497

                                  STATEMENT OF
                             ADDITIONAL INFORMATION
                                January 31, 1997
                                          
                             (Revised July 18, 1997)
                                          
BT Investment Funds
      Intermediate Tax Free Fund
      Global High Yield Securities Fund
      Capital Appreciation Fund
      Small Cap Fund
      International Equity Fund
      Pacific Basin Fund
      Latin American Equity Fund

         BT Investment Funds (the "Trust") is comprised of a number of separate
investment funds. The shares of the following funds - Intermediate Tax Free
Fund, Global High Yield Securities Fund, Capital Appreciation Fund, Small Cap
Fund, International Equity Fund, Pacific Basin Equity Fund, and Latin American
Equity Fund (each, a "Fund") - are described herein.

         As described in the Prospectuses, the Trust seeks to achieve the
investment objectives of each Fund by investing all the investable assets
("Assets") of the Fund (with the exception of the Global High Yield Securities
Fund) in a diversified open-end management investment company having the same
investment objectives as the Fund. The Global High Yield Securities Fund invests
its Assets in a non-diversified open-end management investment company (or
series thereof). These investment companies (or a series thereof) are,
respectively, Intermediate Tax Free Portfolio, Global High Yield Securities
Portfolio, Capital Appreciation Portfolio, Small Cap Portfolio, International
Equity Portfolio, Pacific Basin Equity Portfolio, and Latin American Equity
Portfoio (collectively, the "Portfolios"). The Global High Yield Securities
Portfolio, Small-Cap Portfolio, Pacific Basin Equity Portfolio, and Latin
American Equity Portfolio are each a series of BT Investment Portfolios.

         Since the investment characteristics of the Funds will correspond
directly to those of the respective Portfolio in which the Fund invests all of
its Assets, the following is a discussion of the various investments of and
techniques employed by each Portfolio. Shares of the Funds are sold by Edgewood
Services, Inc. ("Edgewood"), the Trust's Distributor, to clients and customers
(including affiliates and correspondents) of Bankers Trust Company ("Bankers
Trust"), the Portfolios' investment adviser ("Adviser"), and to clients and
customers of other organizations

         The Trust's Prospectuses for each Fund are each dated January 31, 1997.
The Prospectuses provide the basic information investors should know before
investing and may be obtained without charge by calling the Trust at the
telephone number listed below or by contacting any Service Agent. This Statement
of Additional Information ("SAI"), which is not a Prospectus, is intended to
provide additional information regarding the activities and operations of the
Trust and should be read in conjunction with that Fund's Prospectus. This SAI is
not an offer of any Fund for which an investor has not received a Prospectus.
Capitalized terms not otherwise defined in this SAI have the meanings accorded
to them in the Trust's Prospectuses.

                              BANKERS TRUST COMPANY
             Investment Adviser of each Portfolio and Administrator

                             EDGEWOOD SERVICES, INC.
                                   Distributor
     Clearing Operations Pittsburgh, Pennsylvania 15230-0897 (800) 730-1313
                                  P.O. Box 897











I

                                TABLE OF CONTENTS

Investment Objectives, Policies and Restrictions                 1
Performance Information                                          29
Valuation of Securities; Redemptions and Purchases in Kind       32
Management of the Trust and Portfolios                           34
Organization of the Trust                                        43
Taxation                                                         44
Financial Statements                                             46











9

                INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

                              Investment Objectives

     The  investment  objective(s)  of each  Fund is  described  in that  Fund's
Prospectus. There can, of course, be no assurance that any Fund will achieve its
investment objective(s).

                               Investment Policies

         Each Fund seeks to achieve its investment objective(s) by investing all
of its Assets in the corresponding Portfolio. The Trust may withdraw a Fund's
investment from the corresponding Portfolio at any time if the Board of Trustees
of the Trust determines that it is in the best interests of the Fund to do so.

     Since the investment  characteristics of each Fund will correspond directly
to those of the  corresponding  Portfolio,  the following is a discussion of the
various investments of and techniques employed by each Portfolio.

         Certificates of Deposit and Bankers' Acceptances. Certificates of
deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity.
Although maturities for acceptances can be as long as 270 days, most acceptances
have maturities of six months or less.

         Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.

         Illiquid Securities. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the "1933
Act"), securities which are otherwise not readily marketable and repurchase
agreements having a remaining maturity of longer than seven days. Securities
which have not been registered under the 1933 Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.






         In recent years, however, a large institutional market has developed
for certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.

