may,  on  behalf  of the  Bond,  Balanced  and  International
Portfolios,  purchase and sell futures  contracts  on debt  securities  to hedge
against  anticipated  changes in  interest  rates that might  otherwise  have an
adverse effect upon the value of the Portfolio's debt  securities.  In addition,
the Fund may, on behalf of the Non-Money  Market  Portfolios,  purchase and sell
securities  index  futures to hedge the equity  securities  of a Portfolio  with
regard to market  (systematic) risk as distinguished from  stock-specific  risk.
Each of these five  Portfolios  may also purchase and write put and call options
on futures  contracts of the type which such  Portfolio is  authorized  to enter
into and may engage in related closing transactions. All of such futures on debt
securities,  stock index futures and related options will be traded on exchanges
that are licensed and  regulated by the  Commodity  Futures  Trading  Commission
("CFTC") or on appropriate  foreign  exchanges,  to the extent permitted by law.
Even though at the present time no contracts  based on global indices which meet
the International Portfolio's investment criteria are available,  there are U.S.
stock indices which may be used to hedge U.S. securities held in that Portfolio.

Futures on Debt Securities

         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  future  month,  of  securities  having a
standardized  face  value and rate of  return.  By  purchasing  futures  on debt
securities--assuming a "long" position--the Fund, on behalf of a Portfolio, will
legally obligate itself 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 such price
does not appear to the  Trustees to reflect the fair value of the  contract,  in
which  case the  positions  will be  valued  by or under  the  direction  of the
Trustees.

                                       27
<PAGE>

         Positions  taken  in the  futures  markets  are  normally  not  held to
maturity,  but are instead liquidated through offsetting  transactions which may
result  in a profit  or a loss.  While  futures  positions  taken by the Fund on
behalf of a Portfolio  will usually be liquidated  in this manner,  the Fund 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 closing-out and guarantees  that the sale and purchase  obligations  will be
performed  with regard to all positions  that remain open 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 will be substantially  offset
by appreciation in the value of the futures position.

         On  other  occasions,  the  Portfolio  may take a  "long"  position  by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends 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 will 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.

Stock  Index  Futures.  A stock  index  futures  contract  does not  require the
physical  delivery of  securities,  but merely  provides  for profits and losses
resulting  from  changes in the market  value of the  contract to be credited or
debited  at the close of each  trading  day to the  respective  accounts  of the
parties  to the  contract.  On the  contract's  expiration  date  a  final  cash
settlement  occurs and the futures  positions are simply closed out.  Changes in
the market value of a particular stock index futures contract reflect changes in
the  specified  index of equity  securities  on which the future is based.  That
index is  designed  to  reflect  overall  price  trends in the market for equity
securities.

         Stock index futures may be used to hedge the equity  securities of each
of the Balanced,  Growth and Income, Capital Growth or International  Portfolios
with regard to market  (systematic)  risk (involving the market's  assessment of
over-all  economic   prospects),   as  distinguished  from  stock-specific  risk
(involving  the market's  evaluation of the merits of the issuer of a particular
security).  By  establishing  an  appropriate  "short"  position  in stock index
futures,  the Fund may seek to protect the value of the equity of a  Portfolio's
securities  against  an overall  decline  in the  market for equity  securities.
Alternatively,  in anticipation of a generally rising market,  the Fund can seek
on behalf of a Portfolio to avoid losing the benefit of  apparently  low current
prices by  establishing  a "long"  position  in stock  index  futures  and later
liquidating that position as particular  equity securities are in fact acquired.
To the extent that these hedging  strategies are successful,  the Portfolio will
be  affected  to a lesser  degree by adverse  overall  market  price  movements,
unrelated  to the merits of specific  portfolio  equity  securities,  than would
otherwise be the case.

Options on Futures.  For bona fide hedging purposes,  the Fund may also purchase
and write, on behalf of each of the Bond, Balanced,  Growth and Income,  Capital
Growth and International Portfolios,  call and put options on futures contracts,
which are traded on exchanges  that are licensed and regulated by the CFTC or on
any foreign exchange for the purpose of options trading, to the extent permitted
by law. A "call" option on a futures  contract gives the purchaser the right, in
return for the premium  paid,  to purchase a futures  contract  (assume a "long"
position) at a specified exercise price at any time before the option expires. A
"put" option gives the purchaser  the right,  in return for the premium paid, to
sell a futures contract (assume a "short"  position),  for a specified  exercise
price, at any time before the option expires.

         Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option  exercise  price,  which will  presumably  be lower than the  current
market price of the contract in the futures  market.  Upon  exercise of a "put,"
the writer of the option is obligated to purchase the futures contract  (deliver
a "short"  position to the option holder) at the option  exercise  price,  which
will  presumably be higher than the current  market price of the contract in the


                                       28
<PAGE>

futures  market.  When a person  exercises  an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," his gain will be credited to his futures margin  account,  while the loss
suffered by the writer of the option will be debited to his account. However, as
with the trading of futures,  most  participants  in the options  markets do not
seek to  realize  their  gains or losses by  exercise  of their  option  rights.
Instead,  the holder of an option will usually  realize a gain or loss by buying
or selling an offsetting  option at a market price that will reflect an increase
or a decrease from the premium originally paid.

         Options on futures  can be used by a Portfolio  to hedge  substantially
the same  risks as might be  addressed  by the  direct  purchase  or sale of the
underlying futures contracts.  If the Portfolio purchases an option on a futures
contract,  it may obtain benefits  similar to those that would result if it held
the futures position itself. But in contrast to a futures transaction,  in which
only transaction costs are involved,  benefits received in an option transaction
will be  reduced  by the amount of the  premium  paid as well as by  transaction
costs. In the event of an adverse market movement,  however,  the Portfolio will
not be subject to a risk of loss on the option  transaction  beyond the price of
the premium it paid plus its transaction  costs,  and may  consequently  benefit
from a favorable  movement in the value of its portfolio  securities  that would
have been more completely  offset if the hedge had been effected through the use
of futures.

         If a Portfolio writes options on futures contracts,  the Portfolio will
receive a premium but will assume a risk of adverse movement in the price of the
underlying  futures  contract  comparable  to that involved in holding a futures
position. If the option is not exercised,  the Portfolio will gain the amount of
the premium,  which may  partially  offset  unfavorable  changes in the value of
securities  held  in or to be  acquired  for the  Portfolio.  If the  option  is
exercised, the Portfolio will incur a loss in the option transaction, which will
be reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities.

         While the  holder or  writer  of an  option on a futures  contract  may
normally terminate its position by selling or purchasing an offsetting option of
the same series,  the  Portfolio's  ability to  establish  and close out options
positions at fairly  established  prices will be subject to the maintenance of a
liquid  market.  A  Portfolio  will not  purchase  or write  options  on futures
contracts  unless,  in the  Adviser's  opinion,  the market for such options has
sufficient  liquidity that the risks  associated with such options  transactions
are not at unacceptable levels.

Limitations on the Use of Futures Contracts and Options on Futures

         All of the futures  contracts and options on futures  transactions into
which the Fund will  enter will be for bona fide  hedging  or other  appropriate
risk  management  purposes as  permitted by CFTC  regulations  and to the extent
consistent  with  requirements  of the Securities and Exchange  Commission  (the
"SEC").

         To ensure that its futures and options transactions meet this standard,
the Fund will enter into them only for the purposes or with the intent specified
in CFTC  regulations,  subject  to the  requirements  of the SEC.  The Fund will
further seek to assure that  fluctuations in the price of the futures  contracts
and options on futures that it uses for hedging  purposes will be  substantially
correlated to fluctuations in the price of the securities held by a Portfolio or
which it expects to purchase,  though there can be no assurance that this result
will be  achieved.  The Fund will sell  futures  contracts  or  acquire  puts to
protect  against a decline in the price of securities that a Portfolio owns. The
Fund will purchase futures  contracts or calls on futures contracts to protect a
Portfolio  against an increase in the price of securities the Fund intends later
to purchase for the Portfolio before it is in a position to do so.

         As evidence of this  hedging  intent,  the Fund  expects that on 75% or
more of the  occasions  on which it  purchases a long  futures  contract or call
option  on  futures  for a  Portfolio  the Fund  will  effect  the  purchase  of
securities  in the cash market or take  delivery as it closes out a  Portfolio's
futures  position.  In  particular  cases,  however,  when  it  is  economically
advantageous to the Portfolio,  a long futures position may be terminated (or an
option may expire) without the corresponding purchase of securities.

         As an  alternative  to literal  compliance  with the bona fide  hedging
definition,  a CFTC  definition  now  permits the Fund to elect to comply with a
different test,  under which its long futures  positions will not exceed the sum
of (a) cash or cash equivalents  segregated for this purpose,  (b) cash proceeds
on existing  investments  due within thirty days and (c) accrued  profits on the


                                       29
<PAGE>

particular futures or options positions. However, the Fund will not utilize this
alternative unless it is advised by counsel that to do so is consistent with the
requirements of the SEC.

         Futures  on debt  securities  and stock  index  futures  are at present
actively  traded on exchanges  that are licensed and  registered by the CFTC, or
consistent with the CFTC regulations on foreign exchanges. Portfolios will incur
brokerage fees in connection  with their futures and options  transactions,  and
will be  required  to  deposit  and  maintain  funds  with  brokers as margin to
guarantee  performance  of  futures  obligations.  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  options  on  futures,
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.

         Each Portfolio, in dealing in futures contracts and options on futures,
is subject to the 300% asset coverage requirement for borrowings set forth under
"Investment  Restrictions"  in the Fund's  prospectus.  The  Trustees  have also
adopted a policy (which is not  fundamental  and may be modified by the Trustees
without a shareholder  vote) that,  immediately  after the purchase or sale of a
futures  contract or option thereon,  the value of the aggregate  initial margin
with  respect  to all  futures  contracts  and  premiums  on  options on futures
contracts  entered  into by a  Portfolio  will not exceed 5% of the fair  market
value of the Portfolio's total assets. Additionally,  the value of the aggregate
premiums paid for all put and call options held by the Portfolio will not exceed
2% of its net assets.  A futures contract for the receipt of a debt security and
long  index  futures  will  be  offset  by  assets  of the  Portfolio  held in a
segregated  account in an amount  equal to the total market value of the futures
contracts less the amount of the initial margin for the contracts.

Foreign Currency Transactions

         The Non-Money Market Portfolios may enter into forward foreign currency
exchange contracts ("forward contracts") for hedging purposes.  These Portfolios
may also, for hedging purposes,  purchase foreign currencies in the form of bank
deposits as well as other  foreign money market  instruments,  including but not
limited to, bankers'  acceptances,  certificates of deposit,  commercial  paper,
short-term government and corporate obligations and repurchase  agreements.  The
International  Portfolio may also enter into foreign currency futures  contracts
and foreign currency options.

         Because   investments  in  foreign   companies   usually  will  involve
currencies of foreign  countries,  and because the Non-Money  Market  Portfolios
temporarily  may hold funds in bank  deposits in foreign  currencies  during the
completion of investment programs, the value of their assets as measured in U.S.
dollars may be affected  favorably or unfavorably by changes in foreign currency
exchange  rates and exchange  control  regulations,  and they may incur costs in
connection with conversions between various  currencies.  Although the Non-Money
Market Portfolios value their assets daily in terms of U.S. dollars, they do not
intend to convert their holdings of foreign  currencies  into U.S.  dollars on a
daily basis. They will do so from time to time, and investors should be aware of
the costs of  currency  conversion.  Although  foreign  exchange  dealers do not
charge a fee for  conversion,  they do realize a profit based on the  difference
(the "spread")  between the prices at which they are buying and selling  various
currencies. Thus, a dealer may offer to sell a foreign currency to the Non-Money
Market  Portfolios at one rate,  while offering a lesser rate of exchange should
the Non-Money  Market  Portfolios  desire to resell that currency to the dealer.
The Non-Money  Market  Portfolios will conduct their foreign  currency  exchange
transactions  either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency  exchange  market,  or through entering into forward or, in
the case of the International  Portfolio,  futures contracts to purchase or sell
foreign currencies.

         A  forward  contract  involves  an  obligation  to  purchase  or sell a
specific  currency at a future date,  which may be any fixed number of days from
the date of the contract agreed upon by the parties,  at a price set at the time
of the contract.  These contracts are traded in the interbank  market  conducted
directly between  currency  traders  (usually large commercial  banks) and their
customers.  A forward  contract  generally  has no deposit  requirement,  and no
commissions are charged at any stage for trades.

                                       30
<PAGE>

         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. The agreed price may be fixed or within
a specified range of prices.  Foreign currency  futures  contracts traded in the
United  States are  designed by and traded on  exchanges  regulated by the CFTC,
such as the Chicago  Mercantile  Exchange.  Futures  contracts involve brokerage
costs,  which  may vary from less  than 1% to 2.5% of the  contract  price,  and
require parties to the contract to make "margin" deposits to secure  performance
of the contract. The International Portfolio would also be required to segregate
assets to cover contracts that would require it to purchase foreign  currencies.
The  International  Portfolio  would  enter into  futures  contracts  solely for
hedging  or other  appropriate  risk  management  purposes  as  defined  in CFTC
regulations.

         Forward  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, and they may be in
any amounts agreed upon by the parties rather than predetermined  amounts. Also,
forward  contracts  are  traded  directly  between  currency  traders so that no
intermediary is required.  A forward  contract  generally  requires no margin or
other deposit.

         Upon the maturity of a forward or foreign  currency  futures contract a
Portfolio may either  accept or make  delivery of the currency  specified in the
contract or, at or prior to maturity,  enter into a closing purchase transaction
involving  the  purchase or sale of an  offsetting  contract.  Closing  purchase
transactions  with respect to forward  contracts  are usually  effected with the
currency  trader  who is a  party  to the  original  forward  contract.  Closing
purchase  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.

         A Portfolio  may enter into  forward  contracts  and  foreign  currency
futures  contracts under certain  circumstances.  When a Portfolio enters into a
contract  for the  purchase  or  sale of a  security  denominated  in a  foreign
currency,  or when a Portfolio  anticipates the receipt in a foreign currency of
dividends or interest  payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward or futures  contract for the purchase or sale, for a fixed amount
of  dollars,  of the  amount of  foreign  currency  involved  in the  underlying
transactions,  the Portfolio  will attempt to protect  itself against a possible
loss  resulting  from an adverse  change in the  relationship  between  the U.S.
dollar and the 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.

         Additionally, when management of a Portfolio believes that the currency
of a particular  foreign  country may suffer a substantial  decline  against the
U.S.  dollar,  it may enter into a forward or futures  contract  to sell,  for a
fixed amount of dollars, the amount of foreign currency  approximating the value
of  some  or all of the  Portfolio's  securities  denominated  in  such  foreign
currency.  The precise  matching of the forward or futures  contract amounts and
the value of the securities  involved will not generally be possible because the
future  value  of  such  securities  in  foreign  currencies  will  change  as a
consequence  of market  movements in the value of those  securities  between the
date on which the contract is entered into and the date it matures.  The precise
projection  of  short-term  currency  market  movements  is  not  possible,  and
short-term  hedging  provides a means of fixing the dollar value of a portion of
the Portfolio's foreign assets.

         The  Non-Money  Market  Portfolios  do not  intend  to enter  into such
forward or futures contracts to protect the value of their portfolio  securities
on a regular  continuous  basis, and will not do so if, as a result, a Portfolio
will  have  more than 15% of the  value of its  total  assets  committed  to the
consummation  of such  contracts.  A  Portfolio  also will not  enter  into such
forward or foreign currency futures contracts or maintain a net exposure to such
contracts  where the  consummation of the contracts would obligate the Portfolio
to  deliver  an  amount  of  foreign  currency  in  excess  of the  value of the
Portfolio's  securities  or other assets  denominated  in that  currency.  Under
normal  circumstances,  consideration of the prospect for currency parities will
be  incorporated  into the long-term  investment  decisions  made with regard to
overall  diversification  strategies.  However,  the Non-Money Market Portfolios
believe that it is important to have the  flexibility to enter into such forward
or  foreign  currency  futures  contracts  when  each  determines  that the best
interests of the Portfolio will be served.

                                       31
<PAGE>

         Except when a Portfolio  enters into a forward contract for the purpose
of the purchase or sale of a security  denominated in a foreign currency,  State
Street  Bank and Trust  Company  (the  "Custodian"),  will  place cash or liquid
securities into a segregated  account of the Portfolio in an amount equal to the
value of the Portfolio's  total assets  committed to the consummation of forward
contracts  (or the  Portfolio's  forward  contracts  will be  otherwise  covered
consistent with applicable  regulatory  policies) and foreign  currency  futures
contracts  that require the  Portfolio to purchase  foreign  currencies.  If the
value of the securities placed in the segregated  account  declines,  additional
cash or  securities  will be placed in the  account on a daily basis so that the
value of the account will equal the amount of the Portfolio's  commitments  with
respect to such contracts.

         The Non-Money Market Portfolios generally will not enter into a forward
or foreign  currency  futures  contract with a term of greater than one year. It
also  should  be  realized  that  this  method  of  protecting  the  value  of a
Portfolio's  securities  against a decline in the value of a  currency  does not
eliminate  fluctuations in the underlying  prices of the  securities.  It simply
establishes  a rate of exchange  which the  Portfolio can achieve at some future
point in time.

         While the Non-Money  Market  Portfolios will enter into forward and, in
the case of the International Portfolio,  foreign currency futures contracts and
foreign currency options to reduce currency exchange rate risks, transactions in
such contracts involve certain other risks.  Thus, while a Portfolio may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall  performance  for the Portfolio than if it had not engaged in any
such transaction. Moreover, there may be imperfect correlation between the value
of the Portfolio's  holdings of securities  denominated in a particular currency
and forward or futures contracts  entered into by the Portfolio.  Such imperfect
correlation  may prevent the Portfolio from achieving a complete hedge or expose
the Portfolio to risk of foreign exchange loss.

         The International  Portfolio may purchase options on foreign currencies
for hedging  purposes  in a manner  similar to that of  transactions  in forward
contracts.  For example,  a decline in the dollar value of a foreign currency in
which portfolio  securities are denominated will reduce the dollar value of such
securities,  even if their value in the foreign  currency remains  constant.  In
order to protect  against such  decreases in the value of portfolio  securities,
the Portfolio may purchase put options on the foreign currency.  If the value of
the currency  declines,  the Portfolio will have the right to sell such currency
for a fixed amount of dollars which  exceeds the market value of such  currency.
This would result in a gain that may offset,  in whole or in part,  the negative
effect  of  currency  depreciation  on the value of the  Portfolio's  securities
denominated in that currency.

         Conversely,  if a rise in the dollar  value of a currency is  projected
for  those  securities  to be  acquired,  thereby  increasing  the  cost of such
securities,  the  International  Portfolio  may  purchase  call  options on such
currency.  If the value of such  currency  increased,  the purchase of such call
options  would enable the  Portfolio to purchase  currency for a fixed amount of
dollars  which is less than the market value of such  currency.  Such a purchase
would result in a gain that may offset,  at least  partially,  the effect of any
currency  related  increase in the price of securities the Portfolio  intends to
acquire.  As in the case of other types of options  transactions,  however,  the
benefit the Portfolio  derives from purchasing  foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
if  currency  exchange  rates  do not  move in the  direction  or to the  extent
anticipated,  the Portfolio  could  sustain  losses on  transactions  in foreign
currency  options  which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.

         The  International  Portfolio  may close out its position in a currency
option  by either  selling  the  option it has  purchased  or  entering  into an
offsetting option.

Strategic  Transactions  and  Derivatives  Applicable  to the  Global  Discovery
Portfolio

         The Global  Discovery  Portfolio  may, but is not required to,  utilize
various other  investment  strategies as described below to hedge various market
risks (such as interest rates,  currency  exchange rates,  and broad or specific
equity or fixed-income  market  movements),  to manage the effective maturity or
duration of fixed-income  securities in the Portfolio's portfolio, or to enhance
potential gain.  These  strategies may be executed through the use of derivative
contracts.  Such strategies are generally accepted as a part of modern portfolio
management   and  are  regularly   utilized  by  many  mutual  funds  and  other
institutional investors.  Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.

                                       32
<PAGE>

         In the course of pursuing these  investment  strategies,  the Portfolio
may purchase and sell  exchange-listed and over-the-counter put and call options
on securities,  equity and fixed-income indices 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 without limit to attempt to protect against
possible  changes in the market value of  securities  held in or to be purchased
for the Portfolio  resulting from securities  markets or currency  exchange rate
fluctuations,  to protect the Portfolio's  unrealized  gains in the value of its
portfolio securities in the Portfolio, to facilitate the sale of such securities
for  investment  purposes,  to manage the  effective  maturity  or  duration  of
fixed-income  securities  in the  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 enhance
potential  gain  although  no more  than 5% of the  Portfolio's  assets  will be
committed to Strategic  Transactions entered into for non-hedging purposes.  Any
or all of  these  investment  techniques  may be  used  at any  time  and in any
combination  and there is no  particular  strategy  that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions.  The ability of the Portfolio
to  utilize  these  Strategic  Transactions  successfully  will  depend  on  the
Adviser's  ability  to  predict  pertinent  market  movements,  which  cannot be
assured. The Portfolio will comply with applicable regulatory  requirements when
implementing   these   strategies,   techniques   and   instruments.   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 and not for speculative purposes.

         Strategic  Transactions,  including  derivative  contracts,  have risks
associated  with them  including  possible  default  by the  other  party to the
transaction,  illiquidity  and, to the extent the  Adviser's  view as to certain
market  movements  is  incorrect,  the  risk  that  the  use of  such  Strategic
Transactions  could result in losses greater than if they had not been used. Use
of put and call options may result in losses to the Portfolio, force the sale or
purchase of portfolio  securities at inopportune times or for prices higher than
(in the case of put options) or lower than (in the case of call options) current
market values, limit the amount of appreciation the Portfolio can realize on its
investments or cause the Portfolio to hold a security it might  otherwise  sell.
The use of currency transactions can result in the Portfolio incurring losses as
a result of a number of factors  including the imposition of exchange  controls,
suspension  of  settlements,  or the inability to deliver or receive a specified
currency.  The use of options and futures  transactions  entails  certain  other
risks. In particular, the variable degree of correlation between price movements
of futures  contracts and price movements in the related  portfolio  position of
the Portfolio creates the possibility that losses on the hedging  instrument may
be greater  than gains in the value of the  Portfolio's  position.  In addition,
futures and options markets may not be liquid in all  circumstances  and certain
over-the-counter  options may have no markets.  As a result, in certain markets,
the  Portfolio  might not be able to close out a transaction  without  incurring
substantial  losses,  if at  all.  Although  the  use  of  futures  and  options
transactions  for  hedging  should  tend to  minimize  the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any  potential  gain  which  might  result  from an  increase  in  value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential  financial risk than would purchases of
options,  where the  exposure  is  limited to the cost of the  initial  premium.
Losses resulting from the use of Strategic  Transactions  would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized.

General  Characteristics of Options. Put options and call options typically have
similar structural  characteristics and operational  mechanics regardless of the
underlying  instrument on which they are purchased or sold.  Thus, the following
general  discussion relates to each of the particular types of options discussed
in greater  detail below.  In addition,  many Strategic  Transactions  involving
options  require  segregation  of  Portfolio  assets  in  special  accounts,  as
described below under "Use of Segregated and Other Special Accounts."

         A put option  gives the  purchaser  of the  option,  upon  payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security,  commodity, index, currency or other instrument at the exercise price.
For instance,  the  Portfolio's  purchase of a put option on a security might be
designed  to protect  its  holdings in the  underlying  instrument  (or, in some
cases, a similar  instrument)  against a substantial decline in the market value
by giving the Portfolio the right to sell such instrument at the option exercise
price.  A call  option,  upon payment of a premium,  gives the  purchaser of the
option the right to buy, and the seller the  obligation to sell,  the underlying


                                       33
<PAGE>

instrument at the exercise price. The Portfolio's purchase of a call option on a
security,  financial  future,  index,  currency  or  other  instrument  might be
intended  to  protect  the  Portfolio  against an  increase  in the price of the
underlying  instrument  that it intends to  purchase in the future by fixing the
price at which it may purchase such  instrument.  An American  style put or call
option may be  exercised  at any time during the option  period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto.  The Portfolio is authorized to purchase and sell exchange
listed options and  over-the-counter  options ("OTC  options").  Exchange listed
options are issued by a  regulated  intermediary  such as the  Options  Clearing
Corporation ("OCC"),  which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but is
also applicable to other financial intermediaries.

         With  certain  exceptions,  OCC  issued  and  exchange  listed  options
generally  settle by physical  delivery of the underlying  security or currency,
although in the future cash settlement may become  available.  Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which the
option is  "in-the-money"  (i.e.,  where the value of the underlying  instrument
exceeds,  in the case of a call  option,  or is less than,  in the case of a put
option,  the exercise  price of the option) at the time the option is exercised.
Frequently,  rather than taking or making delivery of the underlying  instrument
through  the process of  exercising  the  option,  listed  options are closed by
entering into  offsetting  purchase or sale  transactions  that do not result in
ownership of the new option.

         The  Portfolio's  ability to close out its  position as a purchaser  or
seller of an OCC or exchange  listed put or call option is  dependent,  in part,
upon the  liquidity of the option  market.  Among the  possible  reasons for the
absence of a liquid option market on an exchange are: (i)  insufficient  trading
interest in certain  options;  (ii)  restrictions on transactions  imposed by an
exchange;  (iii) trading halts,  suspensions or other restrictions  imposed with
respect to  particular  classes or series of  options or  underlying  securities
including  reaching  daily  price  limits;   (iv)  interruption  of  the  normal
operations of the OCC or an exchange;  (v)  inadequacy  of the  facilities of an
exchange or OCC to handle current trading  volume;  or (vi) a decision by one or
more exchanges to discontinue  the trading of options (or a particular  class or
series of options),  in which event the relevant  market for that option on that
exchange  would cease to exist,  although  outstanding  options on that exchange
would generally continue to be exercisable in accordance with their terms.