         The Securities and Exchange Commission the (the "SEC") has adopted Rule
144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the 1933
Act of resales of certain securities to qualified institutional buyers. The
Adviser anticipates that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered securities of domestic and foreign issuers, such
as the PORTAL System sponsored by the National Association of Securities
Dealers, Inc.

         The Adviser will monitor the liquidity of Rule 144A securities in each
Portfolio's holdings under the supervision of the Portfolio's Board of Trustees.
In reaching liquidity decisions, the Adviser will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers and other potential purchasers or sellers of the
security; (3) dealer undertakings to make a market in the security and (4) the
nature of the security and of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).

         Futures Contracts and Options on Futures Contracts.

         General. The successful use of such instruments draws upon the
Adviser's skill and experience with respect to such instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Portfolio may not achieve the anticipated benefits of
futures contracts or options on futures contracts or may realize losses and thus
will be in a worse position than if such strategies had not been used. In
addition, the correlation between movements in the price of futures contracts or
options on futures contracts and movements in the price of the securities and
currencies hedged or used for cover will not be perfect and could produce
unanticipated losses.

         Futures Contracts. A Portfolio may enter into contracts for the
purchase or sale for future delivery of fixed-income securities, foreign
currencies, or contracts based on financial indices including any index of U.S.
government securities, foreign government securities or corporate debt
securities. U.S. futures contracts have been designed by exchanges which have
been designated "contracts markets" by the Commodity Futures Trading Commission
("CFTC"), and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through their clearing
corporations, the exchanges guarantee performance of the contracts as between
the clearing members of the exchange. A Portfolio may enter into futures
contracts which are based on debt securities that are backed by the full faith
and credit of the U.S. Government, such as long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities and three-month U.S. Treasury Bills. A
Portfolio may also enter into futures contracts which are based on bonds issued
by entities other than the U.S. government.

         At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.





         At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.

         Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.

         The purpose of the acquisition or sale of a futures contract, in the
case of a Portfolio which holds or intends to acquire fixed-income securities,
is to attempt to protect the Portfolio from fluctuations in interest or foreign
exchange rates without actually buying or selling fixed-income securities or
foreign currencies. For example, if interest rates were expected to increase,
the Portfolio might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an equivalent
value of the debt securities owned by the Portfolio. If interest rates did
increase, the value of the debt security in the Portfolio would decline, but the
value of the futures contracts to the Portfolio would increase at approximately
the same rate, thereby keeping the net asset value of the Portfolio from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.

         Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.

         The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Adviser may still not
result in a successful transaction.





         In addition, futures contracts entail risks. Although the Adviser
believes that use of such contracts will benefit the Portfolios, if the
Adviser's investment judgment about the general direction of interest rates is
incorrect, a Portfolio's overall performance would be poorer than if it had not
entered into any such contract. For example, if a Portfolio has hedged against
the possibility of an increase in interest rates which would adversely affect
the price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities from its portfolio to
meet daily variation margin requirements. Such sales of bonds may be, but will
not necessarily be, at increased prices which reflect the rising market.
A Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.

         Options on Futures Contracts. Each Portfolio may purchase and write
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when a Portfolio is not fully invested it may
purchase a call option on a futures contract to hedge against a market advance
due to declining interest rates.

         The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the security or foreign currency which
is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.

         The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.

         The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.

         The Board of Trustees of each Portfolio has adopted a further
restriction that the Portfolio will not enter into any futures contracts or
options on futures contracts if immediately thereafter the amount of margin
deposits on all the futures contracts of the Portfolio and premiums paid on
outstanding options on futures contracts owned by the Portfolio (other than
those entered into for bona fide hedging purposes) would exceed 5% of the market
value of the total assets of the Portfolio.





         Options on Foreign Currencies. Each Portfolio (except for Intermediate
Tax Free Portfolio) may purchase and write options on foreign currencies for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, will be utilized. 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
diminutions in the value of portfolio securities, the Portfolio may purchase put
options on the foreign currency. If the value of the currency does decline, a
Portfolio will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.

         Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where 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 require it to forego a
portion or all of the benefits of advantageous changes in such rates.

         Each Portfolio (except for Intermediate Tax Free Portfolio) may write
options on foreign currencies for the same types of hedging purposes. For
example, where a Portfolio anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the options will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received.

         Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.

         Each Portfolio (except for Intermediate Tax Free Portfolio) intends to
write covered call options on foreign currencies. A call option written on a
foreign currency by a Portfolio is "covered" if the Portfolio owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its Custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call option is also covered if the Portfolio has a call on the same foreign
currency and in the same principal amount as the call written where the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written or (b) is greater than the exercise price of the call written if
the difference is maintained by the Portfolio in cash, U.S. government
securities and other high quality liquid debt securities in a segregated account
with its custodian.






         Each Portfolio (except for Intermediate Tax Free Portfolio) also
intends to write call options on foreign currencies that are not covered for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is not covered, but is designed to provide a hedge against a
decline in the U.S. dollar value of a security which the Portfolio owns or has
the right to acquire and which is denominated in the currency underlying the
option due to an adverse change in the exchange rate. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account with
its custodian, cash or U.S. government securities or other high quality liquid
debt securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked to market daily.

         Additional Risks of Options on Futures Contracts, Forward Contracts and
Options on Foreign Currencies. Unlike transactions entered into by a Portfolio
in futures contracts, options on foreign currencies and forward contracts are
not traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments, due to the margin and
collateral requirements associated with such positions.

         Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.

         The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.






         As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks
which may not be present in the case of exchange-traded currency options. A
Portfolio's ability to terminate over-the-counter options will be more limited
than with exchange-traded options. It is also possible that broker-dealers
participating in over-the-counter options transactions will not fulfill their
obligations. Until such time as the staff of the SEC changes its position, each
Portfolio will treat purchased over-the-counter options and assets used to cover
written over-the-counter options as illiquid securities. With respect to options
written with primary dealers in U.S. government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to the repurchase
formula.

         In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by: (i) other complex foreign
political and economic factors; (ii) lesser availability than in the United
States 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 nonbusiness 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.

         Options on Securities. Each Portfolio may write (sell) covered call and
put options to a limited extent on its portfolio securities ("covered options")
in an attempt to increase income. However, the Portfolio may forgo the benefits
of appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.

         When a 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. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the 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.

         When a Portfolio writes a covered 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. 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 covered 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. The Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.

         A Portfolio may terminate its obligation as the 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." The Portfolio will realize a profit or loss for a closing purchase
transaction if the amount paid to purchase an option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio, may make a "closing sale
transaction" which involves liquidating the Portfolio's position by selling the
option previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or dealer
spreads in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.





         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's 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.

         A Portfolio may purchase call and put options on any securities in
which it may invest. The Portfolio would normally purchase a call option 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.

         A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is 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 in the Portfolio's holdings, 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 holdings. Put options also may 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.

         Each Portfolio has adopted certain other nonfundamental policies
concerning option transactions which are discussed below. The Portfolio's
activities in options may also be restricted by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.

         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. 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.





         A Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. 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. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolios' Trustees.

         Options on Securities Indices. In addition to options on securities,
each Portfolio (except for Intermediate Tax Free Portfolio) may also purchase
and write (sell) call and put options on securities indices. Such options give
the holder the right to receive a cash settlement during the term of the option
based upon the difference between the exercise price and the value of the index.
Such options will be used for the purposes described above under "Options on
Securities."

     The  International  Equity Portfolio and the Pacific Basin Equity Portfolio
may,  to the extent  allowed by Federal  and state  securities  laws,  invest in
securities   indices  instead  of  investing   directly  in  individual  foreign
securities.

         Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolio generally will only purchase or write such an option if the Adviser
believes the option can be closed out.

         Use of options on securities indices also entails the risk that trading
in such options may be interrupted if trading in certain securities included in
the index is interrupted. The Portfolio will not purchase such options unless
the Adviser believes the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.

         Price movements in a Portfolio's holdings may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Adviser may be forced to liquidate portfolio
securities to meet settlement obligations.

         Forward Foreign Currency Exchange Contracts. Because each Portfolio
(except for Intermediate Tax Free Portfolio) may buy and sell securities
denominated in currencies other than the U.S. dollar and receives interest,
dividends and sale proceeds in currencies other than the U.S. dollar, a
Portfolio from time to time may enter into foreign currency exchange
transactions to convert to and from different foreign currencies and to convert
foreign currencies to and from the U.S. dollar. A Portfolio either enters into
these transactions on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market or uses forward contracts to purchase or
sell foreign currencies.





         A forward foreign currency exchange contract is an obligation by a
Portfolio to purchase or sell a specific currency at a future date, which may be
any fixed number of days from the date of the contract. Forward foreign currency
exchange contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward foreign
currency exchange contract generally has no deposit requirement and is traded at
a net price without commission. Each Portfolio maintains with its custodian a
segregated account of high grade liquid assets in an amount at least equal to
its obligations under each forward foreign currency exchange contract. Neither
spot transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.

         Each Portfolio (except for Intermediate Tax Free Portfolio) may enter
into foreign currency hedging transactions in an attempt to protect against
changes in foreign currency exchange rates between the trade and settlement
dates of specific securities transactions or changes in foreign currency
exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long-term investment
decisions, a Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.