         The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the  option  markets  close  before the  markets  for the  underlying  financial
instruments,  significant  price  and  rate  movements  can  take  place  in the
underlying markets that cannot be reflected in the option markets.

         OTC options are purchased from or sold to securities dealers, financial
institutions  or  other  parties  ("Counterparties")  through  direct  bilateral
agreement with the Counterparty.  In contrast to exchange listed options,  which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement,  term, exercise price,
premium,  guarantees and security,  are set by  negotiation of the parties.  The
Portfolio will only sell OTC options (other than OTC currency  options) that are
subject  to a  buy-back  provision  permitting  the  Portfolio  to  require  the
Counterparty  to sell the option back to the Portfolio at a formula price within
seven days. The Portfolio  expects generally to enter into OTC options that have
cash settlement provisions, although it is not required to do so.

         Unless the  parties  provide  for it,  there is no central  clearing or
guaranty function in an OTC option.  As a result,  if the Counterparty  fails to
make or take delivery of the security,  currency or other instrument  underlying
an OTC option it has  entered  into with the  Portfolio  or fails to make a cash
settlement  payment  due in  accordance  with  the  terms  of that  option,  the
Portfolio  will  lose  any  premium  it  paid  for  the  option  as  well as any
anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness   of  each  such   Counterparty  or  any  guarantor  or  credit
enhancement of the  Counterparty's  credit to determine the likelihood  that the
terms of the OTC option  will be  satisfied.  The  Portfolio  will engage in OTC
option transactions only with U.S.  government  securities dealers recognized by
the Federal  Reserve Bank of New York as "primary  dealers",  or broker dealers,
domestic or foreign banks or other  financial  institutions  which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from  Moody's  or an  equivalent  rating  from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency  transactions,  are  determined to be of equivalent  credit
quality by the Adviser.  The staff of the SEC currently  takes the position that
OTC options purchased by the Portfolio,  and portfolio securities "covering" the


                                       34
<PAGE>

amount of the Portfolio's  obligation  pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money  amount,  if any) are illiquid,  and
are subject to the  Portfolio's  limitation on investing no more than 10% of its
assets in illiquid securities.

         If the Portfolio sells a call option,  the premium that it receives may
serve as a  partial  hedge,  to the  extent  of the  option  premium,  against a
decrease  in the  value  of the  underlying  securities  or  instruments  in its
portfolio or will increase the Portfolio's  income.  The sale of put options can
also provide income.

         The  Portfolio  may  purchase  and  sell  call  options  on  securities
including  U.S.  Treasury  and agency  securities,  mortgage-backed  securities,
corporate debt securities,  equity securities (including convertible securities)
and  Eurodollar  instruments  that are  traded on U.S.  and  foreign  securities
exchanges  and in the  over-the-counter  markets,  and  on  securities  indices,
currencies  and  futures  contracts.  All calls  sold by the  Portfolio  must be
"covered"  (i.e.,  the Portfolio  must own the  securities  or futures  contract
subject to the call) or must meet the asset segregation  requirements  described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help protect it against loss, a call sold by the Portfolio
exposes  the  Portfolio  during  the  term of the  option  to  possible  loss of
opportunity  to  realize  appreciation  in the  market  price of the  underlying
security  or  instrument  and may require  the  Portfolio  to hold a security or
instrument which it might otherwise have sold.

         The Portfolio may purchase and sell put options on securities including
U.S.  Treasury  and  agency  securities,   mortgage-backed  securities,  foreign
sovereign  debt,  corporate  debt  securities,   equity  securities   (including
convertible  securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio),  and on securities  indices,  currencies and
futures contracts other than futures on individual corporate debt and individual
equity securities. The Portfolio will not sell put options if, as a result, more
than 50% of the  Portfolio's  assets would be required to be segregated to cover
its potential  obligations  under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the  underlying  security at a  disadvantageous
price above the market price.

General  Characteristics  of Futures.  The  Portfolio  may enter into  financial
futures  contracts or purchase or sell put and call options on such futures as a
hedge against anticipated  interest rate, currency or equity market changes, for
duration  management  and for risk  management  purposes.  Futures are generally
bought and sold on the commodities  exchanges where they are listed with payment
of  initial  and  variation  margin as  described  below.  The sale of a futures
contract  creates a firm obligation by the Portfolio,  as seller,  to deliver to
the buyer the specific type of financial  instrument  called for in the contract
at a specific  future  time for a  specified  price (or,  with  respect to index
futures and  Eurodollar  instruments,  the net cash amount).  Options on futures
contracts  are  similar  to  options on  securities  except  that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.

         The  Portfolio's  use of financial  futures and options thereon will in
all  cases  be  consistent  with  applicable  regulatory   requirements  and  in
particular the rules and regulations of the Commodity Futures Trading Commission
and will be entered into only for bona fide hedging,  risk management (including
duration  management)  or  other  portfolio   management  purposes.   Typically,
maintaining  a futures  contract  or  selling  an option  thereon  requires  the
Portfolio  to  deposit  with  a  financial  intermediary  as  security  for  its
obligations an amount of cash or other specified  assets (initial  margin) which
initially is typically 1% to 10% of the face amount of the contract  (but may be
higher in some circumstances).  Additional cash or assets (variation margin) may
be required to be  deposited  thereafter  on a daily basis as the mark to market
value of the contract fluctuates. The purchase of an option on financial futures
involves  payment of a premium for the option without any further  obligation on
the part of the  Portfolio.  If the  Portfolio  exercises an option on a futures
contract it will be obligated to post initial margin (and  potential  subsequent
variation  margin) for the resulting  futures  position just as it would for any
position.  Futures  contracts  and  options  thereon  are  generally  settled by
entering into an offsetting  transaction  but there can be no assurance that the
position can be offset prior to settlement at an  advantageous  price,  nor that
delivery will occur.

         The Portfolio will not enter into a futures  contract or related option
(except for closing  transactions) if,  immediately  thereafter,  the sum of the
amount of its initial margin and premiums on open futures  contracts and options
thereon  would  exceed 5% of the  Portfolio's  total  assets  (taken at  current
value);  however,  in the case of an option that is  in-the-money at the time of


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<PAGE>

the purchase,  the  in-the-money  amount may be excluded in  calculating  the 5%
limitation.  The segregation  requirements with respect to futures contracts and
options thereon are described below.

Options on Securities  Indices and Other Financial  Indices.  The Portfolio also
may  purchase  and sell call and put  options on  securities  indices  and other
financial  indices and in so doing can achieve  many of the same  objectives  it
would achieve  through the sale or purchase of options on individual  securities
or other instruments.  Options on securities indices and other financial indices
are similar to options on a security or other  instrument  except  that,  rather
than settling by physical delivery of the underlying instrument,  they settle by
cash  settlement,  i.e.,  an option on an index  gives the  holder  the right to
receive,  upon exercise of the option, an amount of cash if the closing level of
the index upon which the option is based  exceeds,  in the case of a call, or is
less than, in the case of a put, the exercise price of the option (except if, in
the case of an OTC option, physical delivery is specified).  This amount of cash
is equal to the excess of the closing price of the index over the exercise price
of the option,  which also may be multiplied by a formula  value.  The seller of
the option is obligated, in return for the premium received, to make delivery of
this  amount.  The  gain or loss on an  option  on an  index  depends  on  price
movements in the instruments making up the market,  market segment,  industry or
other  composite  on which the  underlying  index is based,  rather  than  price
movements in  individual  securities,  as is the case with respect to options on
securities.

Currency  Transactions.  The Portfolio may engage in currency  transactions with
Counterparties in order to hedge the value of portfolio holdings  denominated in
particular   currencies  against   fluctuations  in  relative  value.   Currency
transactions  include  forward  currency  contracts,  exchange  listed  currency
futures,  exchange  listed and OTC options on currencies,  and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract  agreed upon
by the parties,  at a price set at the time of the contract.  A currency swap is
an agreement to exchange cash flows based on the notional  difference  among two
or more  currencies  and operates  similarly to an interest rate swap,  which is
described  below.  The  Portfolio  may enter  into  currency  transactions  with
Counterparties  which have  received (or the  guarantors of the  obligations  of
which  have  received)  a  credit  rating  of A-1  or  P-1  by  S&P or  Moody's,
respectively,  or that have an equivalent  rating from a NRSRO or are determined
to be of equivalent credit quality by the Adviser.

         The  Portfolio's  dealings  in  forward  currency  contracts  and other
currency  transactions  such as futures,  options,  options on futures and swaps
will be limited to hedging  involving either specific  transactions or portfolio
positions.  Transaction  hedging is entering  into a currency  transaction  with
respect to specific assets or liabilities of the Portfolio, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt  of income  therefrom.  Position  hedging  is  entering  into a currency
transaction  with  respect  to  portfolio  security  positions   denominated  or
generally quoted in that currency.

         The  Portfolio  will not enter  into a  transaction  to hedge  currency
exposure to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions,  than the aggregate market value (at the
time of entering into the  transaction)  of the securities held in its portfolio
that are denominated or generally  quoted in or currently  convertible into such
currency, other than with respect to proxy hedging or cross hedging as described
below.

         The  Portfolio  may  also  cross-hedge   currencies  by  entering  into
transactions  to purchase or sell one or more  currencies  that are  expected to
decline in value  relative to other  currencies to which the Portfolio has or in
which the Portfolio expects to have portfolio exposure.

         To reduce the effect of currency  fluctuations on the value of existing
or anticipated holdings of portfolio  securities,  the Portfolio may also engage
in proxy  hedging.  Proxy  hedging is often used when the  currency to which the
Portfolio's  portfolio is exposed is difficult to hedge or to hedge  against the
dollar.  Proxy  hedging  entails  entering into a commitment or option to sell a
currency  whose changes in value are generally  considered to be correlated to a
currency  or  currencies  in  which  some  or all of the  Portfolio's  portfolio
securities are or are expected to be denominated,  in exchange for U.S. dollars.
The  amount of the  commitment  or  option  would  not  exceed  the value of the
Portfolio's securities denominated in correlated currencies. For example, if the
Adviser  considers  that the  Austrian  schilling  is  correlated  to the German
deutschemark  (the  "D-mark"),  the Portfolio  holds  securities  denominated in
schillings  and the Adviser  believes that the value of schillings  will decline
against the U.S.  dollar,  the Adviser may enter into a commitment  or option to
sell D-marks and buy dollars.  Currency  hedging involves some of the same risks
and  considerations  as other  transactions with similar  instruments.  Currency


                                       36
<PAGE>

transactions  can result in losses to the Portfolio if the currency being hedged
fluctuates  in value  to a degree  or in a  direction  that is not  anticipated.
Further,  there  is the risk  that the  perceived  correlation  between  various
currencies may not be present or may not be present  during the particular  time
that the Portfolio is engaging in proxy hedging.  If the Portfolio enters into a
currency  hedging  transaction,   the  Portfolio  will  comply  with  the  asset
segregation requirements described below.

Risks of  Currency  Transactions.  Currency  transactions  are  subject to risks
different from those of other portfolio  transactions.  Because currency control
is of great  importance  to the  issuing  governments  and  influences  economic
planning and policy, purchases and sales of currency and related instruments can
be  negatively  affected  by  government  exchange  controls,   blockages,   and
manipulations or exchange restrictions imposed by governments.  These can result
in losses to the  Portfolio  if it is unable to deliver or receive  currency  or
funds in  settlement of  obligations  and could also cause hedges it has entered
into to be rendered  useless,  resulting  in full  currency  exposure as well as
incurring  transaction costs. Buyers and sellers of currency futures are subject
to the  same  risks  that  apply  to  the  use of  futures  generally.  Further,
settlement of a currency  futures  contract for the purchase of most  currencies
must occur at a bank based in the issuing  nation.  Trading  options on currency
futures is relatively  new, and the ability to establish and close out positions
on such options is subject to the  maintenance  of a liquid market which may not
always be available.  Currency  exchange  rates may  fluctuate  based on factors
extrinsic to that country's economy.

Combined  Transactions.  The  Portfolio  may enter into  multiple  transactions,
including multiple options transactions, multiple futures transactions, multiple
currency  transactions  (including  forward  currency  contracts)  and  multiple
interest rate transactions and any combination of futures, options, currency and
interest  rate  transactions  ("component"  transactions),  instead  of a single
Strategic  Transaction,  as part of a single or combined  strategy  when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined  transaction  will usually contain elements of risk that are present in
each of its component transactions.  Although combined transactions are normally
entered into based on the Adviser's  judgment that the combined  strategies will
reduce  risk  or  otherwise  more  effectively  achieve  the  desired  portfolio
management  goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which the
Portfolio may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Portfolio expects to 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  the Portfolio  anticipates  purchasing at a
later date. The Portfolio intends to 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 and 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.

         The Portfolio  will usually enter into swaps on a net basis,  i.e., the
two payment  streams are netted out in a cash  settlement on the payment date or
dates specified in the instrument,  with the Portfolio  receiving or paying,  as
the case may be,  only the net  amount of the two  payments.  Inasmuch  as these
swaps,  caps,  floors  and  collars  are  entered  into for good  faith  hedging
purposes,  the  Adviser  and  the  Portfolio  believe  such  obligations  do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its  borrowing  restrictions.  The  Portfolio  will not
enter into any swap,  cap, floor or collar  transaction  unless,  at the time of
entering  into  such   transaction,   the  unsecured   long-term   debt  of  the
Counterparty,  combined with any credit enhancements, is rated at least A by S&P
or Moody's or has an  equivalent  rating from an NRSRO or is determined to be of
equivalent  credit  quality  by  the  Adviser.  If  there  is a  default  by the
Counterparty,  the  Portfolio  may have  contractual  remedies  pursuant  to the


                                       37
<PAGE>

agreements related to the transaction.  The swap market has grown  substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively  liquid.  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.

Eurodollar  Instruments.  The  Portfolio  may  make  investments  in  Eurodollar
instruments.   Eurodollar  instruments  are  U.S.   dollar-denominated   futures
contracts or options  thereon which are linked to the London  Interbank  Offered
Rate ("LIBOR"), although foreign currency-denominated  instruments are available
from time to time.  Eurodollar  futures  contracts enable purchasers to obtain a
fixed  rate for the  lending  of funds and  sellers  to obtain a fixed  rate for
borrowings.  The Portfolio  might use Eurodollar  futures  contracts and options
thereon to hedge against changes in LIBOR, to which many interest rate swaps and
fixed income instruments are linked.

Risks of Strategic  Transactions  Outside the U.S.  When  conducted  outside the
U.S., Strategic  Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees,  and are subject to
the risk of governmental actions affecting trading in, or the prices of, foreign
securities,  currencies and other instruments.  The value of such positions also
could be adversely affected by: (i) other complex foreign  political,  legal and
economic factors,  (ii) lesser availability than in the U.S. of data on which to
make  trading  decisions,  (iii) delays in the  Portfolio's  ability to act upon
economic events  occurring in foreign markets during  non-business  hours in the
U.S.,  (iv) the  imposition  of  different  exercise  and  settlement  terms and
procedures  and  margin  requirements  than in the U.S.,  and (v) lower  trading
volume and liquidity.

   
Use of Segregated and Other Special Accounts.  Many Strategic  Transactions,  in
addition to other  requirements,  require that the Portfolio  segregate  cash or
liquid assets with its  custodian to the extent  Portfolio  obligations  are not
otherwise  "covered"  through  ownership of the underlying  security,  financial
instrument or currency. In general,  either the full amount of any obligation by
the  Portfolio  to pay or deliver  securities  or assets  must be covered at all
times by the securities,  instruments or currency required to be delivered,  or,
subject to any regulatory  restrictions,  an amount of cash or liquid high grade
securities  at least  equal to the  current  amount  of the  obligation  must be
segregated  with  the  custodian.  The  segregated  assets  cannot  be  sold  or
transferred  unless equivalent assets are substituted in their place or it is no
longer  necessary to segregate  them. For example,  a call option written by the
Portfolio will require the Portfolio to hold the securities  subject to the call
(or  securities  convertible  into  the  needed  securities  without  additional
consideration) or to segregate cash or liquid securities  sufficient to purchase
and deliver the  securities if the call is exercised.  A call option sold by the
Portfolio on an index will require the  Portfolio  to own  portfolio  securities
which  correlate  with the index or to segregate  cash or liquid assets equal to
the excess of the index value over the exercise  price on a current basis. A put
option  written by the  Portfolio  requires the  Portfolio to segregate  cash or
liquid assets equal to the exercise price.
    

         Except  when the  Portfolio  enters  into a  forward  contract  for the
purchase  or sale of a security  denominated  in a  particular  currency,  which
requires no  segregation,  a currency  contract which obligates the Portfolio to
buy or sell currency will  generally  require the Portfolio to hold an amount of
that currency or liquid  securities  denominated  in that currency  equal to the
Portfolio's  obligations  or to segregate  liquid high grade assets equal to the
amount of the Portfolio's obligation.

         OTC  options  entered  into  by  the  Portfolio,   including  those  on
securities,  currency,  financial  instruments  or  indices  and OCC  issued and
exchange listed index options, will generally provide for cash settlement.  As a
result,  when the Portfolio  sells these  instruments  it will only segregate an
amount  of  assets  equal  to  its  accrued  net  obligations,  as  there  is no
requirement  for  payment or  delivery  of amounts in excess of the net  amount.
These  amounts  will  equal  100% of the  exercise  price  in the  case of a non
cash-settled  put,  the  same as an OCC  guaranteed  listed  option  sold by the
Portfolio,  or the in-the-money  amount plus any sell-back formula amount in the
case of a cash-settled put or call. In addition, when the Portfolio sells a call
option on an index at a time when the  in-the-money  amount exceeds the exercise
price, the Portfolio will segregate,  until the option expires or is closed out,
cash or cash equivalents equal in value to such excess.  OCC issued and exchange
listed  options sold by the Portfolio  other than those above  generally  settle
with physical delivery,  or with an election of either physical delivery or cash
settlement  and the  Portfolio  will  segregate an amount of assets equal to the
full value of the option. OTC options settling with physical  delivery,  or with


                                       38
<PAGE>

an election of either  physical  delivery or cash settlement will be treated the
same as other options settling with physical delivery.

         In the case of a futures  contract or an option thereon,  the Portfolio
must deposit initial margin and possible daily  variation  margin in addition to
segregating  assets  sufficient  to meet its  obligation  to purchase or provide
securities  or  currencies,  or to pay the amount owed at the  expiration  of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.

         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 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 the  Portfolio's  net
obligation, if any.

         Strategic  Transactions  may be covered by other means when  consistent
with  applicable  regulatory  policies.   The  Portfolio  may  also  enter  into
offsetting  transactions  so  that  its  combined  position,  coupled  with  any
segregated assets, equals its net outstanding  obligation in related options and
Strategic  Transactions.  For example, the Portfolio could purchase a put option
if the strike  price of that option is the same or higher than the strike  price
of a put option sold by the Portfolio.  Moreover,  instead of segregating assets
if the Portfolio  held a futures or forward  contract,  it could  purchase a put
option on the same  futures or forward  contract  with a strike price as high or
higher than the price of the contract held.  Other  Strategic  Transactions  may
also be offset in combinations.  If the offsetting transaction terminates at the
time of or after the primary  transaction no segregation is required,  but if it
terminates  prior to such time,  assets equal to any remaining  obligation would
need to be segregated.

         The Portfolio's  activities  involving  Strategic  Transactions  may be
limited by the  requirements  of  Subchapter M of the Internal  Revenue Code for
qualification as a regulated investment company. (See "TAX STATUS.")

Debt Securities

         If the  Adviser  determines  that  the  capital  appreciation  of  debt
securities  is likely to exceed  that of common  stocks,  the  Global  Discovery
Portfolio  may invest in debt  securities  of foreign and U.S.  issuers.  Global
Discovery  Portfolio debt  investments  will be selected on the basis of capital
appreciation potential, by evaluating,  among other things,  potential yield, if
any, credit quality, and the fundamental outlooks for currency and interest rate
trends in different parts of the world, taking into account the ability to hedge
a degree of currency or local bond price risk.  The Global  Discovery  Portfolio
may purchase  "investment-grade"  bonds, which are those rated Aaa, Aa, A or Baa
by  Moody's  or  AAA,  AA,  A or BBB by S&P  or,  if  unrated,  judged  to be of
equivalent quality as determined by the Adviser. Bonds rated Baa or BBB may have
speculative  elements as well as  investment-grade  characteristics.  The Global
Discovery  Portfolio  may  also  invest  up to 5% of  its  net  assets  in  debt
securities which are rated below  investment-grade,  that is, rated below Baa by
Moody's or below BBB by S&P and in unrated securities of equivalent quality.

High Yield, High Risk Securities

         The Bond, Balanced,  Capital Growth and Global Discovery Portfolios may
each invest in below investment grade securities  (rated Ba and lower by Moody's
and BB and lower by S&P) or unrated  securities.  Such  securities  carry a high
degree of risk  (including  the  possibility  of default or  bankruptcy of these
issuers of such securities)  generally  involve greater  volatility of price and
risk of  principal  and income,  and may be less liquid than  securities  in the
higher ratings categories and are considered  speculative.  The Global Discovery
Portfolio  may invest up to 5% of its net assets in such  securities.  The lower
the ratings of such debt  securities,  the greater  their risks render them like
equity securities.  See the Appendix to this Statement of Additional Information
for a more complete description of the ratings assigned by ratings organizations
and their respective characteristics.

         As economic  downturn  may disrupt the high yield market and impair the
ability of  issuers to repay  principal  and  interest.  Also,  an  increase  in
interest rates could adversely  affect the value of such  obligations  held by a
Portfolio.  Prices and yields of high yield  securities will fluctuate over time
and may affect a Portfolio's net asset value.  In addition,  investments in high


                                       39
<PAGE>

yield zero coupon or pay-in-kind bonds,  rather than  income-bearing  high yield
securities,  may be more speculative and may be subject to greater  fluctuations
in value due to changes in interest rates.

         The trading market for high yield  securities may be thin to the extent
that there is no established  retail secondary market or because of a decline in
the value of such securities. A thin trading market may limit the ability of the
Trustees to value high yield securities accurately in a Portfolio and to dispose
of those securities. Adverse publicity and investor perceptions may decrease the
values and liquidity of high yield securities. These securities may also involve
special registration responsibilities, liabilities and costs.

         Credit quality in the high yield securities  market can change suddenly
and unexpectedly,  and even recently-issued credit ratings may not fully reflect
the actual risks posed by a particular high yield  security.  For these reasons,
it is the policy of the Adviser  not to rely  exclusively  on ratings  issued by
established credit rating agencies,  but to supplement such ratings with its own
independent  and  on-going  review of credit  quality.  The  achievement  of the
Portfolios'  investment objectives may be more dependent on the Adviser's credit
analysis  than is the case for  higher  quality  bonds.  Should  the rating of a
portfolio security be downgraded the Adviser will determine whether it is in the
best interest of that Portfolio to retain or dispose of the security.

         Prices  for  below  investment  grade  securities  may be  affected  by
legislative  and  regulatory  developments.  For example,  federal rules require
savings and loan institutions gradually to reduce their holdings of this type of
security.  Also,  Congress has from time to time  considered  legislation  which
would restrict or eliminate the corporate tax deduction for interest payments in
these  securities and regulate  corporate  restructurings.  Such legislation may
significantly depress the prices of outstanding securities of this type.

Combined Transactions

         Each Portfolio may enter into multiple transactions, including multiple
options transactions,  multiple futures transactions,  multiple foreign currency
transactions  (including  forward  contracts)  and any  combination  of futures,
options and foreign currency transactions ("component" transactions), instead of
a single transaction,  as part of a single hedging strategy when, in the opinion
of the Adviser,  it is in the best  interest of a Portfolio to do so. A combined
transaction,  while part of a single hedging strategy,  may not offset fully the
risks of each component transaction and, therefore, may contain elements of risk
that are present in each of its component transactions.  (See above for the risk
characteristics of certain transactions.)

Risks of Specialized Investment Techniques Abroad

         The above described  specialized  investment  techniques when conducted
abroad may not be  regulated as  effectively  as in the United  States;  may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of  governmental  actions  affecting  trading  in,  or the  prices  of,  foreign
securities. The value of such positions also could be adversely affected by: (i)
other  complex  foreign  political,  legal and  economic  factors;  (ii)  lesser
availability  than  in the  United  States  of  data on  which  to make  trading
decisions;  (iii)  delays in the  Fund's  ability  to act upon  economic  events
occurring in foreign markets during on-business hours in the United States; (iv)
the  imposition of different  exercise and  settlement  terms and procedures and
margin requirements than in the United States; and (v) lesser trading volume.

                             INVESTMENT RESTRICTIONS

            (See "INVESTMENT RESTRICTIONS" in the Fund's prospectus.)

         Unless specified to the contrary, the following restrictions may not be
changed  with respect to any  Portfolio  without the approval of the majority of
outstanding  voting securities of that Portfolio (which,  under the 1940 Act and
the rules  thereunder and as used in this  Statement of Additional  Information,
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding  shares of that Portfolio are
present in person or by proxy, or (2) more than 50% of the outstanding shares of
that Portfolio).  Any investment restrictions which involve a maximum percentage
of securities or assets shall not be considered to be violated  unless an excess


                                       40
<PAGE>

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.

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, the Fund may not on behalf of any Portfolio:

         (1)      purchase  and  sell  real  estate  (though  it may  invest  in
                  securities of companies which deal in real estate and in other
                  permitted  investments  secured by real estate) or commodities
                  or commodities  contracts,  except (a) debt securities futures
                  contracts and securities  index futures  contracts and options
                  thereon,  and (b) in the case of the International  Portfolio,
                  foreign currency futures contracts;

         (2)      participate  on a joint or a joint  and  several  basis in any
                  trading  account  in  securities,  but may for the  purpose of
                  possibly   achieving   better   net   results   on   portfolio
                  transactions  or lower  brokerage  commission  rates join with
                  other  investment  company  and  client  accounts  managed  by
                  Scudder,  Stevens & Clark or its affiliates in the purchase or
                  sale of portfolio securities;

         (3)      purchase  or  retain  securities  of an  issuer  any of  whose
                  officers,  directors,  trustees  or  security  holders  is  an
                  officer or Trustee of the Fund or a member, officer,  director
                  or  trustee  of the  investment  adviser of the Fund if one or
                  more of such individuals owns  beneficially more than one-half
                  of one percent (1/2 of 1%) of the shares or securities or both
                  (taken at market  value) of such  issuer and such  individuals
                  owning more than  one-half of one percent  (1/2 of 1%) of such
                  shares or securities together own beneficially more than 5% of
                  such shares or securities or both;

         (4)      purchase  securities on margin or make short sales unless,  by
                  virtue of its ownership of other securities,  it has the right
                  to  obtain  securities  equivalent  in kind and  amount to the
                  securities sold and, if the right is conditional,  the sale is
                  made upon the same conditions;

         (5)      issue senior  securities,  except as  appropriate  to evidence
                  indebtedness  which a Portfolio is permitted to incur pursuant
                  to  the  Investment  Restrictions  set  forth  in  the  Fund's
                  prospectus and except for shares of various  additional series
                  which may be established by the Trustees; or

         (6)      act as underwriter of the securities issued by others,  except
                  to the extent that the purchase of  securities  in  accordance
                  with its investment  objective and policies  directly from the
                  issuer thereof and the later disposition thereof may be deemed
                  to be underwriting.

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery and International Portfolios:

         (1)      hedge by purchasing put and call options,  futures  contracts,
                  or other derivative  instruments on securities in an aggregate
                  amount  equivalent to more than 10% of the  Portfolio's  total
                  assets;

         (2)      make securities  loans if the value of such securities  loaned
                  exceeds 10% of the value of the  Portfolio's  total  assets at
                  the time any loan is made.

         In  addition  to the  investment  restrictions  set forth in the Fund's
prospectus, as a matter of nonfundamental policy, the Fund may not, on behalf of
the Global Discovery Portfolio:

         (1)      purchase  or  retain  securities  of any  open-end  investment
                  company,  or  securities of  closed-end  investment  companies
                  except by purchase in the open market where no  commission  or
                  profit to a sponsor or dealer results from such purchases,  or
                  except when such purchase, though not made in the open market,
                  is part of a plan of merger, consolidation,  reorganization or
                  acquisition  of  assets;  in any event the  Portfolio  may not
                  purchase more than 3% of the outstanding  voting securities of
                  another investment company, may not invest more than 5% of its
                  total assets in another investment company, and may not invest
                  more  than  10%  of  its  total  assets  in  other  investment
                  companies;

                                       41
<PAGE>

         (2)      invest more than 10% of its net assets in securities which are
                  not readily marketable, the disposition of which is restricted
                  under Federal securities laws, or in repurchase agreements not
                  terminable  within 7 days,  and the Portfolio  will not invest
                  more than 5% of its total assets in restricted securities;

         (3)      buy options on securities or financial instruments, unless the
                  aggregate  premiums  paid  on all  such  options  held  by the
                  Portfolio at any time do not exceed 20% of its net assets;  or
                  sell put options on securities if, as a result,  the aggregate
                  value of the  obligations  underlying  such put options  would
                  exceed 50% of the Portfolio's net assets;

         (4)      enter into  futures  contracts  or  purchase  options  thereon
                  unless  immediately  after  the  purchase,  the  value  of the
                  aggregate initial margin with respect to all futures contracts
                  entered into on behalf of the  Portfolio and the premiums paid
                  for  options  on futures  contracts  does not exceed 5% of the
                  Portfolio's  total  assets  provided  that  in the  case of an
                  option  that is  in-the-money  at the  time of  purchase,  the
                  in-the-money amount may be excluded in computing the 5% limit;

         (5)      borrow  other  than from  banks,  or borrow  money  (including
                  reverse  repurchase  agreements) in excess of 10% of its total
                  assets  (taken at market  value)  except that for temporary or
                  emergency  purposes the  Portfolio may borrow up to 25% of its
                  total assets;

         (6)      purchase  securities on margin or make short sales unless,  by
                  virtue of its ownership of other securities,  it has the right
                  to  obtain  securities  equivalent  in kind and  amount to the
                  securities  sold  at no  added  cost  and,  if  the  right  is
                  conditional, the sale is made upon the same conditions, except
                  in connection with arbitrage  transactions and except that the
                  Fund may obtain such  short-term  credits as may be  necessary
                  for the clearance of purchases and sales of securities;

         (7)      purchase  warrants if as a result  warrants taken at the lower
                  of cost or market value would  represent  more than 10% of the
                  value of the Portfolio's net assets or more than 2% of its net
                  assets  in  warrants  that are not  listed  on the New York or
                  American  Stock  Exchanges or on an exchange  with  comparable
                  listing  requirements (for this purpose,  warrants attached to
                  securities will be deemed to have no value).

         If a percentage  restriction  on investment or utilization of assets as
set forth under "Investment  Restrictions" and "Other Investment Policies" above
is adhered to at the time an  investment  is made, a later change in  percentage
resulting from changes in the value or the total cost of the Portfolio's  assets
will not be considered a violation of the restriction.

         "Value" for the purposes of all investment  restrictions shall mean the
value  used in  determining  a  Portfolio's  net asset  value.  (See "NET  ASSET
VALUE.")

                            PURCHASES AND REDEMPTIONS

           (See "PURCHASES AND REDEMPTIONS" in the Fund's prospectus.)

   
         The separate accounts of the Participating Insurance Companies 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 variable  annuity  contracts  and variable life
insurance  policies  but only on days on which the Exchange is open for trading.
Such  purchases and  redemptions of the shares of each Portfolio are effected at
their  respective  net  asset  values  per share  determined  as of the close of
regular trading on the Exchange  (normally 4 p.m. eastern time) on that same day
except that, in the case of the Money Market  Portfolio,  purchases  will not be
effected  until the next  determination  of net asset value after  federal funds
have been made  available  to the Fund.  (See "NET ASSET  VALUE.")  Payment  for
redemptions  will be made by  State  Street  Bank  and  Trust  Company  or Brown
Brothers  Harriman  & Co. on behalf  of the Fund and the  applicable  Portfolios
within seven days  thereafter.  No fee is charged the  separate  accounts of the
Participating Insurance Companies when they redeem Fund shares.
    

                                       42
<PAGE>

         The Fund may suspend the right of redemption of shares of any Portfolio
and may postpone payment for any period: (i) during which the Exchange is closed
other than customary weekend and holiday closings or during which trading on the
Exchange is restricted;  (ii) when the SEC determines  that a state of emergency
exists which may make payment or transfer not reasonably  practicable,  (iii) as
the SEC may by order permit for the  protection  of the security  holders of the
Fund or (iv) at any  other  time when the Fund may,  under  applicable  laws and
regulations, suspend payment on the redemption of its shares.

         Should any conflict  between VA contract and VLI policy  holders  arise
which would  require that a substantial  amount of net assets be withdrawn  from
the Fund,  orderly  portfolio  management  could be disrupted  to the  potential
detriment of such contract and policy holders.

                       INVESTMENT ADVISER AND DISTRIBUTOR

     (See "INVESTMENT ADVISER" and "DISTRIBUTOR" in the Fund's prospectus.)

Investment Adviser
   

         The Fund has four  investment  advisory  agreements,  one for the Money
Market  Portfolio,  Bond  Portfolio,   Balanced  Portfolio  and  Capital  Growth
Portfolio,  one for the International  Portfolio,  one for the Growth and Income
Portfolio and one for the Global Discovery Portfolio (the  "Agreements").  These
Agreements  are with the  investment  counsel firm of Scudder,  Stevens & Clark,
Inc., a Delaware corporation,  doing business under the name Scudder,  Stevens &
Clark. This organization is one of the most experienced investment counsel firms
in the United States.  It currently  manages in excess of $115 billion in assets
for its clients, including: more than $50 billion in U.S. and foreign bonds, and
over $10 billion in balanced portfolios for over 3,000 institutional and private
accounts. In addition, the assets of Scudder's international  investment company
clients exceed $6 billion.  Scudder,  Stevens & Clark,  Inc. was  established in
1919 and  pioneered the practice of providing  investment  counsel to individual
clients on a fee basis.  In 1928, it introduced the first no-load mutual fund to
the public. The Adviser has been a leader in international investment management
and trading for over 40 years.

         The  principal  source of the  Adviser's  income is  professional  fees
received from providing  continuous  investment  advice, and the firm derives no
income  from  brokerage  or  underwriting  of  securities.  Today,  it  provides
investment  counsel for many individuals and institutions,  including  insurance
companies,   colleges,  industrial  corporations,   and  financial  and  banking
organizations.  In addition,  it manages  Montgomery  Street Income  Securities,
Inc., Scudder California Tax Free Trust,  Scudder Cash Investment Trust, Scudder
Equity Trust,  Scudder Fund,  Inc.,  Scudder Funds Trust,  Scudder  Global Fund,
Inc., Scudder GNMA Fund, Scudder Portfolio Trust,  Scudder  Institutional  Fund,
Inc.,  Scudder  International  Fund, Inc.,  Scudder  Investment  Trust,  Scudder
Municipal  Trust,  Scudder  Mutual  Funds,  Inc.,  Scudder New Asia Fund,  Inc.,
Scudder New Europe Fund, Inc., Scudder Pathway Series, Scudder Securities Trust,
Scudder  State Tax Free Trust,  Scudder  Tax Free Money  Fund,  Scudder Tax Free
Trust,  Scudder U.S. Treasury Money Fund, Scudder Variable Life Investment Fund,
Scudder World Income  Opportunities  Fund,  Inc., The Argentina Fund,  Inc., The
Brazil Fund, Inc., The First Iberian Fund, Inc., The Korea Fund, Inc., The Japan
Fund,  Inc. and The Latin America Dollar Income Fund, Inc. Some of the foregoing
companies or trusts have two or more series.

         The Adviser also provides  investment  advisory  services to the mutual
funds  which  comprise  the  AARP  Investment  Program  from  Scudder.  The AARP
Investment  Program  from  Scudder has assets over $13 billion and  includes the
AARP Growth Trust,  AARP Income Trust,  AARP Tax Free Income Trust, AARP Managed
Investment Portfolios Trust and AARP Cash Investment Funds.
    

         Certain  investments  may be  appropriate  for the Fund  and for  other
clients  advised by the  Adviser.  Investment  decisions  for the Fund and other
clients 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 on the same day.  In
such event,  such  transactions  will be allocated among the clients in a manner
believed by the Adviser to be equitable to each. In some cases,  this  procedure


                                       43
<PAGE>

could have an adverse effect on the price or amount of the securities  purchased
or sold by the Fund.  Purchase and sale orders for the Fund may be combined with
those of other clients of the Adviser in the interest of the most  favorable net
results to the Fund.

         The  Adviser  maintains a large  research  department,  which  conducts
continuous   studies  of  the  factors  that  affect  the  position  of  various
industries,  companies and individual securities. The Adviser receives published
reports and statistical  compilations from issuers and other sources, as well as
analyses from brokers and dealers who may execute portfolio transactions for the
Adviser's clients. However, the Adviser regards this information and material as
an adjunct to its own research activities.  Scudder's  international  investment
management  team  travels  the world,  researching  hundreds  of  companies.  In
selecting  the  securities  in which the Fund may invest,  the  conclusions  and
investment decisions of the Adviser with respect to the Fund are based primarily
on the analyses of its own research department.

         Under the  Agreements,  the Adviser  regularly  provides  the Fund with
investment  research,  advice and  supervision  and  furnishes  continuously  an
investment  program  consistent  with the investment  objectives and policies of
each Portfolio,  and determines,  for each Portfolio,  what securities  shall be
purchased,  what  securities  shall  be held or  sold,  and  what  portion  of a
Portfolio's assets shall be held uninvested, subject always to the provisions of
the  Fund's  Declaration  of  Trust  and  By-Laws,  and of the 1940 Act and to a
Portfolio's  investment  objectives,  policies  and  restrictions,  and  subject
further to such policies and  instructions as the Trustees may from time to time
establish.  The Adviser  also  advises  and assists the  officers of the Fund in
taking such steps as are necessary or  appropriate to carry out the decisions of
its Trustees  and the  appropriate  committees  of the  Trustees  regarding  the
conduct of the business of the Fund.

         The  Adviser  pays the  compensation  and  expenses  of all  affiliated
Trustees  and  executive  employees  of the Fund and  makes  available,  without
expense to the Fund,  the  services  of such  affiliated  persons as may duly be
elected Trustees of the Fund,  subject to their individual  consent to serve and
to any limitations  imposed by law, and pays the Fund's office rent and provides
investment  advisory,  research  and  statistical  facilities  and all  clerical
services relating to research, statistical and investment work. For its advisory
services the Adviser receives compensation monthly at the following annual rates
for each Portfolio:
<TABLE>
<CAPTION>
   

                                        % of the average
                                        daily net asset
                                         values of each       Dollar Amount
                Portfolio                  Portfolio              1994                1995                1996

     <S>                                    <C>                <C>                 <C>                 <C>     
      Money Market Portfolio                .370%              $269,963            $306,996            $325,791
      Bond Portfolio                        .475%               650,361             657,112             291,740
      Balanced Portfolio                    .475%               218,621             269,230             372,176
      Growth and Income Portfolio           .475%                     0             169,852             326,033
      Capital Growth Portfolio              .475%             1,199,585           1,383,919           1,870,361
      Global Discovery Portfolio            .975%                    --                  --              80,681
      International Portfolio               .875%*            3,363,597           4,357,541           5,590,601
    
</TABLE>

   
*        For any calendar  month  during  which the average  daily net assets of
         International  Portfolio exceed $500,000,000,  the fee payable for that
         month, with respect to the excess over  $500,000,000,  is calculated at
         an annual rate of .775%. As a result, the Adviser received compensation
         at an annual rate of .863% for the fiscal year ended December 31, 1996.
    

         Under  the  Agreements,  the  Fund is  responsible  for  all its  other
expenses,  including clerical salaries; fees and expenses incurred in connection
with  membership  in investment  company  organizations;  brokers'  commissions;
legal,  auditing and  accounting  expenses;  taxes and  governmental  fees;  the
charges of custodians,  transfer  agents and other agents;  any other  expenses,
including  clerical  expenses,  of  issue,  sale,  underwriting,   distribution,
redemption or repurchase of shares;  the expenses of and fees for registering or
qualifying  securities  for sale;  the fees and  expenses of the Trustees of the
Fund who are not  affiliated  with the Adviser;  and the cost of  preparing  and
distributing  reports and notices to shareholders.  The Fund may arrange to have
third  parties  assume  all or part of the  expense  of sale,  underwriting  and


                                       44
<PAGE>

distribution  of its shares.  (See  "Distributor"  for expenses  paid by Scudder
Investor Services,  Inc.) The Fund is also responsible for its expenses incurred
in connection with  litigation,  proceedings and claims and the legal obligation
it may have to indemnify its officers and Trustees with respect thereto.

         In addition to payments for investment  advisory  services  provided by
the  Adviser,  the  Trustees,  consistent  with the Fund's  investment  advisory
agreements and underwriting agreement, have approved payments to the Adviser and
Scudder  Investor  Services,  Inc. for  clerical,  accounting  and certain other
services  they may provide the Fund.  Effective  October 1, 1994,  the  Trustees
authorized  the  elimination  of  these  administrative  expenses.  Under  a new
agreement,  effective  October 1, 1994,  the Trustees  authorized  the Fund,  on
behalf  of  each  Portfolio,  to pay  Scudder  Fund  Accounting  Corporation,  a
subsidiary of the Adviser,  for  determining the daily net asset value per share
and maintaining the portfolio and general accounting records of the Fund.

         For the year ended  December 31, 1994,  such  compensation  amounted to
$40,297 for the Money Market Portfolio,  $40,238 for the Bond Portfolio, $38,204
for the Balanced Portfolio, $25,179 for the Growth and Income Portfolio, $45,253
for the  Capital  Growth  Portfolio,  $45,272 for the  International  Portfolio;
administrative   expenses  not  imposed   aggregated  $7,119  for  the  Balanced
Portfolio.

         For the year ended  December 31, 1995,  such  compensation  amounted to
$30,000 for the Money Market Portfolio,  $43,187 for the Bond Portfolio, $37,353
for the Balanced Portfolio, $38,256 for the Growth and Income Portfolio, $73,583
for the Capital Growth Portfolio and $277,867 for the International Portfolio.

   
         For the year ended  December 31, 1996,  such  compensation  amounted to
$___ for the Money Market Portfolio,  $___ for the Bond Portfolio,  $___ for the
Balanced  Portfolio,  $___ for the  Growth and  Income  Portfolio,  $___ for the
Capital Growth Portfolio,  $___ for the Global Discovery  Portfolio and $___ for
the International Portfolio.

         The Agreements dated November 14, 1986 (for the Money Market Portfolio,
Bond Portfolio, Balanced Portfolio and Capital Growth Portfolio), April 30, 1987
(for the  International  Portfolio),  May 1, 1994  (for the  Growth  and  Income
Portfolio)  will remain in effect until  September 30, 1997. The Agreement dated
May 1, 1996 (for the Global  Discovery  Portfolio)  will remain in effect  until
September  30, 1997.  The  Agreements  will continue in effect from year to year
thereafter  only if their  continuance  is  approved  annually  by the vote of a
majority of those Trustees who are not parties to such Agreements or "interested
persons" of the  Adviser or the Fund cast in person at a meeting  called for the
purpose  of voting on such  approval  and  either by vote of a  majority  of the
Trustees or a majority of the  outstanding  securities  of such  Portfolio.  The
Agreement for the Money Market Portfolio, Bond Portfolio, Balanced Portfolio and
Capital Growth Portfolio,  the Agreement for the International Portfolio and the
Agreement  for the  Growth  and  Income  Portfolio  were last  approved  by such
Trustees  (including  a majority of the  Trustees  who are not such  "interested
persons") on August 9, 1996.  The Agreement for the Global  Discovery  Portfolio
was last approved by such Trustees (including a majority of the Trustees who are
not such  "interested  persons")  on  October  5, 1995.  Each  Agreement  may be
terminated at any time without payment of penalty by either party on sixty days'
written notice, and automatically terminates in the event of its assignment.
    

         Each  Agreement  also  provides  that the Fund may use any name derived
from the name "Scudder,  Stevens & Clark" only as long as such Agreement remains
in effect.

         In reviewing the terms of the Agreements  and in  discussions  with the
Adviser concerning the Agreements,  Trustees who are not "interested persons" of
the Fund are represented by independent counsel at the Fund's expense.

         The  Agreements  provide  that the Adviser  shall not be liable for any
error of  judgment  or  mistake of law or for any loss  suffered  by the Fund in
connection with matters to which the Agreements relate,  except a loss resulting
from  willful  misfeasance,  bad  faith or gross  negligence  on the part of the
Adviser in the  performance  of its  duties or from  reckless  disregard  by the
Adviser of its obligations and duties under the Agreements.

         Each  Participating  Insurance  Company  has agreed with the Adviser to
reimburse  the  Adviser  for a  period  of five  years  to the  extent  that the
aggregate  annual  advisory fee paid on behalf of all Portfolios with respect to
the average daily net asset value of the shares of all  Portfolios  held in that
Participating  Insurance  Company's  general or  separate  account  (or those of


                                       45
<PAGE>

affiliates)  is less than  $25,000 in any year.  It is expected  that  insurance
companies which become  Participating  Insurance Companies in the future will be
required to enter into similar arrangements.

   
         Until  April 30,  1998,  the Adviser has agreed to waive part or all of
both the management and administrative fees for the Global Discovery  Portfolio,
excluding  12b-1  fees,  to the extent  that the  Portfolio's  expenses  will be
maintained at 1.50%.
    

         Officers  and  employees  of the  Adviser  from  time to time  may have
transactions with various banks,  including the Fund's custodian bank. It is the
Adviser's  opinion that the terms and conditions of those  transactions were not
influenced by existing or potential custodial or other Fund relationships.

         None of the Trustees or officers of the Fund may have dealings with the
Fund as principals in the purchase or sale of securities.

Personal Investments by Employees of the Adviser

         Employees  of the Adviser are  permitted  to make  personal  securities
transactions,  subject  to  requirements  and  restrictions  set  forth  in  the
Adviser's  Code  of  Ethics.   The  Code  of  Ethics  contains   provisions  and
requirements  designed to identify  and address  certain  conflicts  of interest
between personal investment  activities and the interests of investment advisory
clients such as the Portfolios.  Among other things,  the Code of Ethics,  which
generally  complies  with  standards   recommended  by  the  Investment  Company
Institute's  Advisory Group on Personal  Investing,  prohibits  certain types of
transactions  absent prior approval,  imposes time periods during which personal
transactions may not be made in certain securities,  and requires the submission
of  duplicate  broker   confirmations   and  monthly   reporting  of  securities
transactions.  Additional  restrictions  apply to portfolio  managers,  traders,
research  analysts  and others  involved  in the  investment  advisory  process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.

Distributor

         The Fund has an underwriting  agreement with Scudder Investor Services,
Inc. (the "Distributor"),  a subsidiary of the Adviser, Two International Place,
Boston,  Massachusetts 02110-4103.  The Fund's underwriting agreement dated July
12, 1985,  will remain in effect until September 30, 1997, and from year to year
thereafter  only if its  continuance  is approved  annually by a majority of the
Trustees who are not parties to such  agreement or  "interested  persons" of any
such party and either by vote of a majority of the Trustees or a majority of the
outstanding voting securities of the Fund.

         Under the  principal  underwriting  agreement  between the Fund and the
Distributor, the Fund is responsible for the payment of all fees and expenses in
connection  with the preparation  and filing of any  registration  statement and
prospectus  covering  the issue and sale of  shares,  and the  registration  and
qualification  of shares for sale with the SEC in the various states,  including
registering the Fund as a broker or dealer.  The Fund will also pay the fees and
expenses of preparing,  printing and mailing  prospectuses  annually to existing
shareholders  and any  notice,  proxy  statement,  report,  prospectus  or other
communication to shareholders of the Fund, printing and mailing confirmations of
purchases of shares, any issue taxes or any initial transfer taxes, a portion of
toll-free  telephone service for shareholders,  wiring funds for share purchases
and redemptions  (unless paid by the shareholder who initiates the transaction),
printing and postage of business  reply  envelopes and a portion of the computer
terminals used by both the Fund and the Distributor.

         The Distributor will pay for printing and distributing  prospectuses or
reports  prepared for its use in  connection  with the offering of the shares to
the  public  and  preparing,  printing  and  mailing  any  other  literature  or
advertising  in  connection  with the offering of the shares to the public.  The
Distributor will pay all fees and expenses in connection with its  qualification
and  registration  as a broker or dealer under Federal and state laws, a portion
of the  toll-free  telephone  service  and  of  computer  terminals,  and of any
activity  which is primarily  intended to result in the sale of shares issued by
the Fund,  unless a 12b-l Plan is in effect which  provides  that the Fund shall
bear some or all of such expenses.  The  Distributor has entered into agreements
with  broker-dealers  authorized to offer and sell VA contracts and VLI policies
on behalf of the  Participating  Insurance  Companies under which agreements the
broker-dealers  have agreed to be  responsible  for the fees and expenses of any
prospectus,   statement  of  additional   information  and  printed  information


                                       46
<PAGE>

supplemental  thereto of the Fund  distributed in connection with their offer of
VA contracts and VLI policies.

         As agent, the Distributor  currently offers shares of each Portfolio on
a continuous basis to the separate accounts of Participating Insurance Companies
in all  states  in which  the  Portfolio  or the  Fund may from  time to time be
registered or where  permitted by  applicable  law. The  underwriting  agreement
provides  that the  Distributor  accepts  orders for  shares at net asset  value
without sales commission or load being charged. The Distributor has made no firm
commitment to acquire shares of any Portfolio.

         A  description  of the  Rule  12b-1  plan  for  Class B  shares  of the
Portfolio (the "Plan") and related  services and fees  thereunder is provided in
the  prospectus.  On  October  5,  1995,  the  Board  of  Trustees  of the  Fund
unanimously approved the Plan. In connection with its consideration of the Plan,
the  Board of  Trustees  was  furnished  with  drafts  of the  Plan and  related
materials,  including information related to the advantages and disadvantages of
Rule 12b-1 plans currently being used in the mutual fund industry. Legal counsel
for the Fund provided additional  information,  summarized the provisions of the
proposed Plan and discussed the legal and regulatory  considerations in adopting
such Plan.

         The Board considered various factors in connection with its decision as
to  whether  to  approve  the Plan,  including  (a) the nature and causes of the
circumstances  which make  implementation of the Plan necessary and appropriate;
(b) the way in which the Plan would address those  circumstances,  including the
nature and potential amount of  expenditures;  (c) the nature of the anticipated
benefits;  (d) the possible benefits of the Plan to any other person relative to
those of the Fund; (e) the effect of the Plan on existing owners of VA contracts
and VLI  policies;  (f) the  merits of  possible  alternative  plans or  pricing
structures; (g) competitive conditions in the variable products industry and (h)
the relationship of the Plan to other distribution efforts of the Fund.