         While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such event
the Portfolio's ability to utilize forward contracts in the manner set forth in
the Prospectus may be restricted. Forward contracts may reduce the potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the Portfolio than if it had not entered into
such contracts. The use of foreign currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject a Portfolio to certain
risks.

         The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, a Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices and this will limit the Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates of
the foreign currencies in which the Portfolio's assets that are the subject of
such cross-hedges are denominated.






         Short-Term Instruments. When a Portfolio experiences large cash inflows
through the sale of securities and desirable equity securities, that are
consistent with the Portfolio's investment objective, which are unavailable in
sufficient quantities or at attractive prices, each Portfolio may invest in
short-term instruments for a limited time pending availability of such portfolio
securities. Short-term instruments consist of foreign or domestic: (i)
short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated AA or higher by Standard & Poor's Rating Group ("S&P") or
Aa or higher by Moody's Investors Services, Inc. ("Moody's") or, if unrated, of
comparable quality in the opinion of Bankers Trust; (iii) commercial paper; (iv)
bank obligations, including negotiable certificates of deposit, time deposits
and banker's acceptances; and (v) repurchase agreements. At the time the
Portfolio invests in commercial paper, bank obligations or repurchase
agreements, the issuer of the issuer's parent must have outstanding debt rated
AA or higher by S&P or Aa or higher by Moody's or outstanding commercial paper
or bank obligations rated A-1 by S&P or Prime-1 by Moody's; or, if no such
ratings are available, the instrument must be of comparable quality in the
opinion of Bankers Trust. These instruments may be denominated in U.S. dollars
or in foreign currencies.

         Lending of Portfolio Securities. Each Portfolio (except for the
Intermediate Tax Free Portfolio) has the authority to lend portfolio securities
to brokers, dealers and other financial organizations. The Portfolios will not
lend securities to Bankers Trust, Edgewood or their affiliates. By lending its
securities, a Portfolio can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term securities or obtaining yield in the form of interest
paid by the borrower when U.S. government obligations are used as collateral.
There may be risks of delay in receiving additional collateral or risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. Each Portfolio will adhere to
the following conditions whenever its securities are loaned: (i) the Portfolio
must receive at least 100 percent cash collateral or equivalent securities from
the borrower; (ii) the borrower must increase this collateral whenever the
market value of the securities including accrued interest rises above the level
of the collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower; provided, however, that if a material event
adversely affecting the investment occurs, the Board of Trustees must terminate
the loan and regain the right to vote the securities.

         Lower-Rated Debt Securities ("Junk Bonds"). The Global High Yield
Securities Portfolio and the Latin American Equity Portfolio may invest in
lower-rated debt securities. While the market for high yield corporate debt
securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.

         The market for lower-rated debt securities may be thinner and less
active than that for higher rated debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
lower- rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the ability of outside pricing services
to value lower-rated debt securities and the Global High Yield Securities
Portfolio's ability to dispose of these securities.





         Since the risk of default is higher for lower-rated debt securities,
Bankers Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.

         The Global High Yield Securities Portfolio may choose, at its expense
or in conjunction with others, to pursue litigation or otherwise exercise its
rights as a security holder to seek to protect the interest of security holders
if it determines this to be in the best interest of the Global High Yield
Securities Fund.

         Brady Bonds. The Global High Yield Securities Portfolio and the Latin
American Equity Portfolio may invest in "Brady bonds," which have been issued by
the governments of Argentina, Brazil, Costa Rica, Mexico, Nigeria, Philippines,
Uruguay and Venezuela. Most Brady bonds are currently rated below BBB by S&P or
Baa by Moody's.

         The Brady Plan was conceived by the U.S. Treasury in the 1980's in an
attempt to produce a debt restructuring program which would enable a debt
country to (i) reduce the absolute level of debt of its creditor banks, and (ii)
reschedule its external debt repayments, based upon its ability to service such
debts by persuading its creditor banks to accept a debt write-off by offering
them a selection of options, each of which represented an attractive substitute
for the nonperforming debt. Although it was envisaged that each debtor country
would agree to a unique package of options with its creditor banks, the plan was
that these options would be based upon the following:(i) a discount bond
carrying a market rate of interest (whether fixed or floating), with principal
collateralized by the debtor country with cash or securities in an amount equal
to at least one year of rolling interest; (ii) a par bond carrying a low rate of
interest (whether fixed or floating), collateralized in the same way as in (i)
above; and (iii) retention of existing debt (thereby avoiding a debt write-off)
coupled with an advance of new money or subscription of new bonds.