         Based  upon its  review  of the  foregoing  factors  and the  materials
presented to it, and in light of its fiduciary  duties under  relevant state law
and the  1940  Act,  the  Board  determined,  in the  exercise  of its  business
judgment,  that the Fund's Plan is reasonably likely to benefit the Fund and the
VA contract and VLI policy owners in at least one of several ways. Specifically,
the Board concluded that the Participating  Insurance  Companies would have less
incentive  to  educate  VA  contract  and VLI  policy  owners  and sales  people
concerning the Fund if expenses  associated with such services were not paid for
by the Fund. In addition,  the Board determined that the payment of distribution
fees to  insurers  should  motivate  them to  maintain  and enhance the level of
services  relating to the Fund  provided to VA contract  and VLI policy  owners,
which would, of course, benefit such VA contract and VLI policy owners. Further,
the  adoption  of the Plan  would  likely  help to  maintain  and may lead to an
increase  in net  assets  under  management  given  the  distribution  financing
alternatives  available through the multi-class  structure.  The Board also took
into account expense  structures of other competing  products and administrative
compensation  arrangements  between  other funds,  their  advisers and insurance
companies that currently are in use in the variable products industry.  Further,
it is anticipated  that Plan fees may be used to educate  potential and existing
owners of VA contracts  and VLI policies  concerning  the Fund,  the  securities
markets and related  risks. A better  educated  investor,  in the  Distributor's
view,  is less likely to surrender  his or her VA contract or VLI policy  early,
thereby avoiding the costs associated with such an event. Accordingly,  the Plan
may help the Fund and Participating  Insurance Companies meet investor education
needs.

         The Board realizes that there is no assurance  that the  expenditure of
Fund assets to finance  distribution  of Fund  shares will have the  anticipated
results.  However, the Board believes there is a reasonable  likelihood that one
or more of such benefits will result,  and since the Board will be in a position
to monitor the  distribution  expenses of the Fund,  it will be able to evaluate
the benefit of such expenditures in deciding whether to continue the Plan.

         The Plan and any Rule  12b-1-related  agreement that is entered into by
the Fund or the  Distributor in connection with the Plan will continue in effect
for a period of more than one year only so long as continuance  is  specifically
approved  at least  annually  by a vote of a  majority  of the  Fund's  Board of
Trustees,  and of a majority of the Trustees who are not interested  persons (as
defined in the 1940 Act) of the Fund or a  Portfolio  ("Independent  Trustees"),
cast in person at a meeting called for the purpose of voting on the Plan, or the
Rule 12b-1 related agreement, as applicable.  In addition, the Plan and any Rule
12b-1 related  agreement,  may be terminated as to Class B shares of a Portfolio
at any time,  without penalty,  by vote of a majority of the outstanding Class B
shares of that Portfolio or by vote of a majority of the  Independent  Trustees.


                                       47
<PAGE>

The Plan also  provides  that it may not be amended to increase  materially  the
amount  that may be spent  for  distribution  of Class B shares  of a  Portfolio
without the approval of Class B shareholders of that Portfolio.
<TABLE>
<CAPTION>

                             MANAGEMENT OF THE FUND

   
Trustees and Officers
                                                                                               Position with
                                                                                               Underwriter, Scudder
                                                                                               Investor Services,
Name, Age and Address               Position with Fund       Principal Occupation**            Inc.
---------------------               ------------------       ----------------------            --------------------

<S>                                 <C>                      <C>                               <C>
David B. Watts*@+ (62)              President and Trustee    Managing Director of Scudder,     Assistant Treasurer
                                                             Stevens & Clark, Inc.

Daniel Pierce*@+ (63)               Vice President and       Chairman of the Board and         Vice President,
                                    Trustee                  Managing Director of Scudder,     Director and Assistant
                                                             Stevens & Clark, Inc.             Treasurer

Dr. Kenneth Black, Jr. (72)         Trustee                  Regents' Professor Emeritus of       ----
Educational Foundation, Inc.                                 Insurance, Georgia State
35 Broad Street                                              University
11th Floor, Room 1144
Atlanta, GA  30303

Dr. Rosita P. Chang (42)            Trustee                  Professor of Finance,                _____
PACAP Research Center                                        University of Rhode Island
College of Business
  Administration
University of Rhode Island
7 Lippitt Road
Kingston, RI 02881-0802

Peter B. Freeman@ (64)              Trustee                  Corporate Director and Trustee      ----
100 Alumni Avenue
Providence, RI  02906

Dr. J. D. Hammond (63)              Trustee                  Dean, Smeal College of Business     ----
801 Business                                                 Administration, Pennsylvania
  Administration Bldg.                                       State University
Pennsylvania State University
University Park, PA  16802

Thomas S. Crain++ (56)              Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Carol Franklin*#(44)                Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

William F. Gadsden*#(42)            Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

Jerard K. Hartman#(64)              Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.


                                       48
<PAGE>

                                                                                               Position with
                                                                                               Underwriter, Scudder
                                                                                               Investor Services,
Name, Age and Address               Position with Fund       Principal Occupation**            Inc.
---------------------               ------------------       ----------------------            --------------------

Robert T. Hoffman*#(38)             Vice President           Managing Director of Scudder,        ----
                                                             Stevens & Clark, Inc.

Richard A. Holt*** (55)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

William M. Hutchinson*+(49)         Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Thomas W. Joseph+ (58)              Vice President           Principal of Scudder, Stevens &   Vice President,
                                                             Clark, Inc.                       Director, Treasurer
                                                                                               and Assistant Clerk

David S. Lee+ (63)                  Vice President           Managing Director of Scudder,     President, Assistant
                                                             Stevens & Clark, Inc.             Treasurer and Director

Valerie F. Malter*#(38)             Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Steven M. Meltzer+ (38)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Gerald J. Moran*#(57)               Vice President           Principal of Scudder, Stevens &      ----
                                                             Clark, Inc.

Randall K. Zeller# (42)             Vice President           Managing Director of Scudder,       ----
                                                             Stevens & Clark, Inc.

Thomas F. McDonough+ (50)           Vice President and       Principal of Scudder, Stevens &   Clerk
                                    Secretary                Clark, Inc.

Pamela A. McGrath+ (43)             Vice President and       Managing Director of Scudder,       ----
                                    Treasurer                Stevens & Clark, Inc.

Edward J. O'Connell# (51)           Vice President and       Principal of Scudder, Stevens &   Assistant Treasurer
                                    Assistant Treasurer      Clark, Inc.

Kathryn L. Quirk# (44)              Vice President and       Managing Director of Scudder,     Vice President
                                    Assistant Secretary      Stevens & Clark, Inc.
    
</TABLE>

*        Messrs.  Watts and Pierce are considered by the Fund and its counsel to
         be Trustees who are "interested  persons" of the Adviser or of the Fund
         (within the meaning of the 1940 Act).
**       Unless  otherwise  stated,  all the  officers  and  Trustees  have been
         associated  with their  respective  companies for more than five years,
         but not necessarily in the same capacity.
@        Peter B.  Freeman,  Daniel Pierce and David B. Watts are members of the
         Executive  Committee,  which has the power to  declare  dividends  from
         ordinary income and distributions of realized capital gains to the same
         extent as the Board is so empowered.
+        Address: Two International Place, Boston, Massachusetts 02110-4103
#        Address: 345 Park Avenue, New York, New York 10154
++       Address: 600 Vine Street - Suite 2000, Cincinnati, Ohio 45202

                                       49
<PAGE>

***      Address: 111 E. Wacker Drive - Suite 2200, Chicago, Illinois 60601

   
Certain  of the  Trustees  and  officers  of the  Fund  also  serve  in  similar
capacities with other Scudder Funds.

                                  REMUNERATION

Responsibilities of the Board--Board and Committee Meetings

         The Board of Trustees is responsible  for the general  oversight of the
Fund's  business.  A majority of the Board's  members  are not  affiliated  with
Scudder,  Stevens & Clark, Inc. (The "Advisor").  These  "Independent  Trustees"
have primary  responsibility  for assuring  that the Fund is managed in the best
interests of its shareholders.

         The Board of Trustees meets at least quarterly to review the investment
performance of the Fund and other operational  matters,  including  policies and
procedures designated to assure compliance with various regulatory requirements.
At least annually,  the Independent Trustees review the fees paid to the Adviser
and its affiliates for investment advisory services and other administrative and
shareholder  services.  In this regard, they evaluate,  among other things, each
Funds' investment  performance,  the quality and efficiency of the various other
services  provided,  costs  incurred  by the  Adviser  and its  affiliates,  and
comparative  information  regarding fees and expenses of competitive funds. They
are assisted in this process by the Fund's independent public accountants and by
independent legal counsel selected by the Independent Trustees.

         All of the  Independent  Trustees serve on the Committee on Independent
Trustees,  which  nominates  Independent  Trustees and  considers  other related
matters,  and the Audit Committee,  which selects the Fund's  independent public
accountants  and  reviews  accounting   policies  and  controls.   In  addition,
Independent  Trustees  from time to time  have  established  and  served on task
forces and  subcommittees  focusing on  particular  matters such as  investment,
accounting and shareholder service issues.

         The Independent  Trustees met _____ times during 1996,  including Board
and  Committee   meetings  and  meetings  to  review  each  Fund's   contractual
arrangements as described above. All of the Independent  Trustees attended ____%
of all such meetings.

Compensation of Officers and Trustees

         The Independent Trustees receive the following compensation from Funds:
an annual  trustee's fee of $12,000;  a fee of $300 for attendance at each Board
meeting,  audit  committee  meeting,  or other  meeting held for the purposes of
considering  arrangements  between the Fund and the Adviser or any  affiliate of
the Adviser;  $100 for any other committee  meeting  (although in some cases the
Independent  Trustees have waived committee  meeting fees); and reimbursement of
expenses  incurred  for  travel  to  and  from  Board  Meetings.  No  additional
compensation  is paid to any  Independent  Trustee for travel time to  meetings,
attendance  at  directors'  educational  seminars  or  conferences,  service  on
industry or  association  committees,  participation  as speakers at  directors'
conferences,  service on special trustee task forces or subcommittees or service
as lead or liaison  trustee.  Independent  Trustees do not receive any  employee
benefits such as pension, retirement or health insurance.

         The  Independent  Trustees  also serve in the same  capacity  for other
funds managed by the Adviser.  These funds differ  broadly in type an complexity
and in some  cases have  substantially  different  Trustee  fee  schedules.  The
following table shows the aggregate  compensation  received by each  Independent
Trustee during 1996 from the Trust and from all of Scudder funds as a group.
    

                                       50
<PAGE>
<TABLE>
<CAPTION>
   

                                                   Compensation Table
                                          for the year ended December 31, 1996
------------------------------------------------------------------------------------------------------------------
           (1)                          (2)                      (3)                (4)                 (5)

                                                           
                                                              Pension or                                          
                                                              Retirement                        Total Compensation
                            Aggregate Compensation from    Benefits Accrued      Estimated       From the Fund and
     Name of Person,         the Scudder Variable Life     As Part of Fund    Annual Benefits    Fund Complex Paid
         Position                 Investment Fund*             Expenses       Upon Retirement       to Trustee   
------------------------------------------------------------------------------------------------------------------

<S>                                  <C>                        <C>                <C>              <C>     
Dr. Kenneth Black, Jr.,              $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)

Dr. Rosita P. Chang,                 $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)

Peter B. Freeman, Trustee            $ 16,483                   N/A                N/A              $ 131,734
                                                                                                   (33 funds)

Dr. J.D. Hammond,                    $ 26,233                   N/A                N/A              $ 26,233
Trustee                                                                                             (7 funds)
    
</TABLE>

   
*        Scudder  Variable Life  Investment  Fund consists of seven  Portfolios:
         Money Market Portfolio, Bond Portfolio,  Balanced Portfolio, Growth and
         Income Portfolio,  Capital Growth Portfolio, Global Discovery Portfolio
         and International Portfolio.

         Members of the Board of Trustees  who are  employees  of Scudder or its
affiliates  receive  no direct  compensation  from the Fund,  although  they are
compensated  as employees of Scudder,  or its  affiliates,  as a result of which
they may be deemed to participate in fees paid by the Fund.
    


                                 NET ASSET VALUE

         (See "NET ASSET VALUE" and "VALUATION OF PORTFOLIO SECURITIES"
                            in the Fund's prospectus)

         The net asset value of shares of each Portfolio of the Fund is computed
as of the close of regular  trading on the  Exchange on each day the Exchange is
open for trading (the "Value  Time").  The Exchange is scheduled to be closed on
the following holidays:  New Year's Day,  Presidents Day, Good Friday,  Memorial
Day,  Independence Day, Labor Day,  Thanksgiving and Christmas.  Net asset value
per share is  determined  by dividing  the value of the total  assets of a Fund,
less all liabilities, by the total number of shares outstanding.

         The  valuation of the Money Market  Portfolio  securities is based upon
their amortized  cost,  which does not take into account  unrealized  securities
gains or losses.  This method  involves  initially  valuing an instrument at its
cost and thereafter assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.  While this method provides certainty in valuation,  it
may result in periods  during which value,  as determined by amortized  cost, is
higher or lower than the price the Money Market  Portfolio  would  receive if it
sold the  instrument.  During periods of declining  interest  rates,  the quoted
yield on shares of the Money Market  Portfolio may tend to be higher than a like
computation  made by a fund with  identical  investments  utilizing  a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio  instruments.  Thus,  if the use of  amortized  cost by the  Portfolio
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Portfolio would be able to obtain a somewhat higher
yield if he  purchased  shares of the Money Market  Portfolio on that day,  than
would  result/from  investment in a fund  utilizing  solely market  values,  and


                                       51
<PAGE>

existing  investors in the Money Market  Portfolio would receive less investment
income. The converse would apply in a period of rising interest rates.

         An exchange-traded equity security (not subject to resale restrictions)
is valued at its most recent sale price as of the Value Time. Lacking any sales,
the  security  is valued at the  calculated  mean  between  the most  recent bid
quotation and the most recent asked quotation (the "Calculated  Mean"). If there
are no bid and asked  quotations,  the security is valued at the most recent bid
quotation.  An  unlisted  equity  security  which  is  traded  on  the  National
Association  of Securities  Dealers  Automated  Quotation  ("NASDAQ")  system is
valued at the most recent sale price.  If there are no such sales,  the security
is valued at the high or "inside" bid quotation. The value of an equity security
not quoted on the NASDAQ System, but traded in another  over-the-counter market,
is the most  recent  sale price.  If there are no such  sales,  the  security is
valued at the Calculated  Mean. If there is no Calculated  Mean, the security is
valued at the most recent bid quotation.

         Debt securities, other than short-term securities, are valued at prices
supplied  by the Fund's  pricing  agent  which  reflect  broker/dealer  supplied
valuations and electronic data processing techniques. Short-term securities with
remaining  maturities  of sixty  days or less are valued by the  amortized  cost
method,  which  the  Board  believes  approximates  market  value.  If it is not
possible  to value a  particular  debt  security  pursuant  to  these  valuation
methods, the value of such security is the most recent bid quotation supplied by
a bona fide marketmaker.  If no such bid quotation is available, the Adviser may
calculate the price of that debt security, subject to limitations established by
the Board.

         Option contracts on securities, currencies, futures and other financial
instruments  traded on an exchange are valued at their most recent sale price on
the exchange. If no sales are reported,  the value is the Calculated Mean, or if
the Calculated Mean is not available,  the most recent bid quotation in the case
of purchased options,  or the most recent asked quotation in the case of written
options.  Option contracts traded over-the-counter are valued at the most recent
bid  quotation  in the case of  purchased  options and at the most recent  asked
quotation in the case of written  options.  Futures  contracts are valued at the
most recent settlement  price.  Foreign currency forward contracts are valued at
the value of the underlying currency at the prevailing currency exchange rate.

         If a security  is traded on more than one  exchange,  or on one or more
exchanges  and in the  over-the-counter  market,  quotations  are taken from the
market in which the security is traded most extensively.

         If, in the opinion of the Fund's Valuation  Committee,  the value of an
asset as determined in accordance  with these  procedures does not represent the
fair market value of the asset,  the value of the asset is taken to be an amount
which, in the opinion of the Valuation  Committee,  represents fair market value
on the basis of all available information. The value of other portfolio holdings
owned by the Fund is  determined  in a manner  which,  in the  discretion of the
Valuation  Committee  most fairly  reflects fair market value of the property on
the valuation date.

         Following the  valuations of  securities or other  portfolio  assets in
terms of the currency in which the market  quotation  used is expressed  ("Local
Currency"),  the value of these assets in terms of U.S. dollars is calculated by
converting  the Local  Currency  into U.S.  dollars at the  prevailing  currency
exchange rates on the valuation date.

                                   TAX STATUS

    (See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)

         Each  Portfolio  of the Fund has  elected to be treated as a  regulated
investment  company under  Subchapter M of the Internal Revenue Code of 1986, as
amended  (the  "Code").   Such  qualification  does  not  involve   governmental
supervision or management of investment practices or policy.

         Each Portfolio  intends to comply with the provisions of Section 817(h)
of the Code  relating to  diversification  requirements  for  variable  annuity,
endowment and life insurance contracts.  Specifically, each Portfolio intends to
comply with either (i) the requirement of Section 817(h)(1) of the Code that its
assets be adequately diversified,  or (ii) the "Safe Harbor for Diversification"
specified  in  Section  817(h)(2)  of the  Code,  or (iii)  the  diversification
requirement of Section 817(h)(1) of the Code by having all or part of its assets


                                       52
<PAGE>

invested in U.S.  Treasury  securities  which  qualify for the "Special Rule for
Investments in United States Obligations"  specified in Section 817(h)(3) of the
Code.

         A regulated  investment  company  qualifying  under Subchapter M of the
Code is required to  distribute to its  shareholders  at least 90 percent of its
investment company taxable income and generally is not subject to federal income
tax to the extent that it distributes  annually its investment  company  taxable
income and net realized capital gains in the manner required under the Code.

         Investment  company taxable income of a Portfolio  generally is made up
of dividends,  interest,  certain  currency gains and losses and  net-short-term
capital gains in excess of net long-term  capital  losses,  less  expenses.  Net
realized  capital  gains of a Portfolio for a fiscal year are computed by taking
into account any capital loss carryforward of the Portfolio.

         At December  31, 1994 the Bond  Portfolio  had a net tax basis  capital
loss  carryforward of approximately  $4,153,327 which may be applied against any
realized net taxable  capital gains of each succeeding year until fully utilized
or until December 31, 2002,  whichever occurs first. In addition,  from November
1, 1994 through December 31, 1994, the Balanced  Portfolio  incurred $275,417 of
net realized capital losses which the Fund intends to defer and treat as arising
in the fiscal year ended December 31, 1995.

         If any net realized  long-term  capital gains in excess of net realized
short-term  capital  losses  are  retained  by  a  Portfolio  for  reinvestment,
requiring  federal  income  taxes  to be paid  thereon  by the  Portfolio,  such
Portfolio  intends  to  elect  to  treat  such  capital  gains  as  having  been
distributed to  shareholders.  As a result,  each  shareholder  will report such
capital  gains as long-term  capital  gains,  will be able to claim its share of
federal income taxes paid by the Portfolio on such gains as a credit against its
own federal income tax liability,  and will be entitled to increase the adjusted
tax basis of its shares of the Portfolio by the difference  between its pro rata
share of such gains and its tax credit.

         Distributions  of  investment  company  taxable  income are  taxable to
shareholders as ordinary income.

         Distributions  of the  excess of net  long-term  capital  gain over net
short-term  capital loss are taxable to shareholders as long-term  capital gain,
regardless of the length of time the shares of the relevant  Portfolio have been
held by such shareholders.  Any loss realized upon the redemption of shares held
at the time of redemption  for six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as  distributions of long-term
capital gain during such six-month period.

         Distributions  of investment  company  taxable  income and net realized
capital  gains  will be  taxable  as  described  above,  whether  reinvested  in
additional shares or in cash.  Shareholders electing to receive distributions in
the form of  additional  shares  will have a cost basis for  federal  income tax
purposes  in each share so  received  equal to the net asset value of a share on
the reinvestment date.

         All distributions of investment company taxable income and net realized
capital  gain,  whether  reinvested  in  additional  shares or in cash,  must be
reported  by each  shareholder  on its  federal  income  tax  return.  Dividends
declared  in October,  November  or December  with a record date in such a month
will be deemed to have been  received  by  shareholders  on  December 31 if paid
during  January of the following  year.  Redemptions of shares may result in tax
consequences  (gain or loss) to the  shareholder  and are also  subject to these
reporting requirements.

         Distributions by a Portfolio (except the Money Market Portfolio) result
in a  reduction  in the net  asset  value of the  Portfolio's  shares.  Should a
distribution  reduce the net asset value below a shareholder's  cost basis, such
distribution would nevertheless be taxable to the shareholder as ordinary income
or capital gain as described above, even though, from an investment  standpoint,
it may constitute a partial return of capital.  In particular,  investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares  purchased at that time  includes the amount of the  forthcoming
distribution.  Those purchasing just prior to a distribution will then receive a
partial  return of capital upon the  distribution,  which will  nevertheless  be
taxable to them.

         If the Balanced, Growth and Income, Capital Growth, Global Discovery or
International   Portfolios  invest  in  stock  of  certain  foreign   investment
companies,  the Portfolios may be subject to U.S.  federal income  taxation on a
portion  of any  "excess  distribution"  with  respect  to,  or  gain  from  the


                                       53
<PAGE>

disposition  of, such stock.  The tax would be  determined  by  allocating  such
distribution or gain ratably to each day of a Portfolio's holding period for the
stock. The distribution or gain so allocated to any taxable year of a Portfolio,
other than the taxable year of the excess distribution or disposition,  would be
taxed to a  Portfolio  at the  highest  ordinary  income rate in effect for such
year,  and the tax would be further  increased by an interest  charge to reflect
the value of the tax deferral  deemed to have resulted from the ownership of the
foreign  company's  stock.  Any amount of  distribution or gain allocated to the
taxable  year  of  the  distribution  or  disposition  would  be  included  in a
Portfolio's  investment  company taxable income and,  accordingly,  would not be
taxable to a Portfolio to the extent distributed by a Portfolio as a dividend to
its shareholders.

         Proposed  regulations  have been issued  which may allow the  Balanced,
Growth and  Income,  Capital  Growth  and  International  Portfolios  to make an
election to mark to market their shares of these foreign investment companies in
lieu of  being  subject  to U.S.  federal  income  taxation.  At the end of each
taxable  year to which the  election  applies,  the  Balanced,  Capital  Growth,
International  and Growth and Income  Portfolios would report as ordinary income
the amount by which the fair market value of the foreign company's stock exceeds
the Balanced,  Capital Growth,  International and Growth and Income  Portfolios'
adjusted  basis in these shares.  No mark to market losses would be  recognized.
The effect of the election  would be to treat excess  distributions  and gain on
dispositions  as ordinary  income  which is not subject to a fund level tax when
distributed to  shareholders  as a dividend.  Alternatively,  the Portfolios may
elect to include as income and gain their share of the ordinary earnings and net
capital gain of certain foreign  investment  companies in lieu of being taxed in
the manner described above.

         Equity options  (including options on stock and options on narrow-based
stock  indexes)  and  over-the-counter  options  on debt  securities  written or
purchased by a Portfolio  will be subject to tax under Section 1234 of the Code.
In general,  no loss is recognized  by a Portfolio  upon payment of a premium in
connection with the purchase of a put or call option.  The character of any gain
or loss recognized (i.e.,  long-term or short-term) will generally depend in the
case of a lapse or sale of the option on the Portfolio's  holding period for the
option and in the case of an exercise of a put option on the Portfolio's holding
period for the underlying security.  The purchase of a put option may constitute
a short sale for  federal  income tax  purposes,  causing an  adjustment  in the
holding period of the underlying security or a substantially  identical security
of the  Portfolio.  If the  Portfolio  writes a put or call  option,  no gain is
recognized upon its receipt of a premium. If the option lapses or is closed out,
any gain or loss is  treated as a  short-term  capital  gain or loss.  If a call
option  written by a Portfolio is  exercised,  the character of the gain or loss
depends on the holding period of the underlying security.  The exercise of a put
option written by a Portfolio is not a taxable transaction for the Portfolio.

         Many futures  contracts,  certain foreign  currency  forward  contracts
entered  into by a  Portfolio  and  all  listed  nonequity  options  written  or
purchased by the Portfolio  (including  options on debt  securities,  options on
futures  contracts,  options on  securities  indexes and options on  broad-based
stock  indexes)  will be  governed  by  Section  1256 of the Code.  Absent a tax
election to the contrary,  gain or loss  attributable to the lapse,  exercise or
closing out of any such position  generally will be treated as 60% long-term and
40%  short-term  capital gain or loss, and on the last trading day of the fiscal
year,  all  outstanding  Section 1256  positions  will be marked to market (i.e.
treated as if such  positions  were  closed out at their  closing  price on such
day),  with any  resulting  gain or loss  recognized  as 60%  long-term  and 40%
short-term capital gain or loss. Under Section 988 of the Code, discussed below,
foreign currency gain or loss from foreign  currency-related  forward contracts,
certain futures and options and similar  financial  instruments  entered into or
acquired  by a  Portfolio  will be treated as  ordinary  income.  Under  certain
circumstances, entry into a futures contract to sell a security may constitute a
short sale for federal income tax purposes, causing an adjustment in the holding
period of the underlying security or a substantially identical security owned by
the Portfolio.

         Subchapter M of the Code requires that each Portfolio realize less than
30% of its annual  gross  income  from the sale or other  disposition  of stock,
securities and certain options, futures and forward contracts held for less than
three months. Certain options, futures and forward activities of a Portfolio may
increase the amount of gains realized by a Portfolio that are subject to the 30%
limitation.  Accordingly,  the amount of such  transactions that a Portfolio may
undertake may be limited.

         Positions  of a  Portfolio  which  consist of at least one stock and at
least one stock  option or other  position  with  respect to a related  security
which substantially diminishes the Portfolio's risk of loss with respect to such
stock could be treated as a "straddle"  which is governed by Section 1092 of the
Code,  the operation of which may cause  deferral of losses,  adjustments in the


                                       54
<PAGE>

holding  periods of stock or securities  and  conversion  of short-term  capital
losses into  long-term  capital  losses.  An exception to these  straddle  rules
exists for any "qualified covered call options" on stock written by a Portfolio.

         Positions  of a Portfolio  which  consist of at least one  position not
governed by Section  1256 and at least one futures  contract,  foreign  currency
forward   contract  or   nonequity   option   governed  by  Section  1256  which
substantially diminishes the Portfolio's risk of loss with respect to such other
position will be treated as a "mixed  straddle."  Although  mixed  straddles are
subject to the straddle rules of Section 1092 of the Code, certain tax elections
exist for them which reduce or  eliminate  the  operation  of these rules.  Each
Portfolio  will  monitor  its  transactions  in options and futures and may make
certain tax elections in connection with these investments.

         Under  the  Code,  gains or  losses  attributable  to  fluctuations  in
exchange rates which occur between the time a Portfolio  accrues  receivables or
liabilities  denominated  in a  foreign  currency  and the  time  the  Portfolio
actually  collects  such  receivables  or pays such  liabilities  generally  are
treated as ordinary income or ordinary loss.  Similarly,  on disposition of debt
securities  denominated  in a foreign  currency  and on  disposition  of certain
futures contracts,  forward contracts and options,  gains or losses attributable
to fluctuations in the value of foreign currency between the date of acquisition
of the  security or contract  and the date of  disposition  are also  treated as
ordinary  gain or loss.  These  gains or losses,  referred  to under the Code as
"Section  988"  gains or  losses,  may  increase  or  decrease  the  amount of a
Portfolio's   investment  company  taxable  income  to  be  distributed  to  its
shareholders as ordinary income.

         If a Portfolio holds zero coupon  securities or other  securities which
are issued at a discount, a portion of the difference between the issue price of
zero coupon  securities and the face value  ("original  issue discount") will be
treated as 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 investment company taxable
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 Portfolio  level.  Shareholders  will be
subject to income tax on such original issue discount, whether or not they elect
to  receive  their  distributions  in  cash.  If a  Portfolio  acquires  a  debt
instrument at a market discount,  a portion of the gain  recognized,  if any, on
disposition of such instrument may be treated as ordinary income.

         Dividend and interest  income  received by the Portfolios  from sources
outside the U.S. may be subject to  withholding  and other taxes imposed by such
foreign  jurisdictions.  Tax conventions  between certain countries and the U.S.
may reduce or eliminate  these foreign  taxes,  however,  and foreign  countries
generally do not impose taxes on capital gains respecting investments by foreign
investors.

         Each  Portfolio  will be  required  to report to the  Internal  Revenue
Service all distributions of investment company taxable income and capital gains
as well as gross proceeds from the  redemption or exchange of shares,  except in
the case of certain exempt shareholders,  which include most corporations. Under
the backup withholding provisions of Section 3406 of the Code,  distributions of
taxable income and capital gains and proceeds from the redemption or exchange of
the shares of a regulated  investment  company may be subject to  withholding of
federal income tax at the rate of 31% in the case of non-exempt shareholders who
fail to  furnish  the  investment  company  with their  taxpayer  identification
numbers  and with  required  certifications  regarding  their  status  under the
federal  income tax law.  Withholding  may also be required  if a  Portfolio  is
notified  by  the  IRS or a  broker  that  the  taxpayer  identification  number
furnished by the shareholder is incorrect or that the shareholder has previously
failed to report interest or dividend income.  Participating Insurance Companies
that are corporations should furnish their taxpayer  identification  numbers and
certify  their  status  as  corporations  in order to avoid  possible  erroneous
application of backup withholding.

         Shareholders  of the Portfolios may be subject to state and local taxes
on  distributions  received from such  Portfolios  and on  redemptions  of their
shares.

         Each distribution is accompanied by a brief explanation of the form and
character of the distribution.

         The Fund is organized as a Massachusetts  business  trust,  and neither
the Fund nor the  Portfolios  are liable for any income or franchise  tax in the
Commonwealth of Massachusetts providing each Portfolio continues to qualify as a
regulated investment company under Subchapter M of the Code.

                                       55
<PAGE>

         The foregoing  discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. persons.  Each shareholder which is not a
U.S. person should  consider the U.S. and foreign tax  consequences of ownership
of shares of the Portfolio,  including the  possibility  that such a shareholder
may be  subject to a U.S.  withholding  tax at a rate of 30% (or at a lower rate
under an applicable income tax treaty) on amounts  constituting  ordinary income
received by it, where such amounts are treated as income from U.S. sources under
the Code.

         For further information  concerning federal income tax consequences for
the holders of the VA contracts and VLI policies,  shareholders  should  consult
the  prospectus  used in  connection  with  the  issuance  of  their  particular
contracts or policies.  Shareholders should consult their tax advisers about the
application  of the  provisions  of tax  law  described  in  this  statement  of
additional information in light of their particular tax situations.

                           DIVIDENDS AND DISTRIBUTIONS

    (See "TAX STATUS, DIVIDENDS AND DISTRIBUTIONS" in the Fund's prospectus.)

Money Market Portfolio

         The net investment  income of the Money Market  Portfolio is determined
as of the close of regular  trading on the  Exchange  (normally  4 p.m.  eastern
time) on each day on which the  Exchange  is open for  business.  All of the net
income so determined  normally will be declared as a dividend to shareholders of
record as of the close of regular  trading on such  Exchange  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 will be
invested in additional shares of the Portfolio at the net asset value per share,
normally  $1.00,  determined  as of the first  business day of each month unless
payment of the dividend in cash has been requested.

         Net  investment  income of the Money Market  Portfolio  consists of all
interest  income accrued on portfolio  assets less all expenses of the Portfolio
and amortized  market premium.  Accreted 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.

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

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


                                       56
<PAGE>

extent possible the disproportionate effect of such income, appreciation or gain
on the dividend received by existing  shareholders.  Such actions may reduce the
amount of the daily dividend received by existing shareholders.

Global Discovery Portfolio and International Portfolio

         The Global Discovery  Portfolio and  International  Portfolio will each
follow the practice of distributing  substantially all of its investment company
taxable income.  The Portfolios  intend to distribute the excess of net realized
long-term capital gains over net realized short-term capital losses.

         Distributions of investment  company taxable income and any net capital
gain will be made within  three months of the end of the Fund's  fiscal  taxable
year.  Both  distributions  will be  reinvested  in  additional  shares  of each
Portfolio unless a shareholder has elected to receive cash.

Other Portfolios

         Each of the Bond,  Capital  Growth,  Balanced  and  Growth  and  Income
Portfolios has followed the practice of declaring and distributing a dividend of
investment company taxable income, if any,  quarterly,  in January,  April, July
and October.  Each Portfolio has  distributed  its net capital gain within three
months  of the  end of  each  fiscal  year.  Both  dividends  and  capital  gain
distributions will be reinvested in additional shares of such a Portfolio unless
an election  is made on behalf of a separate  account to receive  dividends  and
capital gain distributions in cash.

                             PERFORMANCE INFORMATION

            (See "Performance Information" in the Fund's prospectus)

         From  time to time,  quotations  of a  Portfolio's  performance  may be
included in  advertisements,  sales  literature  or reports to  shareholders  or
prospective  investors.  These  performance  figures  may be  calculated  in the
following manner:

Money Market Portfolio

         A.       Yield is the net annualized  yield based on a specified  seven
                  calendar days calculated at simple  interest  rates.  Yield is
                  calculated by determining the net change, exclusive of capital
                  changes, in the value of a hypothetical  pre-existing  account
                  having a balance of one share at the  beginning  of the period
                  subtracting a hypothetical  charge reflecting  deductions from
                  shareholder  accounts and dividing the difference by the value
                  of the account at the  beginning  of the base period to obtain
                  the base period return. The yield is annualized by multiplying
                  the base period return by 365/7. The yield figure is stated to
                  the nearest  hundredth of one percent.  The yield of the Money
                  Market  Portfolio for the seven-day  period ended December 31,
                  1995, was 5.28%.

         B.       Effective  yield is the net  annualized  yield for a specified
                  seven calendar days assuming a  reinvestment  of the income or
                  compounding.  Effective yield is calculated by the same method
                  as yield  except the yield figure is  compounded  by adding 1,
                  raising  the sum to a power  equal  to 365  divided  by 7, and
                  subtracting  one from the result,  according to the  following
                  formula:

             Effective Yield = [(Base Period Return + 1)^365/7] - 1.

   
                  The net  annualized  yield of the  Portfolio for the seven-day
                  period ended December 31, 1996, was 5.04%.
    

         As described  above,  yield and effective yield are based on historical
earnings  and show the  performance  of a  hypothetical  investment  and are not
intended to indicate  future  performance.  Yield and effective  yield will vary
based on changes in market conditions and the level of expenses.

                                       57
<PAGE>

         In  connection  with  communicating  its  yield or  effective  yield to
current or prospective shareholders, the Money Market Portfolio also may compare
these  figures to the  performance  of other mutual funds tracked by mutual fund
rating services or to other unmanaged  indexes which may assume  reinvestment of
dividends  but  generally  do not  reflect  deductions  for  administrative  and
management costs.

         From time to time, in marketing pieces and other fund  literature,  the
Fund's yield and  performance  over time may be compared to the  performance  of
broad groups of comparable  mutual funds, bank money market deposit accounts and
fixed-rate  insured  certificates  of deposit  (CDs),  or  unmanaged  indexes of
securities  that are comparable to money market funds in their terms and intent,
such as Treasury bills,  bankers'  acceptances,  negotiable  order of withdrawal
accounts, and money market certificates.  Most bank CDs differ from money market
funds in several ways:  the interest rate is fixed for the term of the CD, there
are interest  penalties  for early  withdrawal  of the deposit,  and the deposit
principal is insured by the FDIC.

Bond Portfolio

         Yield is the net annualized  yield based on a specified  30-day (or one
         month) period  assuming a semiannual  compounding  of income.  Yield is
         calculated  by  dividing  the net  investment  income per share  earned
         during the period by the maximum  offering  price per share on the last
         day of the period, according to the following formula:

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

                      a    =    dividends and interest earned during the period.
                      b    =    expenses accrued  for  the  period  (net of
                                reimbursements).
                      c    =    the average  daily  number of shares outstanding
                                during the period that
                                were entitled to receive dividends.
                      d    =    the maximum offering price per share on the last
                                day of the period.

   
               Yield for the 30-day period ended December 31, 1996

                   As of December 31,  1996,  the Bond  Portfolio  had not begun
issuing Class B shares.
    

All Portfolios

         A.       Average  Annual  Total Return is the average  annual  compound
                  rate of return for the  periods of one year and five years (or
                  such  shorter  periods as may be  applicable  dating  from the
                  commencement of the  Portfolio's  operations) all ended on the
                  date of a recent calendar quarter.

                  Average annual total return quotations  reflect changes in the
                  price of a  Portfolio's  shares and assume that all  dividends
                  and capital gains distributions  during the respective periods
                  were  reinvested  in Portfolio  shares.  Average  annual total
                  return is  calculated by finding the average  annual  compound
                  rates  of  return  of  a  hypothetical  investment  over  such
                  periods,  according to the following  formula  (average annual
                  total return is then expressed as a percentage):

                               T = (ERV/P)^1/n - 1

         Where:

                            P         =      a hypothetical initial investment 
                                             of $1,000
                            T         =      Average Annual Total Return
                            n         =      number of years
                            ERV       =      ending redeemable value: ERV is the
                                             value, at the end of the applicable
                                             period,  of a  hypothetical  $1,000
                                             investment made at the beginning of
                                             the applicable period.


                                       58
<PAGE>


   
         Average Annual Total Return for periods ended December 31, 1996

                           One Year     Five Years    Ten Years     Life of Fund

 Money Market Portfolio       5.65%        4.20%         5.65% (1)       -- %
    

As of  December  31,  1996,  each of the  Portfolios  (except  the Money  Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.*

        B.        Cumulative  Total Return is the cumulative rate of return on a
                  hypothetical  initial  investment  of $1,000  for a  specified
                  period.  Cumulative total return quotations reflect changes in
                  the price of a Fund's shares and assume that all dividends and
                  capital gains distributions  during the period were reinvested
                  in Fund  shares.  Cumulative  total  return is  calculated  by
                  finding  the  cumulative  rates of  return  of a  hypothetical
                  investment  over  such  periods,  according  to the  following
                  formula  (cumulative  total  return  is  then  expressed  as a
                  percentage):

                                 C = (ERV/P) - 1
         Where:

                        C      =     Cumulative Total Return
                        P      =     a hypothetical initial investment of $1,000
                        ERV    =     ending redeemable value: ERV is the value, 
                                     at the end of the applicable period,  of a
                                     hypothetical  $1,000 investment made at the
                                     beginning of the applicable period.

   
           Cumulative Total Return for periods ended December 31, 1996

                             One Year    Five Years   Ten Years     Life of Fund

 Money Market Portfolio        5.65%       22.85%       73.27% (1)     -- %
    

As of  December  31,  1996,  each of the  Portfolios  (except  the Money  Market
Portfolio which does not offer separate classes of shares) had not begun issuing
Class B shares.*

         As described  above,  average  annual total  return,  cumulative  total
return  and yield are  based on  historical  earnings  and are not  intended  to
indicate  future  performance.  Average  annual total return,  cumulative  total
return and yield for a Portfolio will vary based on changes in market conditions
and the level of the Portfolio's expenses.

         In connection with  communicating  its total return or yield to current
or  prospective  shareholders,  the Fund also may  compare  these  figures for a
Portfolio to the performance of other mutual funds tracked by mutual fund rating
services  or to  other  unmanaged  indexes  which  may  assume  reinvestment  of
dividends  but  generally  do not  reflect  deductions  for  administrative  and
management costs.

         Quoted  yields on shares of the  Fund's  Portfolios  will be of limited
usefulness to policy and contract  holders for comparable  purposes because such
quoted yields will be more than yields on  participating  contracts and policies
due to charges imposed at the separate account level.

---------------------------------
*        On May 1, 1993,  the  Balanced  Portfolio  adopted its present name and
         investment  objective  which is a balance of growth  and income  from a
         diversified  portfolio of equity and fixed income securities.  Prior to
         that date, the Portfolio was known as the Managed Diversified Portfolio
         and its  investment  objective was to realize a high level of long-term
         total  rate  of  return   consistent  with  prudent   investment  risk.
         Performance  information  for the five  years and life of Fund  periods
         should not be considered representative of the present Portfolio.

                                       59
<PAGE>

   
Comparison of Portfolio Performance

         A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner. Since
there  are  different  methods  of  calculating  performance,  investors  should
consider the effects of the methods used to calculate performance when comparing
performance of a Fund with  performance  quoted with respect to other investment
companies or types of investments.

         In  connection  with   communicating  its  performance  to  current  or
prospective  shareholders,  a  Fund  also  may  compare  these  figures  to  the
performance of unmanaged  indices which may assume  reinvestment of dividends or
interest  but  generally  do  not  reflect  deductions  for  administrative  and
management  costs.  Examples  include,  but are  not  limited  to the Dow  Jones
Industrial  Average,  the Consumer Price Index,  Standard & Poor's 500 Composite
Stock  Price  Index  (S&P  500),  the NASDAQ  OTC  Composite  Index,  the NASDAQ
Industrials Index, the Russell 2000 Index, and statistics published by the Small
Business Administration.

         Because some or all each Fund's  investments are denominated in foreign
currencies,  the  strength  or  weakness  of the U.S.  dollar as  against  these
currencies may account for part the Fund's  investment  performance.  Historical
information  on the value of the dollar versus  foreign  currencies  may be used
from  time to time in  advertisements  concerning  the  Funds.  Such  historical
information  is not indicative of future  fluctuations  in the value of the U.S.
dollar  against  these  currencies.  In addition,  marketing  materials may cite
country and economic  statistics and historical stock market performance for any
of the  countries in which either Fund invests,  including,  but not limited to,
the following:  population  growth,  gross  domestic  product,  inflation  rate,
average stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various foreign
governments and exchanges.

         From time to time, in advertising  and marketing  literature,  a Fund's
performance  may be compared to the  performance of broad groups of mutual funds
with similar investment goals, as tracked by independent  organizations such as,
Investment  Company  Data,  Inc.  ("ICD"),   Lipper  Analytical  Services,  Inc.
("Lipper"), CDA Investment Technologies,  Inc. ("CDA"), Morningstar, Inc., Value
Line  Mutual  Fund  Survey  and  other  independent  organizations.  When  these
organizations'  tracking  results  are  used,  a Fund  will be  compared  to the
appropriate fund category, that is, by fund objective and portfolio holdings, or
to the  appropriate  volatility  grouping,  where  volatility  is a measure of a
fund's risk.  For instance,  a Scudder  growth fund will be compared to funds in
the growth fund category; a Scudder income fund will be compared to funds in the
income fund  category;  and so on. Scudder funds (except for money market funds)
may also be compared to funds with similar volatility, as measured statistically
by independent  organizations.  In addition,  a Fund's  performance  may also be
compared  to the  performance  of  broad  groups  of  comparable  mutual  funds.
Unmanaged indices with which a Fund's  performance may be compared include,  but
are not limited to, the following:

                  The Europe/Australia/Far East (EAFE) Index
                  International Finance Corporation's Latin America Investable 
                    Total Return Index
                  Morgan Stanley Capital International World Index
                  J.P. Morgan Global Traded Bond Index
                  Salomon Brothers World Government Bond Index
                  NASDAQ Composite Index
                  Wilshire 5000 Stock Index

         From  time  to  time,   in   marketing   and  other  Fund   literature,
(Trustees)(Directors)  and officers of the Funds, the Funds' portfolio  manager,
or members of the portfolio  management  team may be depicted and quoted to give
prospective and current  shareholders a better sense of the outlook and approach
of those who manage  the  Funds.  In  addition,  the  amount of assets  that the
Adviser  has under  management  in various  geographical  areas may be quoted in
advertising and marketing materials.

         The Funds  may be  advertised  as an  investment  choice  in  Scudder's
college planning program. The description may contain illustrations of projected
future  college  costs  based on assumed  rates of  inflation  and  examples  of
hypothetical fund performance, calculated as described above.
    

                                       60
<PAGE>

   
         Statistical and other  information,  as provided by the Social Security
Administration,  may be used in marketing  materials  pertaining  to  retirement
planning  in order to  estimate  future  payouts  of social  security  benefits.
Estimates may be used on demographic and economic data.

         Marketing and other Fund  literature  may include a description  of the
potential  risks and rewards  associated  with an investment  in the Funds.  The
description  may include a  "risk/return  spectrum"  which compares the Funds to
other Scudder funds or broad categories of funds, such as money market,  bond or
equity funds,  in terms of potential  risks and returns.  Money market funds are
designed to maintain a constant $1.00 share price and have a fluctuating  yield.
Share  price,  yield and total return of a bond fund will  fluctuate.  The share
price and return of an equity fund also will fluctuate. The description may also
compare the Funds to bank  products,  such as  certificates  of deposit.  Unlike
mutual  funds,  certificates  of deposit  are insured up to $100,000 by the U.S.
government and offer a fixed rate of return.

         Because bank products  guarantee  the principal  value of an investment
and money  market funds seek  stability  of  principal,  these  investments  are
considered  to be less risky than  investments  in either bond or equity  funds,
which may involve the loss of principal.  However,  all  long-term  investments,
including investments in bank products,  may be subject to inflation risk, which
is the risk of erosion of the value of an investment  as prices  increase over a
long time period.  The  risks/returns  associated  with an investment in bond or
equity funds depend upon many factors. For bond funds these factors include, but
are not limited to, a fund's overall investment objective, the average portfolio
maturity,  credit quality of the securities  held, and interest rate  movements.
For equity funds,  factors include a fund's overall  investment  objective,  the
types of equity securities held and the financial position of the issuers of the
securities.  The  risks/returns  associated with an investment in  international
bond or equity funds also will depend upon currency exchange rate fluctuation.

         A risk/return  spectrum  generally will position the various investment
categories in the following order: bank products, money market funds, bond funds
and equity funds.  Shorter-term  bond funds  generally are considered less risky
and offer the potential for less return than longer-term bond funds. The same is
true of domestic bond funds relative to international bond funds, and bond funds
that purchase  higher  quality  securities  relative to bond funds that purchase
lower  quality  securities.   Growth  and  income  equity  funds  are  generally
considered  to be less risky and offer the potential for less return than growth
funds. In addition, international equity funds usually are considered more risky
than domestic equity funds but generally offer the potential for greater return.

         Risk/return  spectrums  also  may  depict  funds  that  invest  in both
domestic and foreign securities or a combination of bond and equity securities.
    

         Evaluation  of  Fund   performance   or  other   relevant   statistical
information  made by  independent  sources  may  also be used in  advertisements
concerning the Funds,  including reprints of, or selections from,  editorials or
articles  about  these  Funds.  Sources  for Fund  performance  information  and
articles about the Funds include the following:

American Association of Individual  Investors' Journal, a monthly publication of
the AAII that includes articles on investment analysis techniques.

Asian Wall Street  Journal,  a weekly Asian  newspaper  that often  reviews U.S.
mutual funds investing internationally.

Banxquote,  an on-line source of national  averages for leading money market and
bank CD interest  rates,  published  on a weekly  basis by  Masterfund,  Inc. of
Wilmington, Delaware.

Barron's,  a Dow Jones and  Company,  Inc.  business and  financial  weekly that
periodically reviews mutual fund performance data.

Business  Week,  a  national  business  weekly  that  periodically  reports  the
performance rankings and ratings of a variety of mutual funds investing abroad.

                                       61
<PAGE>

CDA Investment  Technologies,  Inc., an organization which provides  performance
and ranking  information  through  examining the dollar results of  hypothetical
mutual fund investments and comparing these results against  appropriate  market
indices.

Consumer  Digest, a monthly  business/financial  magazine that includes a "Money
Watch" section featuring financial news.

Financial Times,  Europe's business newspaper,  which features from time to time
articles on international or country-specific funds.

Financial World, a general  business/financial  magazine that includes a "Market
Watch" department reporting on activities in the mutual fund industry.

Forbes,  a national  business  publication  that from time to time  reports  the
performance of specific investment companies in the mutual fund industry.

Fortune, a national business publication that periodically rates the performance
of a variety of mutual funds.

The  Frank  Russell  Company,  a  West-Coast  investment  management  firm  that
periodically  evaluates  international stock markets and compares foreign equity
market performance to U.S. stock market performance.

Global  Investor,   a  European   publication  that  periodically   reviews  the
performance of U.S. mutual funds investing internationally.

IBC Money  Fund  Report,  a weekly  publication  of IBC  Financial  Data,  Inc.,
reporting on the  performance  of the nation's  money market funds,  summarizing
money  market fund  activity  and  including  certain  averages  as  performance
benchmarks, specifically "IBC's Money Fund Average," and "IBC's Government Money
Fund Average."

Ibbotson  Associates,  Inc., a company  specializing in investment  research and
data.

Investment  Company  Data,  Inc., an  independent  organization  which  provides
performance ranking information for broad classes of mutual funds.

Investor's Business Daily, a daily newspaper that features financial,  economic,
and business news.

Kiplinger's Personal Finance Magazine, a monthly investment advisory publication
that periodically features the performance of a variety of securities.

Lipper Analytical  Services,  Inc.'s Mutual Fund Performance  Analysis, a weekly
publication of industry-wide mutual fund averages by type of fund.

Money,  a monthly  magazine that from time to time features both specific  funds
and the mutual fund industry as a whole.

Morgan  Stanley  International,  an  integrated  investment  banking  firm  that
compiles statistical information.

Mutual Fund Values,  a biweekly  Morningstar,  Inc.  publication  that  provides
ratings  of  mutual  funds  based  on  fund  performance,   risk  and  portfolio
characteristics.

The New York Times, a nationally  distributed  newspaper which regularly  covers
financial news.

The No-Load Fund Investor,  a monthly  newsletter,  published by Sheldon Jacobs,
that includes mutual fund  performance data and  recommendations  for the mutual
fund investor.

                                       62
<PAGE>

No-Load Fund*X, a monthly newsletter, published by DAL Investment Company, Inc.,
that reports on mutual fund  performance,  rates funds and discusses  investment
strategies for the mutual fund investor.

Personal  Investing  News,  a monthly  news  publication  that often  reports on
investment opportunities and market conditions.

Personal  Investor,  a monthly investment  advisory  publication that includes a
"Mutual Funds Outlook" section  reporting on mutual fund  performance  measures,
yields, indices and portfolio holdings.

Smart Money, a national personal finance magazine published monthly by Dow Jones
and  Company,  Inc.  and The  Hearst  Corporation.  Focus is placed on ideas for
investing, spending and saving.

Success,  a monthly magazine  targeted to the world of entrepreneurs and growing
business, often featuring mutual fund performance data.

United Mutual Fund Selector, a semi-monthly investment newsletter,  published by
Babson United  Investment  Advisors,  that includes mutual fund performance data
and reviews of mutual fund portfolios and investment strategies.

USA Today, a leading national daily newspaper.

U.S. News and World Report,  a national  news weekly that  periodically  reports
mutual fund performance data.

Value Line  Mutual  Fund  Survey,  an  independent  organization  that  provides
biweekly performance and other information on mutual funds.

The Wall Street Journal, a Dow Jones and Company, Inc. newspaper which regularly
covers financial news.

Wiesenberger  Investment Companies Services, an annual compendium of information
about mutual funds and other investment companies, including comparative data on
funds' backgrounds,  management policies, salient features,  management results,
income and dividend records and price ranges.

Working  Woman,  a monthly  publication  that  features a  "Financial  Workshop"
section reporting on the mutual fund/financial industry.

Worth, a national  publication  put out 10 times per year by Capital  Publishing
Company,  a  subsidiary  of  Fidelity  Investments.  Focus is placed on personal
financial journalism.

   
Taking a Global Approach

         Many U.S.  investors  limit their holdings to U.S.  securities  because
they assume that international or global investing is too risky. While there are
risks  connected  with  investing  overseas,  it's important to remember that no
investment  -- even in blue-chip  domestic  securities -- is entirely risk free.
Looking  outside U.S.  borders,  an investor today can find  opportunities  that
mirror  domestic  investments  -- everything  from large,  stable  multinational
companies to start-ups in emerging markets.  To determine the level of risk with
which you are comfortable,  and the potential for reward you're seeking over the
long term,  you need to review the type of investment,  the world  markets,  and
your time horizon.

         The U.S.  is unusual in that it has a very broad  economy  that is well
represented in the stock market.  However,  many countries  around the world are
not only  undergoing a revolution in how their  economies  operate,  but also in
terms of the role their stock  markets  play in financing  activities.  There is
vibrant  change  throughout  the  global  economy  and  all of  this  represents
potential investment opportunity.

         Investing  beyond the United States can open this world of opportunity,
due partly to the dramatic shift in the balance of world  markets.  In 1970, the
United States alone  accounted for  two-thirds of the value of the world's stock
markets.  Now,  the  situation  is reversed -- only 35% of global  stock  market
capitalization  resides  here.  There are  companies in Southeast  Asia that are
    


                                       63
<PAGE>

   
starting to dominate regional  activity;  there are companies in Europe that are
expanding  outside of their  traditional  markets and taking advantage of faster
growth in Asia and  Latin  America;  other  companies  throughout  the world are
getting out from under state  control and  restructuring;  developing  countries
continue to open their doors to foreign investment.

         Stocks in many foreign markets can be attractively  priced.  The global
stock markets do not move in lock step.  When the valuations in one market rise,
there are other markets that are less expensive. There is also volatility within
markets in that some sectors may be more expensive while others are depressed in
valuation.  A wider set of  opportunities  can help make it possible to find the
best values available.

         International or global investing  offers  diversification  because the
investment is not limited to a single country or economy.  In fact, many experts
agree that investment strategies that include both U.S. and non-U.S.
investments strike the best balance between risk and reward.

Scudder's 30% Solution

         The 30 Percent Solution -- A Global Guide for Investors  Seeking Better
Performance  With Reduced  Portfolio Risk is a booklet,  created by Scudder,  to
convey its vision  about the new global  investment  dynamic.  This dynamic is a
result of the  profound  and  ongoing  changes  in the  global  economy  and the
financial  markets.   The  booklet  explains  how  Scudder  believes  an  equity
investment  portfolio  with  up to  30% in  international  holdings  and  70% in
domestic holdings can improve long-term performance while simultaneously helping
to reduce overall risk.
    

                           SHAREHOLDER COMMUNICATIONS

         Owners of policies  and  contracts  issued by  Participating  Insurance
Companies for which shares of one or more Portfolios are the investment  vehicle
will receive from the Participating  Insurance Companies  unaudited  semi-annual
financial  statements and audited year-end financial statements certified by the
Fund's  independent  public  accountants.  Each report will show the investments
owned by the Fund and the market  values  thereof as  determined by the Trustees
and will provide other information about the Fund and its operations.

         Participating Insurance Companies with inquiries regarding the Fund may
call the Fund's underwriter, Scudder Investor Services, Inc., at 617-295-1000 or
write  Scudder  Investor  Services,   Inc.,  Two  International  Place,  Boston,
Massachusetts 02110-4103.

                         ORGANIZATION AND CAPITALIZATION

                   (See "ADDITIONAL INFORMATION - Shareholder
                   Indemnification" in the Fund's prospectus.)
   
General

         The Fund is an open-end  investment company  established under the laws
of The  Commonwealth  of  Massachusetts  by Declaration of Trust dated March 15,
1985.

         As of December 31, 1996,  AEtna Life Insurance and Annuity Company (151
Farmington Avenue TS41,  Hartford,  CT 06156),  owned of record and beneficially
46.9% of the  International  Portfolio;  they owned of record  and  beneficially
7.75% of the Fund's total outstanding  shares; and Banner Life Insurance Company
of Rockville,  MD (1701 Research Blvd., Rockville, MD 20850) owned of record and
beneficially  1.3% of the Money Market  Portfolio,  2.0% of the Bond  Portfolio,
7.1% of the Balanced Portfolio, 0.7% of the International Portfolio, 5.0% of the
Growth and Income Portfolio, 4.4% of the Global Discovery Portfolio and 21.0% of
the Capital Growth Portfolio;  they owned of record and beneficially 2.3% of the
Fund's total  outstanding  shares;  and Charter National Life Insurance  Company
(8301 Maryland  Avenue,  St. Louis,  MO 63105, a Missouri  corporation)  and its
subsidiary, Intramerica Life Insurance Company (1 Blue Hills Plaza, Pearl River,
NY 10965), owned of record and beneficially 56.1% of the Money Market Portfolio,
33.9%  of the Bond  Portfolio,  62.3% of the  Balanced  Portfolio,  25.8% of the
Capital Growth Portfolio, 88.0% of the Growth and Income Portfolio, 95.6% of the
Global Discovery Portfolio and 13.1% of the International Portfolio;  they owned
of record and  beneficially  53.1% of the Fund's total  outstanding  shares.  In
1991, Charter National Life Insurance Company purchased the Colonial Penn Group,
    


                                       64
<PAGE>

   
Inc., which indirectly owns  Intramerica,  a New York domestic life insurer.  On
November 1, 1992,  First Charter Life Insurance  Company  ("First  Charter"),  a
subsidiary of Charter National Life Insurance Company,  was merged with and into
Intramerica.  As the company  surviving the merger,  Intramerica  acquired legal
ownership of all of First Charter's assets,  including the Variable Account, and
became responsible for all of First Charter's liabilities and obligations.  As a
result of the merger,  all Contracts  issued by First Charter  before the merger
became  Contracts  issued by  Intramerica  after  the  merger.  Fortis  Benefits
Insurance  Company (Norwest Bank, Sixth and  Marquette-MS0063,  Minneapolis,  MN
55479) owned of record and  beneficially  0.4% of the  International  Portfolio;
they owned of record and  beneficially  0.05% of the  Fund's  total  outstanding
shares; and Lincoln Benefit Life Insurance Company (206 South 13th Street,  Ste.
300,  Lincoln,  NE 68508)  owned of  record  and  beneficially  4.1% of the Bond
Portfolio  and  6.8%  of the  Balanced  Portfolio;  they  owned  of  record  and
beneficially 0.96% of the Fund's total outstanding shares; and Mutual of America
Life Insurance  Company of New York (320 Park Ave., 6th Fl., New York, NY 10022,
a New York corporation) and its subsidiary, American Life Insurance Company (666
5th Avenue,  New York, NY 10103),  owned of record and beneficially 40.3% of the
Bond  Portfolio,  55.9%  of  the  Capital  Growth  Portfolio  and  23.5%  of the
International  Portfolio;  they owned of record and  beneficially  23.73% of the
Fund's total outstanding  shares;  and Paragon Life Insurance Company (100 South
Brentwood,  St. Louis,  MO 63105) owned of record and  beneficially  0.2% of the
Bond  Portfolio,  0.2% of the Capital  Growth  Portfolio,  0.4% of the  Balanced
Portfolio,   0.1%  of  the  Growth  and  Income  Portfolio,   and  0.1%  of  the
International  Portfolio;  they  owned of record and  beneficially  0.11% of the
Fund's total outstanding shares; and Providentmutual Life and Annuity Company of
America, (1050 Westlakes Dr., Berwyn, PA 19312) owned of record and beneficially
9.3% of the Bond Portfolio, 5.6% of the Growth and Income Portfolio, and 0.8% of
the International Portfolio;  they owned of record and beneficially 1.08% of the
Fund's total outstanding shares; and Safeco Life Insurance Companies (15411 N.E.
51st Street,  Redmond, WA 98052),  owned of record and beneficially 23.4% of the
Balanced Portfolio and 3.7% of the International Portfolio; they owned of record
and beneficially 2.1% of the Fund's total outstanding shares; and Security First
Life Insurance  Company (11365 West Olympic Blvd., Los Angeles,  CA 90064) owned
of record and beneficially 0.3% of the International Portfolio; and Southwestern
Life Insurance  Company (500 North Akard,  Dallas, TX 75201) owned of record and
beneficially  1.5% of the Capital Growth  Portfolio;  and The Union Central Life
Insurance Company (1876 Waycross Road, Cincinnati, OH 45240) owned of record and
beneficially  39.7% of the Money Market  Portfolio,  6.2% of the Capital  Growth
Portfolio  and 8.2% of the  International  Portfolio;  they  owned of record and
beneficially 8.31% of the Fund's total outstanding  shares; and United Companies
Life Insurance Company (8545 United Plaza Blvd., Baton Rouge, LA 70809) owned of
record  and  beneficially  2.4% of the Money  Market  Portfolio  and 0.2% of the
International  Portfolio;  and United of Omaha Life Insurance Company (Mutual of
Omaha Plaza, Law Division,  3301 Dodge Street,  Omaha, NE 68131) owned of record
and beneficially 0.3% of the Money Market Portfolio, 0.6% of the Bond Portfolio,
and 2.1% of the International  Portfolio;  they owned of record and beneficially
0.16% of the Fund's total  outstanding  shares and USAA Life  Insurance  Company
(R.A.F.A.,  F-2-E,  9800  Fredericksburg  Rd., San  Antonio,  TX 78288) owned of
record and  beneficially  2.3% of the Capital Growth  Portfolio;  and Washington
National Life Insurance Company (c/o United Presidential Life Insurance Co., One
Presidential  Pkwy.,  Kokomo, IN 46904) owned of record and beneficially 0.5% of
the Money Market Portfolio,  9.3% of the Bond Portfolio,  1.3% of the Growth and
Income Portfolio and 6.0% of the Capital Growth Portfolio.

         Shares entitle their holders to one vote per share;  however,  separate
votes  will be  taken by each  Portfolio  on  matters  affecting  an  individual
Portfolio.  For  example,  a change in  investment  policy for the Money  Market
Portfolio  would  be  voted  upon  only  by  shareholders  of the  Money  Market
Portfolio. Additionally,  approval of the investment advisory agreement covering
a Portfolio 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,  which means that holders of more than 50% of
the shares  voting for the election of Trustees  can elect all Trustees  and, in
such  event,  the holders of the  remaining  shares  voting for the  election of
Trustees  will not be able to elect any person or persons  as  Trustees.  Shares
have no preemptive or subscription rights, and are transferable.

         Shareholders  have certain  rights,  as set forth in the Declaration of
Trust of the Fund, including the right to call a meeting of shareholders for the
purpose of voting on the removal of one or more  Trustees.  Such  removal can be
effected upon the action of two-thirds of the  outstanding  shares of beneficial
interest of the Fund.
    

                                       65
<PAGE>

Shareholder and Trustee Liability

         The Fund is an entity of the type  commonly  known as a  "Massachusetts
business  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 for acts or obligations of the Fund. Notice
of such  disclaimer  will normally be given in each  agreement,  obligation,  or
instrument entered into or executed by the Fund or the Trustees. The Declaration
of  Trust  provides  for  indemnification  out  of  the  Fund  property  of  any
shareholder  held  personally  liable  for  the  obligations  of the  Fund.  The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any  shareholder  for any act or obligation of
the Fund and satisfy  any  judgment  thereon.  Thus,  the risk of a  shareholder
incurring  financial  loss on account  of  shareholder  liability  is limited to
circumstances  in which the Fund itself would be unable to meet its obligations.
The Trustees believe that, in view of the above, the risk of personal  liability
of shareholders is remote.

         The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment  or  mistakes  of fact or law,  but nothing in the
Declaration of Trust protects a Trustee  against any liability to which he would
otherwise  be  subject  by reason  of  willful  misfeasance,  bad  faith,  gross
negligence,  or reckless  disregard of the duties involved in the conduct of his
office.

                        ALLOCATION OF PORTFOLIO BROKERAGE

         To the maximum extent feasible, the Adviser places orders for portfolio
transactions through its affiliate, the Distributor, which in turn places orders
on  behalf  of the Fund  with the  issuer,  underwriters  or other  brokers  and
dealers. The Distributor will receive no commissions, fees or other remuneration
for this service. Allocation of brokerage is supervised by the Adviser.

         The Fund's  purchases  and sales of portfolio  securities  of the Money
Market Portfolio and the Bond Portfolio and of debt securities  acquired for the
other Portfolios, are generally placed by the Adviser with primary market makers
for these securities on a net basis, without any brokerage commission being paid
by the Fund. Trading does, however, involve transaction costs. Transactions with
dealers  serving as primary market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues may be made which will include an
underwriting  fee paid to the  underwriter.  Transactions  in equity  securities
generally involve the payment of a brokerage commission.

         The primary objective of the Adviser in placing orders for the purchase
and sale of  securities  for any  Portfolio is to obtain the most  favorable net
results taking into account such factors as price, commission (negotiable in the
case of U.S. stock  exchange  transactions  but which is generally  fixed in the
case of foreign  exchange  transactions),  if any, size of order,  difficulty of
execution  and skill  required of the  executing  broker/dealer.  Subject to the
foregoing,  the Adviser may consider sales of variable life  insurance  policies
and variable annuity  contracts for which the Fund is an investment  option as a
factor in the selection of firms to execute portfolio transactions.  The Adviser
seeks to evaluate  the overall  reasonableness  of  brokerage  commissions  paid
through  the  familiarity  of  the  Distributor  with  commissions   charged  on
comparable transactions, as well as by comparing commissions paid by the Fund to
reported  commissions  paid by others.  The Adviser  reviews on a routine  basis
commission rates,  execution and settlement services performed,  making internal
and external comparisons.

         When it can be done  consistently with the policy of obtaining the most
favorable net results,  it is the  Adviser's  practice to place such orders with
brokers and dealers who supply research,  market and statistical  information to
the Adviser. The term "research,  market and statistical  information"  includes
advice  as to the  value  of  securities,  the  advisability  of  investing  in,
purchasing  or  selling  securities;  and  the  availability  of  securities  or
purchasers  or  sellers of  securities;  and  furnishing  analyses  and  reports
concerning  issuers,  industries,   securities,  economic  factors  and  trends,
portfolio  strategy and the  performance of accounts.  The Adviser is authorized
when placing portfolio  transactions for the Fund to pay a brokerage  commission
(to the extent  applicable)  in excess of that which  another  broker might have
charged for effecting the same  transaction  solely on account of the receipt of
research,  market or  statistical  information.  Subject to the  foregoing,  the
Adviser may  consider  sales of variable  life  insurance  policies and variable
annuity contracts for which the Fund is an investment option, as a factor in the
selection of firms to execute  portfolio  transactions.  Except for implementing
the policy stated above,  there is no intention to place portfolio  transactions
with  any  particular  brokers  or  dealers  or  groups  thereof.  In  effecting
transactions  in  over-the-counter  securities,   orders  are  placed  with  the


                                       66
<PAGE>

principal  market-makers  for the securities being traded unless, in the opinion
of the Adviser,  after exercising  care, it appears that more favorable  results
are available otherwise.

         Although  certain  research,  market and statistical  information  from
brokers and dealers is useful to the Fund and the Adviser,  it is the opinion of
the Adviser that such  information  is only  supplementary  to the Adviser's own
research  effort,  since the information  must still be analyzed,  weighed,  and
reviewed by the Adviser's  staff.  Such information may be useful to the Adviser
in  providing  services  to  clients  other  than  the  Fund  and not  all  such
information is used by the Adviser in connection with the Fund. Conversely, such
information  provided to the Adviser by brokers and dealers  through  whom other
clients  of the  Adviser  effect  securities  transactions  may be useful to the
Adviser in providing services to the Fund.

   
         In the years ended  December  31,  1994,  1995 and 1996,  the Fund paid
brokerage commissions of $2,006,264,  $2,669,610, and $2,106,414,  respectively.
In the  years  ended  December  31,  1994,  1995,  and 1996,  the  International
Portfolio paid brokerage commissions of $1,471,275,  $1,813,248, and $1,403,778,
respectively,  the  Capital  Growth  Portfolio  paid  brokerage  commissions  of
$420,391,  $788,596, and $505,817,  respectively and the Balanced Portfolio paid
brokerage commissions of $79,629, $67,758, and $67,828, respectively. The Growth
and Income  Portfolio  paid  brokerage  commissions  of  $34,967,  $54,235,  and
$78,517,  respectively.  In the year ended December 31, 1996,  $967,678 (69%) of
the total brokerage  commissions paid by the International  Portfolio,  $447,832
(89%) of the total brokerage  commissions paid by the Capital Growth  Portfolio,
$59,359 (76%) of the total brokerage  commissions  paid by the Growth and Income
Portfolio, $59,289 (87%) of the total brokerage commissions paid by the Balanced
Portfolio,  and $47,463  (94%) of the total  brokerage  commissions  paid by the
Global  Discovery  Portfolio  resulted from orders placed,  consistent  with the
policy of obtaining the most favorable net results, with brokers and dealers who
provided  supplementary  research  information to the Portfolios or the Adviser.
The amount of such  transactions  aggregated  $309,783,591 for the International
Portfolio  (66% of all  brokerage  transactions),  $373,506,365  for the Capital
Growth Portfolio (72% of all brokerage transactions), $38,460,391 for the Growth
and Income  Portfolio (57% of all brokerage  transactions),  $43,374,165 (40% of
all brokerage  transactions) for the Balanced  Portfolio and $19,601,728 (85% of
all brokerage  transactions) for the Global Discovery Portfolio.  The balance of
such brokerage was not allocated to any particular  broker or dealer with regard
to the above-mentioned or other special factors.
    

         The Trustees  will  periodically  review  whether the recapture for the
benefit of the Fund of some portion of the brokerage commissions or similar fees
paid by the Fund on portfolio transactions is legally permissible and advisable.
No recapture arrangements are currently in effect.

                                       67
<PAGE>

                               PORTFOLIO TURNOVER

   
         The average annual portfolio turnover rate for each Portfolio, i.e. 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),  for the years
ended December 31, 1994 and 1995, respectively, was:


                                                               December 31,
                                                           1995           1996

                   Bond Portfolio                         177.21%         85.11%
                   Balanced Portfolio                      87.98          67.56
                   Growth and Income Portfolio             24.33          32.18
                   Capital Growth Portfolio               119.41          65.56
                   Global Discovery Portfolio              --             50.31
                   International Portfolio                 45.76          32.63
    

         Under the above  definition,  the Money Market  Portfolio  will have no
portfolio turnover.  Purchases and sales, for these Portfolios, are made for the
Portfolio whenever necessary,  in management's  opinion, to meet the Portfolio's
objective.

                                     EXPERTS

         The Financial Highlights of the Fund included in the prospectus and the
Financial  Statements  incorporated by reference in this Statement of Additional
Information  have been  audited by  Coopers & Lybrand  L.L.P.,  One Post  Office
Square, Boston,  Massachusetts 02109, independent accountants,  and have been so
included or incorporated by reference in reliance upon the  accompanying  report
of said  firm,  which  report  is given  upon  their  authority  as  experts  in
accounting and auditing.

                                     COUNSEL

         The firm of Dechert Price & Rhoads, Ten Post Office Square, Suite 1230,
Boston, Massachusetts 02109, is counsel for the Fund.

                             ADDITIONAL INFORMATION

         The  activities of the Fund are  supervised  by its  Trustees,  who are
elected  by  shareholders.  Shareholders  have one vote  for  each  share  held.
Fractional shares have fractional votes.

         Portfolio securities of the Money Market,  Bond,  Balanced,  Growth and
Income,  and  Capital  Growth  Portfolios  are held  separately,  pursuant  to a
custodian  agreement,  by State  Street  Bank and Trust  Company,  225  Franklin
Street,  Boston,  Massachusetts  02110,  as custodian.  Portfolio  securities of
Global Discovery and International Portfolios are held separately, pursuant to a
custodian agreement,  by Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109, as custodian.

         Scudder Fund Accounting  Corporation ("SFAC"), Two International Place,
Boston,  Massachusetts  02110-4103,  a subsidiary  of the Adviser,  computes net
asset value for the Portfolios.  Money Market  Portfolio pays SFAC an annual fee
equal to 0.020% of the first $150 million of average  daily net assets,  0.0060%
of such assets in excess of $150 million and 0.0035% of such assets in excess of
$1  billion,  plus  holding  and  transaction  charges  for this  service.  Bond
Portfolio,  Balanced  Portfolio,  Growth and Income Portfolio and Capital Growth
Portfolio  each pay SFAC an annual fee equal to 0.025% of the first $150 million
of average  daily net assets,  0.0075% of such assets in excess of $150  million
and 0.0045% of such assets in excess of $1 billion, plus holding and transaction
charges for this service. Global Discovery and International Portfolios pay SFAC
an annual  fee equal to 0.065% of the first $150  million  of average  daily net
assets,  0.040% of such  assets in excess  of $150  million  and  0.020% of such
assets in excess of $1 billion,  plus holding and  transaction  charges for this


                                       68
<PAGE>

service.  SFAC  computes  net asset  value  for the Fund.  The Fund pays SFAC an
annual  fee equal to  0.065% of the first  $150  million  of  average  daily net
assets,  0.040% of such  assets in excess  of $150  million  and  0.020% of such
assets in excess of $1 billion,  plus holding and  transaction  charges for this
service.

         Scudder  Service  Corporation,  P.O. Box 2291,  Boston,  Massachusetts,
02107-2291, is the transfer and dividend paying agent for the Fund.

         The Fund has a December 31 fiscal year end.

         The name "Scudder  Variable Life Investment Fund" is the designation of
the  Trustees  for the time being under a  Declaration  of Trust dated March 15,
1985, as amended from time to time,  and all persons  dealing with the Fund must
look  solely  to the  property  of the Fund for the  enforcement  of any  claims
against  the Fund as neither  the  Trustees,  officers,  agents or  shareholders
assume any  personal  liability  for  obligations  entered into on behalf of the
Fund. Upon the initial purchase of shares, the shareholder agrees to be bound by
the Fund's  Declaration of Trust,  as amended from time to time. The Declaration
of Trust is on file at the Massachusetts  Secretary of State's Office in Boston,
Massachusetts.

         The Fund's prospectus and this Statement of Additional Information omit
certain information  contained in the Registration  Statement which the Fund has
filed with the SEC under the Securities Act of 1933 and reference is hereby made
to the Registration Statement, and its amendments,  for further information with
respect  to the  Fund  and  the  securities  offered  hereby.  The  Registration
Statement, and its amendments, are available for inspection by the public at the
SEC in Washington, D.C.

                              FINANCIAL STATEMENTS

         The financial  statements of Scudder  Variable Life Investment Fund are
comprised of the following:

                           Money Market Portfolio
                           Balanced Portfolio
                           Bond Portfolio
                           Growth and Income Portfolio
                           Capital Growth Portfolio
                           International Portfolio

   
         The  financial  statements,  including  the  investment  portfolios  of
Scudder Variable Life Investment  Fund,  together with the Report of Independent
Accountants,   Financial  Highlights  and  notes  to  financial  statements  are
incorporated  by reference  and  attached  hereto,  in the Annual  Report to the
Shareholders  of the Fund dated  December 31, 1996,  and are hereby deemed to be
part of this Statement of Additional Information.
    

                                       69
<PAGE>


                                    APPENDIX

Description of Bond Ratings

Moody's Investors Service, Inc.

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

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

         Baa:   Bonds  that  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 that 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  that  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.

Standard & Poor's

         AAA:  Bonds rated AAA are highest grade debt  obligations.  This rating
indicates an extremely strong capacity to pay principal and interest.

         AA: Bonds rated AA also qualify as high-quality  obligations.  Capacity
to pay principal  and interest is very strong,  and in the majority of instances
they differ from AAA issues only in small degree.

         A: Bonds rated A have a strong  capacity to pay principal and interest,
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
debt in this category than in higher rated categories.

         Bonds rated BB and B are regarded as having  predominantly  speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation. While such debt will likely have some

<PAGE>

quality  and   protective   characteristics,   these  are  outweighed  by  large
uncertainties or major risk exposures to adverse conditions.

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

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

Description of Commercial Paper Ratings

Moody's Investors Service, Inc.

       P-1:       Moody's  Commercial  Paper ratings are opinions of the ability
                  of issuers to repay punctually  senior debt obligations  which
                  have  an  original   maturity  not  exceeding  one  year.  The
                  designation  "Prime-1" or "P-1"  indicates the highest quality
                  repayment capacity of the rated issue.

Standard & Poor's

       A-1:       Standard  &  Poor's   Commercial  Paper  ratings  are  current
                  assessments  of the  likelihood  of  timely  payment  of  debt
                  considered   short-term  in  the  relevant  market.   The  A-1
                  designation  indicates the degree of safety  regarding  timely
                  payment  is  strong.   Those  issues   determined  to  possess
                  extremely  strong  safety  characteristics  are denoted with a
                  plus (+) sign designation.
commitment to professional long-term investment management have helped shape the
investment industry. In 1928, we introduced the nation's first no-load mutual
fund. Today we offer over 40 pure no load(TM) funds, including the first
international mutual fund offered to U.S. investors.


     Over the years, Scudder's global investment perspective and dedication to
research and fundamental investment disciplines have helped Scudder become one
of the largest and most respected investment managers in the world. Though times
have changed since our beginnings, we remain committed to our long-standing
principles: managing money with integrity and distinction; keeping the interests
of our clients first; providing access to investments and markets that may not
be easily available to individuals; and making investing as simple and
convenient as possible through friendly, comprehensive service.




An investment in the Money Market Portfolio is neither insured nor guaranteed by
the United States Government and there can be no assurance that the Portfolio
will be able to maintain a stable net asset value of $1.00 per share.

This information must be preceded or accompanied by a current prospectus.

Portfolio changes should not be considered recommendations for action by
individual investors.




SCUDDER


<PAGE>
                      SCUDDER VARIABLE LIFE INVESTMENT FUND

                            PART C. OTHER INFORMATION
<TABLE>
<CAPTION>

Item 24.          Financial Statements and Exhibits
--------          ---------------------------------
<S>               <C>
                  a.       Financial Statements

                           Included in Part A of this Registration Statement:

                                    Financial Highlights for:  the ten years ended December 31, 1996 for
                                    the Money Market Portfolio, the Bond Portfolio, the Capital Growth
                                    Portfolio and the Balanced Portfolio; the period May 2, 1994
                                    (commencement of operations) to December 31, 1994 and for the two years
                                    ended December 31, 1996 for the Growth and Income Portfolio; the period
                                    May 1, 1987 (commencement of operations) to December 31, 1987 and the
                                    nine years ended December 31, 1996 for the International Portfolio; the
                                    period May 1, 1996 (commencement of operations) to December 31, 1996
                                    for the Global Discovery Portfolio.

                           Included in Part B of this Registration Statement:

                                    Investment Portfolios as of December 31, 1996.
                                    Statements of Assets and Liabilities as of December 31, 1996.
                                    Statements of Operations for the fiscal year ended December 31, 1996.
                                    Statements of Changes in Net Assets for the year ended December 31,
                                    1996.
                                    Financial Highlights for: the ten years ended December 31, 1996 for the
                                    Money Market Portfolio, the Bond Portfolio, the Capital Growth
                                    Portfolio and the Balanced Portfolio; the period May 2, 1994
                                    (commencement of operations) to December 31, 1995 and the fiscal year
                                    ended December 31, 1996 for the Growth and Income Portfolio; the period
                                    May 1, 1987 (commencement of operations) to December 31, 1987 and the
                                    nine years ended December 31, 1996 for the International Portfolio; the
                                    period May 1, 1996 (commencement of operations) to December 31, 1996
                                    for the Global Discovery Portfolio.
                                    Notes to Financial Statements are filed herein.

                           Statements, schedules and historical information other than those listed above
                           have been omitted since they are either not applicable or are not required.

                   b.   Exhibits:

                        1.    (a)         Declaration of Trust of the Registrant dated March 15, 1985.
                                          (Previously filed as Exhibit (a) to Pre-Effective Amendment No. 4 to this
                                          Registration Statement.)

                              (b)         Amendment to the Declaration of Trust dated March 10, 1988.
                                          (Previously filed as Exhibit 1(b) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (c)         Establishment and Designation of Series of Shares of Beneficial Interest,
                                          without Par Value.
                                          (Previously filed as Exhibit 1(b) to Pre-Effective Amendment No. 4 to this
                                          Registration Statement.)

                              (d)         Establishment and Designation of Series of Shares of Beneficial Interest,
                                          without Par Value.
                                          (Previously filed as Exhibit 1(c) to Post-Effective Amendment No. 2 to
                                          this Registration Statement.)

                                Part C - Page 1
<PAGE>

                              (e)         Establishment and Designation of Series of Shares of Beneficial Interest,
                                          without Par Value, with respect to the Managed International Portfolio.
                                          (Previously filed as Exhibit 1(d) to Post-Effective Amendment No. 7 to
                                          this Registration Statement.)

                              (e)(1)      Establishment and Designation of Series of Beneficial Interest, without
                                          Par Value dated February 9, 1996 is filed herein.

                              (f)         Amended Establishment and Designation of Series of Shares of Beneficial
                                          Interest, without Par Value dated April 15, 1988.
                                          (Previously filed as Exhibit 1(f) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (g)         Amended Establishment and Designation of Series of Shares of Beneficial
                                          Interest, without Par Value dated April 30, 1993.
                                          (Previously filed as Exhibit 1(g) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (h)         Abolition of Series.
                                          (Previously filed as Exhibit 1(h) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (i)         Amended Establishment and Designation of Series of Shares of Beneficial
                                          Interest, without Par Value, with respect to the Growth and Income
                                          Portfolio dated February 11, 1994.
                                          (Previously filed as Exhibit 1(i) to Post-Effective Amendment No. 14 to
                                          this Registration Statement.)

                        2.    (a)         By-Laws of the Registrant dated March 15, 1985.
                                          (Previously filed as Exhibit 2 to Pre-Effective Amendment No. 4 to this
                                          Registration Statement.)

                              (b)         Amendment to the By-Laws of the Registrant dated November 13, 1991.
                                          (Previously filed as Exhibit 2(b) to Post-Effective Amendment No. 12 to
                                          this Registration Statement.)

                        3.    Inapplicable.

                        4.    Inapplicable.

                        5.    (a)         Investment Advisory Agreement between the Registrant and Scudder, Stevens
                                          & Clark Ltd. dated November 14, 1986.
                                          (Previously filed as Exhibit 5(a) to Post-Effective Amendment No. 5 to
                                          this Registration Statement.)

                              (b)         Investment Advisory Agreement between the Registrant and Scudder, Stevens
                                          & Clark, Inc. with respect to the Managed International Portfolio.
                                          (Previously filed as Exhibit 5(b) to Post-Effective Amendment No. 8 to
                                          this Registration Statement.)

                              (c)         Investment Advisory Agreement between the Registrant and Scudder, Stevens
                                          & Clark, Inc. with respect to the Growth and Income Portfolio dated May 1,
                                          1994.
                                          (Previously filed as Exhibit 5(c) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                                Part C - Page 2
<PAGE>

                              (d)         Form of an Investment Advisory Agreement between the Registrant and
                                          Scudder, Stevens & Clark, Inc. with respect to the Global Discovery
                                          Portfolio dated May 1,1996.
                                          (Previously filed as Exhibit 5(d) to Post-Effective Amendment No. 17 to
                                          this Registration Statement.)

                              (d)(1)      Investment Advisory Agreement between the Registrant and Scudder, Stevens
                                          & Clark, Inc. with respect to the Global Discovery Portfolio dated May 1,
                                          1996.
                                          (Incorporated by reference to Exhibit 5(d)1 to Post-Effective Amendment
                                          No. 19 to this Registration Statement.)

                              (e)         Investment Advisory Agreement between the Registrant and Scudder, Stevens
                                          & Clark, Inc. with respect to the International Portfolio dated August 12,
                                          1996 is filed herein.

                        6.    (a)         Underwriting Agreement between the Registrant and Scudder Investor
                                          Services, Inc., dated July 12, 1985.
                                          (Previously filed as Exhibit 6(a) to Post-Effective Amendment No. 1 to
                                          this Registration Statement.)

                              (a)(1)      Underwriting Agreement between the Registrant and Scudder Investor
                                          Services, Inc., dated October 5, 1995 is filed herein.

                              (b)         Participating Contract and Policy Agreement between Scudder Investor
                                          Services, Inc. and Participating Insurance Companies.
                                          (Previously filed as Exhibit 6(b) to Post-Effective Amendment No. 1 to
                                          this Registration Statement).

                              (c)         Participating Contract and Policy Agreement between Scudder Investor
                                          Services, Inc. and Carillon Investments, Inc. dated February 18, 1992.
                                          (Previously filed as Exhibit 6(c) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (d)         Participating Contract and Policy Agreement between Scudder Investor
                                          Services, Inc. and AEtna Life Insurance and Annuity Company dated April
                                          27, 1992.
                                          (Previously filed as Exhibit 6(d) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (e)         Participating Contract and Policy Agreement between Scudder Investor
                                          Services, Inc. and PNMR Securities, Inc. dated December 1, 1992.
                                          (Previously filed as Exhibit 6(e) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (f)         Prototype Participating Contract and Policy Agreement.
                                          (Previously filed as Exhibit 6(f) to Post-Effective Amendment No. 14 to
                                          this Registration Statement.)

                              (f)(1)      Prototype Participating Contract and Policy Agreement is filed herein.

                        7.    Inapplicable.

                                Part C - Page 3
<PAGE>

                        8.    (a)         Custodian Contract between the Registrant and State Street Bank and Trust
                                          Company dated August 22, 1985.
                                          (Previously filed as Exhibit 8(a) to Post-Effective Amendment No. 1 to
                                          this Registration Statement.)

                              (a)(1)      Custodian Agreement between the Registrant and Brown Brothers Harriman &
                                          Co. dated April 15, 1996 is filed herein.

                              (a)(2)      Custodian Agreement between the Registrant and Brown Brothers Harriman &
                                          Co. dated April 29, 1996 is filed herein.

                              (b)         Fee schedule for Exhibit 8(a).
                                          (Previously filed as Exhibit 8(b) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (c)         Amendment to the Custodian Contract dated February 17, 1987
                                          (Previously filed as Exhibit 8(c) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (d)         Amendment to the Custodian Contract dated February 17, 1987.
                                          (Previously filed as Exhibit 8(d) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (e)         Amendment to the Custodian Contract dated August 13, 1987.
                                          (Previously filed as Exhibit 8(e) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (f)         Amendment to the Custodian Contract dated August 12, 1988.
                                          (Previously filed as Exhibit 8(f) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (g)         Amendment to the Custodian Contract dated August 9, 1991.
                                          (Previously filed as Exhibit 8(g) to Post-Effective Amendment No. 12 to
                                          this Registration Statement.)

                              (h)         Fee Schedule for Exhibit 8(a).
                                          (Previously filed as Exhibit 8(h) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                        9.    (a)(1)      Transfer, Dividend Disbursing and Plan Agency Agreement between the
                                          Registrant and State Street Bank and Trust Company dated July 12, 1985.
                                          (Previously filed as Exhibit 9(a)(1) to Post-Effective Amendment No. 1 to
                                          this Registration Statement.)

                              (a)(2)      Fee schedule for Exhibit 9(a)(1).
                                          (Previously filed as Exhibit 9(a)(2) to Post-Effective Amendment No. 1 to
                                          this Registration Statement.)

                              (a)(3)      Transfer Agency and Service Agreement between the Registrant and Scudder
                                          Service Corporation dated April 6, 1992.
                                          (Previously filed as Exhibit 9(a)(3) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (b)(1)      Participation Agreement between the Registrant and Security Equity Life
                                          Insurance Company dated September 10, 1985.
                                          (Previously filed as Exhibit 9(b) to Post-Effective Amendment No. 1 to
                                          this Registration Statement.)


                                Part C - Page 4
<PAGE>


                              (b)(2)      Amendment to Participation Agreement between the Registrant and Security
                                          Equity Life Insurance Company dated July 21, 1987.
                                          (Previously filed as Exhibit 9(b)(2) to Post-Effective Amendment No. 8 to
                                          this Registration Statement.)

                              (c)(1)      Participation Agreement between the Registrant and Charter National Life
                                          Insurance Company dated June 9, 1986.
                                          (Previously filed as Exhibit 9(c)(1) to Post- Effective Amendment No. 8 to
                                          this Registration Statement.)

                              (c)(2)      Amendment to Participation Agreement between the Registrant and Charter
                                          National Life Insurance Company dated July 20, 1987.
                                          (Previously filed as Exhibit 9(c)(2) to Post- Effective Amendment No. 8 to
                                          this Registration Statement.)

                              (c)(3)      Amendment to Participation Agreement between the Registrant and Charter
                                          National Life Insurance Company dated May 2, 1988.
                                          (Previously filed as Exhibit 9(c)(3) to Post-Effective Amendment No. 9 to
                                          this Registration Statement.)

                              (c)(4)      Amendment to Participation Agreement between the Registrant and Charter
                                          National Life Insurance Company dated June 30, 1991.
                                          (Previously filed as Exhibit 9(c)(4) to Post-Effective Amendment No. 12 to
                                          this Registration Statement.)

                              (c)(5)      Participation Agreement between the Registrant and The Union Central Life
                                          Insurance Company dated February 18, 1992.
                                          (Previously filed as Exhibit 9(c)(5) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (c)(6)      Participation Agreement between the Registrant and AEtna Life Insurance
                                          and Annuity Company dated April 27, 1992.
                                          (Previously filed as Exhibit 9(c)(6) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (c)(7)      Participation Agreement between the Registrant and Safeco Life Insurance
                                          Companies dated December 31, 1992.
                                          (Previously filed as Exhibit 9(c)(7) to Post-Effective Amendment No. 13 to
                                          this Registration Statement.)

                              (c)(8)      Prototype Participation Agreement - Form A.
                                          (Previously filed as Exhibit 9(c)(8) to Post-Effective Amendment No. 14 to
                                          this Registration Statement.)

                              (c)(9)      Prototype Participation Agreement - Form B.
                                          (Previously filed as Exhibit 9(c)(9) to Post-Effective Amendment No. 14 to
                                          this Registration Statement.)

                              (c)(9)(1)   Prototype Participation Agreement is filed herein.

                              (c)(10)     First Amendment to the Fund Participation Agreement between AEtna Life
                                          Insurance and Annuity Company and the Fund dated February 19, 1993.
                                          (Previously filed as Exhibit 9(c)(10) to Post-Effective Amendment No. 14
                                          to this Registration Statement.)


                                Part C - Page 5
<PAGE>

                              (c)(11)     Second Amendment to the Fund Participation Agreement between AEtna Life
                                          Insurance and Annuity Company and the Fund dated August 13, 1993.
                                          (Previously filed as Exhibit 9(c)(11) to Post-Effective Amendment No. 14
                                          to this Registration Statement.)

                              (c)(12)     First Amendment to the Participation Agreement between Mutual of America
                                          Life Insurance Company, The American Life Insurance Company of New York
                                          and the Fund dated August 13, 1993.
                                          (Previously filed as Exhibit 9(c)(12) to Post-Effective Amendment No. 14
                                          to this Registration Statement.)

                              (c)(13)     First Amendment to the Participation Agreement between The Union Central
                                          Life Insurance Company and the Fund dated September 30, 1993.
                                          (Previously filed as Exhibit 9(c)(13) to Post-Effective Amendment No. 14
                                          to this Registration Statement.)

                              (c)(14)     Participation Agreement between the Registrant and American Life Assurance
                                          Corporation dated May 3, 1993.
                                          (Previously filed as Exhibit 9(c)(14) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(15)     Participation Agreement between the Registrant and AUSA Life Insurance
                                          Company, Inc. dated October 21, 1993.
                                          (Previously filed as Exhibit 9(c)(15) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(16)     Participation Agreement between the Registrant and Banner Life Insurance
                                          Company dated January 18, 1990.
                                          (Previously filed as Exhibit 9(c)(16) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(17)     Participation Agreement between the Registrant and Banner Life Insurance
                                          Company dated January 18, 1995.
                                          (Previously filed as Exhibit 9(c)(17) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(18)     Participation Agreement between the Registrant and Fortis Benefits
                                          Insurance Company dated June 1, 1994.
                                          (Previously filed as Exhibit 9(c)(18) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(19)     Participation Agreement between the Registrant and Lincoln Benefit Life
                                          Company dated December 30, 1993.
                                          (Previously filed as Exhibit 9(c)(19) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(20)     Participation Agreement between the Registrant and Charter National Life
                                          Insurance Company dated September 3, 1993.
                                          (Previously filed as Exhibit 9(c)(20)to Post-Effective Amendment No. 16 to
                                          this Registration Statement).

                              (c)(21)     Participation Agreement between the Registrant and Mutual of America Life
                                          Insurance Company dated December 30, 1988.
                                          (Previously filed as Exhibit 9(c)(21) to Post-Effective Amendment No. 16
                                          to this Registration Statement).


                                Part C - Page 6
<PAGE>

                              (c)(22)     First Amendment to Participation Agreement between the Registrant and
                                          Mutual of America Life Insurance Company dated August 13, 1993.
                                          (Previously filed as Exhibit 9(c)(22) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(23)     Participation Agreement between the Registrant and Mutual of America Life
                                          Insurance Company dated December 30, 1988.
                                          (Previously filed as Exhibit 9(c)(23) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(24)     First Amendment to Participation Agreement between the Registrant and
                                          Mutual of America Life Insurance Company dated August 13, 1993.
                                          (Previously filed as Exhibit 9(c)(24) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(25)     Participation Agreement between the Registrant and Mutual of America Life
                                          Insurance Company dated December 30, 1993.
                                          (Previously filed as Exhibit 9(c)(25) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(26)     Participation Agreement between the Registrant and Paragon Life Insurance
                                          Company dated April 30, 1993.
                                          (Previously filed as Exhibit 9(c)(26) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(27)     Participation Agreement between the Registrant and Provident Mutual Life
                                          Insurance Company of Philadelphia dated July 21, 1993.
                                          (Previously filed as Exhibit 9(c)(27) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(28)     Participation Agreement between the Registrant and United of Omaha Life
                                          Insurance Company dated May 15, 1994.
                                          (Previously filed as Exhibit 9(c)(28) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(29)     First Amendment to the Participation Agreement between the Registrant and
                                          United of Omaha Life Insurance Company dated January 23, 1995.
                                          (Previously filed as Exhibit 9(c)(29) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(30)     Participation Agreement between the Registrant and USAA Life Insurance
                                          Company dated February 3, 1995.
                                          (Previously filed as Exhibit 9(c)(30) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (c)(31)     Amendment to the Participation Agreement, the Reimbursement Agreement and
                                          the Participating Contract and Policy Agreement dated February 3, 1995.
                                          (Previously filed as Exhibit 9(c)(31) to Post-Effective Amendment No. 16
                                          to this Registration Statement).

                              (d)         Accounting Services Agreement between the Registrant and Scudder Investor
                                          Services, Inc. dated August 1, 1989.
                                          (Previously filed as Exhibit 9(d) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)


                                Part C - Page 7
<PAGE>

                              (e)(1)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Money Market Portfolio, and Scudder Fund Accounting Corporation dated
                                          October 1, 1994.
                                          (Previously filed as Exhibit 9(e)(1) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(2)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Bond Portfolio, and Scudder Fund Accounting Corporation dated October
                                          1, 1994.
                                          (Previously filed as Exhibit 9(e)(2) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(3)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Balanced Portfolio, and Scudder Fund Accounting Corporation dated
                                          October 1, 1994.
                                          (Previously filed as Exhibit 9(e)(3) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(4)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Growth and Income Portfolio, and Scudder Fund Accounting Corporation
                                          dated October 1, 1994.
                                          (Previously filed as Exhibit 9(e)(4) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(5)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Capital Growth Portfolio, and Scudder Fund Accounting Corporation
                                          dated October 1, 1994.
                                          (Previously filed as Exhibit 9(e)(5) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(6)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the International Portfolio, and Scudder Fund Accounting Corporation dated
                                          October 1, 1994.
                                          (Previously filed as Exhibit 9(e)(6) to Post-Effective Amendment No. 15 to
                                          this Registration Statement.)

                              (e)(7)      Fund Accounting Services Agreement between the Registrant, on behalf of
                                          the Global Discovery Portfolio, and Scudder Fund Accounting Corporation
                                          dated May 1, 1996 is filed herein.

                        10.   Inapplicable.

                        11.   Consent of Independent Accountants is filed herein.

                        12.   Inapplicable.

                        13.   Inapplicable.

                        14.   Inapplicable.

                        15.   Form of Master Distribution Plan for Class B shares pursuant to Rule 12b-1 dated
                              February 9, 1996.
                              (Previously filed as Exhibit 15 to Post-Effective Amendment No. 18 to this
                              Registration Statement.)



                                Part C - Page 8
<PAGE>

                              (a)         Master Distribution Plan for Class B shares pursuant to Rule 12b-1 dated
                                          February 9, 1996 is filed herein.

                        16.   Schedule of Computation of Performance Calculation.
                              (Previously filed as Exhibit 16 to Post-Effective Amendment No. 9 to Registration
                              Statement.)

                        17.   Article 6 Financial Data Schedules are filed herein.
</TABLE>

Item 25.          Persons Controlled by or under Common Control with Registrant
--------          -------------------------------------------------------------

                  As of December 31, 1996, 26.1% of the outstanding shares of
                  beneficial interest of the Registrant are owned by Charter
                  National Life Insurance Company of Missouri ("CNL"). CNL is a
                  wholly-owned subsidiary of Leucadia National Corporation.
                  Leucadia National Corporation is a New York corporation.

Item 26.          Number of Holders of Securities (as of December 31, 1996)
--------          ---------------------------------------------------------
<TABLE>
<CAPTION>

                                  (1)                                                    (2)
                            Title of Class                                      Number of Shareholders
<S>                <C>                                                                   <C>
                   Shares of beneficial interest,
                   of no par value
                   Money Market Portfolio                                                (6)

                   Shares of beneficial interest,
                   of no par value
                   Bond Portfolio                                                        (10)

                   Shares of beneficial interest,
                   of no par value
                   Balanced Portfolio                                                    (6)

                   Shares of beneficial interest,
                   of no par value
                   Growth and Income Portfolio                                           (6)

                   Shares of beneficial interest,
                   of no par value
                   Capital Growth Portfolio                                              (9)

                   Shares of beneficial interest,
                   of no par value
                   Global Discovery Portfolio                                            (3)

                   Shares of beneficial interest,
                   of no par value
                   International Portfolio                                               (13)
</TABLE>

Item 27.          Indemnification.
--------          ----------------

                  A policy of insurance covering Scudder, Stevens & Clark, Inc.,
                  its subsidiaries including Scudder Investor Services, Inc.,
                  and all of the registered investment companies advised by
                  Scudder, Stevens & Clark, Inc. insures the Registrant's
                  Trustees and officers and others against liability arising by
                  reason of an alleged breach of duty caused by any negligent
                  act, error or accidental omission in the scope of their
                  duties.

                                Part C - Page 9
<PAGE>

                  Article IV, Sections 4.1 - 4.3 of Registrant's Declaration of
                  Trust provide as follows:

                  Section 4.1. No Personal Liability of Shareholders, Trustees,
                  etc. No Shareholder shall be subject to any personal liability
                  whatsoever to any Person in connection with Fund Property or
                  the acts, obligations or affairs of the Fund. No Trustee,
                  officer, employee or agent of the Fund shall be subject to any
                  personal liability whatsoever to any Person, other than to the
                  Fund or its Shareholders, in connection with Fund Property or
                  the affairs of the Fund, save only that arising from bad
                  faith, willful misfeasance, gross negligence or reckless
                  disregard of his duties with respect to such Person; and all
                  such Persons shall look solely to the Fund Property for
                  satisfaction of claims of any nature arising in connection
                  with the affairs of the Fund. If any Shareholder, Trustee,
                  officer, employee, or agent, as such, of the Fund, is made a
                  party to any suit or proceeding to enforce any such liability
                  of the Fund, he shall not, on account thereof, be held to any
                  personal liability. The Fund shall indemnify and hold each
                  Shareholder harmless from and against all claims and
                  liabilities, to which such Shareholder may become subject by
                  reason of his being or having been a Shareholder, and shall
                  reimburse such Shareholder for all legal and other expenses
                  reasonably incurred by him in connection with any such claim
                  or liability. The rights accruing to a Shareholder under this
                  Section 4.l shall not exclude any other right to which such
                  Shareholder may be lawfully entitled, nor shall anything
                  herein contained restrict the right of the Fund to indemnify
                  or reimburse a Shareholder in any appropriate situation even
                  though not specifically provided herein.

                  Section 4.2. Non-Liability of Trustees, etc. No Trustee,
                  officer, employee or agent of the Fund shall be liable to the
                  Fund, its Shareholders, or to any Shareholder, Trustee,
                  officer, employee, or agent thereof for any action or failure
                  to act (including without limitation the failure to compel in
                  any way any former or acting Trustee to redress any breach of
                  trust) except for his own bad faith, willful misfeasance,
                  gross negligence or reckless disregard of the duties involved
                  in the conduct of his office.

                  Section 4.3 Mandatory Indemnification. (a) Subject to the
                  exceptions and limitations contained in paragraph (b) below:

                  (i)      every person who is, or has been, a Trustee or
                           officer of the Fund shall be indemnified by the Fund
                           to the fullest extent permitted by law against all
                           liability and against all expenses reasonably
                           incurred or paid by him in connection with any claim,
                           action, suit or proceeding in which he becomes
                           involved as a party or otherwise by virtue of his
                           being or having been a Trustee or officer and against
                           amounts paid or incurred by him in the settlement
                           thereof;

                  (ii)     the words "claim," "action," "suit," or "proceeding"
                           shall apply to all claims, actions, suits or
                           proceedings (civil, criminal, or other, including
                           appeals), actual or threatened; and the words
                           "liability" and "expenses" shall include, without
                           limitation, attorneys' fees, costs, judgments,
                           amounts paid in settlement, fines, penalties and
                           other liabilities.

                  (b)               No indemnification shall be provided
                                    hereunder to a Trustee or officer:

                    (i)  against any liability to the Fund or the Shareholders
                         by reason of willful misfeasance, bad faith, gross
                         negligence or reckless disregard of the duties involved
                         in the conduct of his office;

                    (ii) with respect to any matter as to which he shall have
                         been finally adjudicated not to have acted in good
                         faith in the reasonable belief that his action was in
                         the best interest of the Fund;


                                Part C - Page 10
<PAGE>

                    (iii) in the event of a settlement or other disposition not
                         involving a final adjudication as provided in paragraph
                         (b)(i) resulting in a payment by a Trustee or officer,
                         unless there has been a determination that such Trustee
                         or officer did not engage in willful misfeasance, bad
                         faith, gross negligence or reckless disregard of the
                         duties involved in the conduct of his office;

                              (A)       by the court or other body approving the
                                        settlement or other disposition; or

                              (B)       based upon a review of readily available
                                        facts (as opposed to a full trial-type
                                        inquiry) by (x) vote of a majority of
                                        the Disinterested Trustees acting on the
                                        matter (provided that a majority of the
                                        Disinterested Trustees then in office
                                        act on the matter) or (y) written
                                        opinion of independent legal counsel.

          (c)  The rights of indemnification herein provided may be insured
               against by policies maintained by the Fund, shall be severable,
               shall not affect any other rights to which any Trustee or officer
               may now or hereafter be entitled, shall continue as to a person
               who has ceased to be such Trustee or officer and shall inure to
               the benefit of the heirs, executors, administrators and assigns
               of such a person. Nothing contained herein shall affect any
               rights to indemnification to which personnel of the Fund other
               than Trustees and officers may be entitled by contract or
               otherwise under law.

          (d)  Expenses of preparation and presentation of a defense to any
               claim, action, suit, or proceeding of the character described in
               paragraph (a) of this Section 4.3 shall be advanced by the Fund
               prior to final disposition thereof upon receipt of an undertaking
               by or on behalf of the recipient, to repay such amount if it is
               ultimately determined that he is not entitled to indemnification
               under this Section 4.3, provided that either:

               (i)  such undertaking is secured by a surety bond or some other
                    appropriate security provided by the recipient, or the Fund
                    shall be insured against losses arising out of any such
                    advances; or

               (ii) a majority of the Disinterested Trustees acting on the
                    matter (provided that a majority of the Disinterested
                    Trustees act on the matter) or an independent legal counsel
                    in a written opinion shall determine, based upon a review of
                    readily available facts (as opposed to a full trial-type
                    inquiry), that there is reason to believe that the recipient
                    ultimately will be found entitled to indemnification.

          As used in this Section 4.3, a "Disinterested Trustee" is one who is
          not (i) an "Interested Person" of the Trust (including anyone who has
          been exempted from being an "Interested Person" by any rule,
          regulation or order of the Commission), or (ii) involved in the claim,
          action, suit or proceeding.

Item 28.          Business or Other Connections of Investment Adviser
--------          ---------------------------------------------------

                  The Adviser has stockholders and employees who are denominated
                  officers but do not as such have corporation-wide
                  responsibilities. Such persons are not considered officers for
                  the purpose of this Item 28.

                                Part C - Page 11
<PAGE>
<TABLE>
<CAPTION>

                           Business and Other Connections of Board
           Name            of Directors of Registrant's Adviser
           ----            ------------------------------------

<S>                        <C>
Stephen R. Beckwith        Director, Vice President, Assistant Treasurer, Chief Operating Officer & Chief
                                 Financial Officer, Scudder, Stevens & Clark, Inc. (investment adviser)**

Lynn S. Birdsong           Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President & Director, The Latin America Dollar Income Fund, Inc.  (investment company)**
                           President & Director, Scudder World Income Opportunities Fund, Inc.  (investment
                                 company)**
                           President, The Japan Fund, Inc. (investment company)**
                           Supervisory Director, The Latin America Income and Appreciation Fund N.V. (investment
                                 company) +
                           Supervisory Director, The Venezuela High Income Fund N.V. (investment company) xx
                           Supervisory Director, Scudder Mortgage Fund (investment company)+
                           Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
                                 & II (investment company) +
                           Director, Canadian High Income Fund (investment company)#
                           Director, Hot Growth Companies Fund (investment company)#
                           Director, Sovereign High Yield Investment Company (investment company)+
                           Director, Scudder, Stevens & Clark (Luxembourg) S.A. (investment manager) #

Nicholas Bratt             Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President & Director, Scudder New Europe Fund, Inc. (investment company)**
                           President & Director, The Brazil Fund, Inc. (investment company)**
                           President & Director, The First Iberian Fund, Inc. (investment company)**
                           President & Director, Scudder International Fund, Inc.  (investment company)**
                           President & Director, Scudder Global Fund, Inc. (President on all series except Scudder
                                 Global Fund) (investment company)**
                           President & Director, The Korea Fund, Inc. (investment company)**
                           President & Director, Scudder New Asia Fund, Inc. (investment company)**
                           President, The Argentina Fund, Inc. (investment company)**
                           Vice President, Scudder, Stevens & Clark Corporation (Delaware) (investment adviser)**
                           Vice President, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
                           Vice President, Scudder, Stevens & Clark of Canada Ltd. (Canadian investment adviser)
                                 Toronto, Ontario, Canada
                           Vice President, Scudder, Stevens & Clark Overseas Corporationoo

E. Michael Brown           Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Trustee, Scudder GNMA Fund (investment company)*
                           Trustee, Scudder U.S. Treasury Fund (investment company)*
                           Trustee, Scudder Tax Free Money Fund (investment company)*
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Trustee, Scudder Cash Investment Trust (investment company)*
                           Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*
                           Director & President, Scudder Realty Holding Corporation (a real estate holding
                                 company)*
                           Director & President, Scudder Trust Company (a trust company)+++
                           Director, Scudder Trust (Cayman) Ltd.

Mark S. Casady             Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Director & Vice President, Scudder Investor Services, Inc. (broker/dealer)*
                           Director & Vice President, Scudder Service Corporation (in-house transfer agent)*
                           Director, SFA, Inc. (advertising agency)*

                                Part C - Page 12
<PAGE>

Linda C. Coughlin          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Chairman & Trustee, AARP Cash Investment Funds  (investment company)**
                           Chairman & Trustee, AARP Growth Trust (investment company)**
                           Chairman & Trustee, AARP Income Trust (investment company)**
                           Chairman & Trustee, AARP Tax Free Income Trust  (investment company)**
                           Chairman & Trustee, AARP Managed Investment Portfolios Trust  (investment company)**
                           Director & Senior Vice President, Scudder Investor Services, Inc. (broker/dealer)*
                           Director, SFA, Inc. (advertising agency)*

Margaret D. Hadzima        Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Assistant Treasurer, Scudder Investor Services, Inc. (broker/dealer)*

Jerard K. Hartman          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President, Scudder California Tax Free Trust (investment company)*
                           Vice President, Scudder Equity Trust (investment company)**
                           Vice President, Scudder Cash Investment Trust (investment company)*
                           Vice President, Scudder Fund, Inc. (investment company)**
                           Vice President, Scudder Global Fund, Inc. (investment company)**
                           Vice President, Scudder GNMA Fund (investment company)*
                           Vice President, Scudder Portfolio Trust (investment company)*
                           Vice President, Scudder Institutional Fund, Inc. (investment company)**
                           Vice President, Scudder International Fund, Inc. (investment company)**
                           Vice President, Scudder Investment Trust (investment company)*
                           Vice President, Scudder Municipal Trust (investment company)*
                           Vice President, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President, Scudder New Asia Fund, Inc. (investment company)**
                           Vice President, Scudder New Europe Fund, Inc. (investment company)**
                           Vice President, Scudder Securities Trust (investment company)*
                           Vice President, Scudder State Tax Free Trust (investment company)*
                           Vice President, Scudder Funds Trust (investment company)**
                           Vice President, Scudder Tax Free Money Fund (investment company)*
                           Vice President, Scudder Tax Free Trust (investment company)*
                           Vice President, Scudder U.S. Treasury Money Fund (investment company)*
                           Vice President, Scudder Pathway Series (investment company)*
                           Vice President, Scudder Variable Life Investment Fund (investment company)*
                           Vice President, The Brazil Fund, Inc. (investment company)**
                           Vice President, The Korea Fund, Inc. (investment company)**
                           Vice President, The Argentina Fund, Inc. (investment company)**
                           Vice President & Director, Scudder, Stevens & Clark of Canada, Ltd. (Canadian
                                 investment adviser) Toronto, Ontario, Canada
                           Vice President, The First Iberian Fund, Inc. (investment company)**
                           Vice President, The Latin America Dollar Income Fund, Inc. (investment company)**
                           Vice President, Scudder World Income Opportunities Fund, Inc. (investment company)**

Richard A. Holt            Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President, Scudder Variable Life Investment Fund (investment company)*

Dudley H. Ladd             Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President & Trustee, Scudder Cash Investment Trust  (investment company)*
                           Director, Scudder Global Fund, Inc. (investment company)**
                           Director, Scudder International Fund, Inc. (investment company)**
                           Director, Scudder Mutual Fund, Inc. (investment company)**
                           Trustee, Scudder Investment Trust (investment company)*
                           Trustee, Scudder Portfolio Trust (investment company)*
                           Trustee, Scudder Municipal Trust (investment company)*

                                Part C - Page 13
<PAGE>

                           Trustee, Scudder Securities Trust (investment company)*
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Trustee, Scudder Equity Trust (investment company)**
                           Trustee, Scudder Funds Trust (investment company)**
                           Vice President, Scudder U.S. Treasury Money Fund  (investment company)*
                           President & Director, SFA, Inc. (advertising agency)*
                           Senior Vice President & Director, Scudder Investor Services, Inc. (broker/dealer)*
                           Vice President & Director, Scudder Precious Metals, Inc. xxx

John T. Packard            Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President, Montgomery Street Income Securities, Inc. (investment company) o
                           Chairman, Scudder Realty Advisors, Inc. (realty investment adviser) x

Daniel Pierce              Chairman & Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Chairman, Vice President & Director, Scudder Global Fund, Inc.  (investment company)**
                           Chairman & Director, Scudder New Europe Fund, Inc. (investment company)**
                           Chairman & Director, The First Iberian Fund, Inc. (investment company)**
                           Chairman & Director, Scudder International Fund, Inc. (investment company)**
                           Chairman & Director, Scudder New Asia Fund, Inc. (investment company)**
                           President & Trustee, Scudder Equity Trust (investment company)**
                           President & Trustee, Scudder GNMA Fund (investment company)*
                           President & Trustee, Scudder Portfolio Trust (investment company)*
                           President & Trustee, Scudder Funds Trust (investment company)**
                           President & Trustee, Scudder Securities Trust (investment company)*
                           President & Trustee, Scudder Investment Trust (investment company)*
                           President & Director, Scudder Institutional Fund, Inc. (investment company)**
                           President & Director, Scudder Fund, Inc. (investment company)**
                           President & Director, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President & Trustee, Scudder Municipal Trust (investment company)*
                           Vice President & Trustee, Scudder Variable Life Investment Fund (investment company)*
                           Vice President & Trustee, Scudder Pathway Series (investment company)*
                           Trustee, Scudder California Tax Free Trust (investment company)*
                           Trustee, Scudder State Tax Free Trust (investment company)*
                           Vice President, Montgomery Street Income Securities, Inc. (investment company)o
                           Chairman & President, Scudder, Stevens & Clark of Canada, Ltd. (Canadian investment
                                 adviser), Toronto, Ontario, Canada
                           Chairman & Director, Scudder Global Opportunities Funds (investment company) Luxembourg
                           Chairman, Scudder, Stevens & Clark, Ltd. (investment adviser) London, England
                           President & Director, Scudder Precious Metals, Inc. xxx
                           Vice President, Director & Assistant Secretary, Scudder Realty Holdings Corporation
                                 (a real estate holding company)*
                           Vice President, Director & Assistant Treasurer, Scudder Investor Services, Inc.
                                 (broker/dealer)*
                           Director, Scudder Latin America Investment Trust PLC (investment company)@
                           Director, Fiduciary Trust Company (banking & trust company) Boston, MA
                           Director, Fiduciary Company Incorporated (banking & trust company) Boston, MA
                           Trustee, New England Aquarium, Boston, MA
                           Incorporator, Scudder Trust Company (a trust company)+++

Kathryn L. Quirk           Director & Secretary, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Director, Vice President & Assistant Secretary, The Argentina Fund, Inc. (investment
                                 company)**
                           Director, Vice President & Assistant Secretary, Scudder International Fund, Inc.
                                 (investment company)**


                                Part C - Page 14
<PAGE>

                           Director, Vice President & Assistant Secretary, Scudder New Asia Fund (investment
                                 company)**
                           Trustee, Vice President & Assistant Secretary, Scudder Equity Trust (investment
                                 company)**
                           Trustee, Vice President & Assistant Secretary, Scudder Securities Trust (investment
                                 company)*
                           Trustee, Vice President & Assistant Secretary, Scudder Funds Trust (investment
                                 company)**
                           Trustee, Scudder Investment Trust (investment company)*
                           Trustee, Scudder Municipal Trust (investment company)*
                           Vice President & Trustee, Scudder Tax Free Money Fund (investment company)*
                           Vice President & Trustee, Scudder Tax Free Trust (investment company)*
                           Vice President & Secretary, AARP Growth Trust (investment company)**
                           Vice President & Secretary, AARP Income Trust (investment company)**
                           Vice President & Secretary, AARP Tax Free Income Trust (investment company)**
                           Vice President & Secretary, AARP Cash Investment Funds (investment company)**
                           Vice President & Secretary, AARP Managed Investment Portfolios Trust (investment
                                 company)**
                           Vice President & Secretary, The Japan Fund, Inc. (investment company)**
                           Vice President & Assistant Secretary, Scudder World Income Opportunities Fund, Inc.
                                 (investment company)**
                           Vice President & Assistant Secretary, The Korea Fund, Inc. (investment company)**
                           Vice President & Assistant Secretary, The Brazil Fund, Inc. (investment company)**
                           Vice President & Assistant Secretary, Scudder Global Fund, Inc. (investment company)**
                           Vice President & Assistant Secretary, Montgomery Street Income Securities, Inc.
                                 (investment company)o
                           Vice President & Assistant Secretary, Scudder Mutual Funds, Inc. (investment company)**
                           Vice President & Assistant Secretary, Scudder Pathway Series (investment company)*
                           Vice President & Assistant Secretary, Scudder New Europe Fund, Inc. (investment
                                 company)**
                           Vice President & Assistant Secretary, Scudder Variable Life Investment Fund (investment
                                 company)*
                           Vice President & Assistant Secretary, The First Iberian Fund, Inc. (investment
                                 company)**
                           Vice President & Assistant Secretary, The Latin America Dollar Income Fund, Inc.
                                 (investment company)**
                           Vice President, Scudder Fund, Inc. (investment company)**
                           Vice President, Scudder Institutional Fund, Inc. (investment company)**
                           Vice President, Scudder GNMA Fund (investment company)*
                           Director, Senior Vice President & Clerk, Scudder Investor Services, Inc.
                                 (broker/dealer)*
                           Director, Vice President & Secretary, Scudder Fund Accounting Corporation (in-house
                                 fund accounting agent)*
                           Director, Vice President & Secretary, Scudder Realty Holdings Corporation (a real
                                 estate holding company)*
                           Director & Clerk, Scudder Service Corporation (in-house transfer agent)*
                           Director, SFA, Inc. (advertising agency)*
                           Vice President, Director & Assistant Secretary, Scudder Precious Metals, Inc. xxx

Cornelia M. Small          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           President, AARP Cash Investment Funds (investment company)**
                           President, AARP Growth Trust (investment company)**
                           President, AARP Income Trust (investment company)**
                           President, AARP Tax Free Income Trust (investment company)**
                           President, AARP Managed Investment Portfolio Trust (investment company)**

                                Part C - Page 15
<PAGE>


Edmond D. Villani          Director, President & Chief Executive Officer, Scudder, Stevens & Clark, Inc.
                                 (investment adviser)**
                           Chairman & Director, The Argentina Fund, Inc. (investment company)**
                           Chairman & Director, The Latin America Dollar Income Fund, Inc. (investment company)**
                           Chairman & Director, Scudder World Income Opportunities Fund, Inc.  (investment
                                 company)**
                           Supervisory Director, Scudder Mortgage Fund (investment company) +
                           Supervisory Director, Scudder Floating Rate Funds for Fannie Mae Mortgage Securities I
                                 & II (investment company)+
                           Director, Scudder, Stevens & Clark Japan, Inc. (investment adviser)###
                           Director, The Brazil Fund, Inc. (investment company)**
                           Director, Indosuez High Yield Bond Fund (investment company) Luxembourg
                           President & Director, Scudder, Stevens & Clark Overseas Corporationoo
                           President & Director, Scudder, Stevens & Clark Corporation (Delaware) (investment
                                 adviser)**
                           Director, Scudder Realty Advisors, Inc. (realty investment adviser) x
                           Director, IBJ Global Investment Management S.A., (Luxembourg investment management
                                 company) Luxembourg, Grand-Duchy of Luxembourg

Stephen A. Wohler          Director, Scudder, Stevens & Clark, Inc. (investment adviser)**
                           Vice President, Montgomery Street Income Securities, Inc. (investment company)o
</TABLE>

         *        Two International Place, Boston, MA
         x        333 South Hope Street, Los Angeles, CA
         **       345 Park Avenue, New York, NY
         ++       Two Prudential Plaza, 180 N. Stetson Avenue, Chicago, IL
         +++      5 Industrial Way, Salem, NH
         o        101 California Street, San Francisco, CA
         #        Societe Anonyme, 47, Boulevard Royal, L-2449 Luxembourg, R.C. 
                  Luxembourg B 34.564
         +        John B. Gorsiraweg 6, Willemstad Curacao, Netherlands Antilles
         xx       De Ruyterkade 62, P.O. Box 812, Willemstad Curacao, 
                  Netherlands Antilles
         ##       2 Boulevard Royal, Luxembourg
         ***      B1 2F3F 248 Section 3, Nan King East Road, Taipei, Taiwan
         xxx      Grand Cayman, Cayman Islands, British West Indies
         oo       20-5, Ichibancho, Chiyoda-ku, Tokyo, Japan
         ###      1-7, Kojimachi, Chiyoda-ku, Tokyo, Japan
         @        c/o Sinclair Hendersen Limited, 23 Cathedral Yard, Exeter, 
                  Devon, U.K.

Item 29.          Principal Underwriters.
--------          -----------------------

         (a)      Scudder California Tax Free Trust
                  Scudder Cash Investment Trust
                  Scudder Equity Trust
                  Scudder Fund, Inc.
                  Scudder Funds Trust
                  Scudder Global Fund, Inc.
                  Scudder GNMA Fund
                  Scudder Institutional Fund, Inc.
                  Scudder International Fund, Inc.
                  Scudder Investment Trust
                  Scudder Municipal Trust
                  Scudder Mutual Funds, Inc.
                  Scudder Pathway Series
                  Scudder Portfolio Trust
                  Scudder Securities Trust

                                Part C - Page 16
<PAGE>

                  Scudder State Tax Free Trust
                  Scudder Tax Free Money Fund
                  Scudder Tax Free Trust
                  Scudder U.S. Treasury Money Fund
                  Scudder Variable Life Investment Fund
                  AARP Cash Investment Funds
                  AARP Growth Trust
                  AARP Income Trust
                  AARP Tax Free Income Trust
                  AARP Managed Investment Portfolios Trust
                  The Japan Fund, Inc.

         (b)

<TABLE>
<CAPTION>
         (1)                               (2)                                     (3)


         Name and Principal                Position and Offices with               Positions and
         Business Address                  Scudder Investor Services, Inc.         Offices with Registrant
         ----------------                  -------------------------------         -----------------------
<S>      <C>                               <C>                                     <C>
         E. Michael Brown                  Assistant Treasurer                     None
         Two International Place
         Boston, MA  02110

         Mark S. Casady                    Director and Vice President             None
         Two International Place
         Boston, MA  02110

         Linda Coughlin                    Director and Senior Vice President      None
         Two International Place
         Boston, MA  02110

         Richard W. Desmond                Vice President                          None
         345 Park Avenue
         New York, NY  10154

         Paul J. Elmlinger                 Senior Vice President and Assistant     None
         345 Park Avenue                   Clerk
         New York, NY  10154

         Margaret D. Hadzima               Assistant Treasurer                     None
         Two International Place
         Boston, MA  02110

         Thomas W. Joseph                  Director, Vice President,               Vice President
         Two International Place           Treasurer and Assistant Clerk
         Boston, MA 02110

         Dudley H. Ladd                    Director and Senior Vice President      None
         Two International Place
         Boston, MA 02110

         David S. Lee                      Director, President and Assistant       Vice President
         Two International Place           Treasurer
         Boston, MA 02110

                                Part C - Page 17
<PAGE>

         Name and Principal                Position and Offices with               Positions and
         Business Address                  Scudder Investor Services, Inc.         Offices with Registrant
         ----------------                  -------------------------------         -----------------------

         Thomas F. McDonough               Assistant Clerk                         Vice President and
         Two International Place                                                   Secretary
         Boston, MA 02110

         Thomas H. O'Brien                 Assistant Treasurer                     None
         345 Park Avenue
         New York, NY  10154

         Edward J. O'Connell               Assistant Treasurer                     Vice President and
         345 Park Avenue                                                           Assistant Treasurer
         New York, NY 10154

         Daniel Pierce                     Director, Vice President                Vice President and Trustee
         Two International Place           and Assistant Treasurer
         Boston, MA 02110

         Kathryn L. Quirk                  Director, Senior Vice President and     Vice President and
         345 Park Avenue                   Clerk                                   Assistant Secretary
         New York, NY  10154

         Edmund J. Thimme                  Vice President                          None
         345 Park Avenue
         New York, NY  10154

         Benjamin Thorndike                Vice President                          None
         Two International Place
         Boston, MA 02110

         David B. Watts                    Assistant Treasurer                     President and Trustee
         Two International Place
         Boston, MA 02110

         Linda J. Wondrack                 Vice President                          None
         Two International Place
         Boston, MA 02110
</TABLE>

          The Underwriter has employees who are denominated officers of an
          operational area. Such persons do not have corporation-wide
          responsibilities and are not considered officers for the purpose of
          this Item 29.

         (c)
<TABLE>
<CAPTION>

                     (1)                     (2)                 (3)                 (4)                 (5)
                                       Net Underwriting    Compensation on
              Name of Principal         Discounts and        Redemptions          Brokerage             Other 
                 Underwriter             Commissions       and Repurchases       Commissions         Compensation
                 -----------             -----------       ---------------       -----------         ------------
<S>            <C>                           <C>                 <C>                 <C>                <C>
               Scudder Investor              None                None                None               None
                Services, Inc.
</TABLE>

Item 30.          Location of Accounts and Records.
--------          ---------------------------------

                  Certain accounts, books and other documents required to be
                  maintained by Section 31(a) of the 1940 Act and the Rules
                  promulgated thereunder are maintained by Scudder, Stevens &
                  Clark, Inc., Two International Place, Boston, MA 02110-4103.
                  Records relating to the duties of the Registrant's custodian

                                Part C - Page 18
<PAGE>

                  are maintained by State Street Bank and Trust Company,
                  Heritage Drive, North Quincy, Massachusetts. Records relating
                  to the duties of the Registrant's transfer agent are
                  maintained by Scudder Service Corporation, Two International
                  Place, Boston, Massachusetts 02110-4103.

Item 31.          Management Services.
--------          --------------------

                  Inapplicable.

Item 32.          Undertakings.
--------          -------------

                  Inapplicable.



                                Part C - Page 19

<PAGE>

                                         SIGNATURES
                                         ----------

         Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to its Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this amendment to its Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Boston and the
Commonwealth of Massachusetts on the 14th day of April, 1997.


                                           SCUDDER VARIABLE LIFE INVESTMENT FUND

                                           By   Thomas F. McDonough
                                             -----------------------------------
                                             Thomas F. McDonough, Vice
                                               President and Secretary


         Pursuant to the requirements of the Securities Act of 1933, this
amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
SIGNATURE                                   TITLE                                        DATE
---------                                   -----                                        ----
<S>                                          <C>                                          <C>   


/s/David B. Watts
--------------------------------------
David B. Watts*                             President (Principal Executive               April 14, 1997
                                            Officer) and Trustee


/s/Daniel Pierce
--------------------------------------
Daniel Pierce*                              Vice President and Trustee                   April 14, 1997


/s/Dr. Kenneth Black, Jr.
--------------------------------------
Dr. Kenneth Black, Jr.*                     Trustee                                      April 14, 1997


/s/Dr. Rosita P. Chang
--------------------------------------
Dr. Rosita P. Chang*                        Trustee                                      April 14, 1997


/s/Peter B. Freeman
--------------------------------------
Peter B. Freeman*                           Trustee                                      April 14, 1997


/s/Dr. J. D. Hammond
--------------------------------------
Dr. J. D. Hammond*                          Trustee                                      April 14, 1997


/s/Pamela A. McGrath
--------------------------------------
Pamela A. McGrath                           Treasurer (Principal Financial and           April 14, 1997
                                            Accounting Officer) and Vice  
                                            President
</TABLE>


*By:     /s/Thomas F. McDonough
         -----------------------------
         Thomas F. McDonough**

**       Attorney-in-fact pursuant to
         the powers of attorney
         contained in the signature
         pages of Post-Effective
         Amendment No. 9 to the
         Registration Statement filed
         March 3, 1989 and
         Post-Effective Amendment No.
         19 to the Registration
         Statement filed May 1, 1996.

<PAGE>

                                                             File No. 2-96461
                                                             File No. 811-4257



                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549



                                    EXHIBITS

                                       TO

                                    FORM N-1A



                         POST-EFFECTIVE AMENDMENT NO. 22

                            TO REGISTRATION STATEMENT

                                      UNDER

                           THE SECURITIES ACT OF 1933

                                       AND

                                AMENDMENT NO. 26

                            TO REGISTRATION STATEMENT

                                      UNDER

                       THE INVESTMENT COMPANY ACT OF 1940



                      SCUDDER VARIABLE LIFE INVESTMENT FUND


<PAGE>


                      SCUDDER VARIABLE LIFE INVESTMENT FUND


                                  EXHIBIT INDEX


                                 Exhibit 1(e)(1)

                                 Exhibit 5(e)

                                 Exhibit 6(a)(1)

                                 Exhibit 8(a)(1)

                                 Exhibit 8(a)(2)

                                 Exhibit 8(f)(1)

                               Exhibit 9(c)(9)(1)

                                 Exhibit 9(e)(7)

                                   Exhibit 11

                                  Exhibit 15(a)

                                   Exhibit 17