         The Global High Yield Securities Portfolio and the Latin American
Equity Portfolio may invest in either collateralized or uncollateralized Brady
bonds. U.S. dollar-denominated, collateralized Brady bonds, which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on such bonds generally are collateralized by cash or
securities in an amount that in the case of fixed rate bonds, is equal to at
least one year of rolling interest payments or, in the case of floating rate
bonds, initially is equal to at least one year's rolling interest payments based
on the applicable interest rate at the time and is adjusted at regular intervals
thereafter.

     Municipal Bonds.  Municipal bonds generally fund longer-term  capital needs
than municipal  notes and have  maturities  exceeding one year when issued.  The
Intermediate Tax Free Portfolio may invest  ---------------  in municipal bonds.
Municipal bonds include:

         General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.





         Revenue Bonds. The principal security for a revenue bond is generally
the net revenues derived from a particular facility, group of facilities or, in
some cases, the proceeds of a special excise tax or other specific revenue
source. Revenue bonds are issued to finance a wide variety of capital projects,
including electric, gas, water and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund that may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security, including partially or fully
insured mortgages, rent subsidized and/or collateralized mortgages, certificates
of deposit and/or the net revenues from housing or other public projects. Some
authorities provide further security in the form of a state's ability (without
obligation) to make up deficiencies in the debt service reserve fund.

         Private Activity Bonds. Private activity bonds, which are considered
municipal obligations if the interest paid thereon is excluded from gross income
for Federal income tax purposes but is a specific tax preference item for
Federal individual and corporate alternative minimum tax purposes, are issued by
or on behalf of public authorities to raise money to finance various
privately-operated facilities such as manufacturing facilities, certain hospital
and university facilities and housing projects. These bonds are also used to
finance public facilities such as airports, mass transit systems and ports. The
payment of the principal and interest on these bonds is dependent solely on the
ability of the facility's user to meet its financial obligations and generally
the pledge, if any, of real and personal property so financed as security for
payment.

         Municipal Notes.  Municipal notes generally fund short-term capital
 needs.  The Intermediate Tax Free Portfolio may invest in municipal notes,
 which include:

         Tax Anticipation Notes. Tax anticipation notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as income, sales, use and
business taxes, and are payable from these specific future taxes.

         Revenue Anticipation Notes.  Revenue anticipation notes are issued in 
expectation of receipt of other types of revenue, such as Federal revenues 
available under Federal revenue sharing programs.
         --------------------------

         Bond  Anticipation  Notes.  Bond  anticipation  notes are issued to 
provide  interim  financing until long-term  financing can be arranged.  In most
 cases,  the long-term bonds provide funds for the
         -------------------------
repayment of these notes.

         Miscellaneous, Temporary and Anticipatory Instruments. These
instruments may include notes issued to obtain interim financing pending
entering into alternate financial arrangements, such as receipt of anticipated
Federal, state or other grants or aid, passage of increased legislative
authority to issue longer-term instruments or obtaining other refinancing.

         Construction Loan Notes. Construction loan notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of construction loan notes, is sometimes provided by a commitment
of the Government National Mortgage Association ("GNMA") to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan. TheIntermediate Tax Free
Portfolio will only purchase construction loan notes that are subject to
permanent GNMA or bank purchase commitments.





         Tax-Exempt Commercial Paper. The Intermediate Tax Free Portfolio may
invest in tax-exempt commercial paper. Tax-exempt commercial paper is a
short-term obligation with a stated maturity of 365 days or less. It is issued
by agencies of state and local governments to finance seasonal working capital
needs or as short-term financing in anticipation of longer-term financing.

         Standby Commitments. The Intermediate Tax Free Portfolio may acquire
standby commitments or "puts" solely to facilitate portfolio liquidity; the
Portfolio intends to exercise its rights thereunder for trading purposes. The
maturity of a municipal obligation is not to be considered shortened by any
standby commitment to which the obligation is subject. Thus, standby commitments
do not affect the dollar-weighted average maturity of the Portfolio.

         When municipal obligations are subject to puts separate from the
underlying securities, no value is assigned to the put. Because of the
difficulty of evaluating the likelihood of exercise or the potential benefit of
a put, the Board of Trustees has determined that puts shall have a fair market
value of zero, regardless of whether any direct or indirect consideration was
paid.

         Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Portfolio's policy is to
enter into put transactions only with put writers who are approved by Bankers
Trust. It is the Portfolio's general policy to enter into put transactions only
with those put writers which are determined to present minimal credit risks. In
connection with this determination, the Board of Trustees will review regularly
Bankers Trust's list of approved put writers, taking into consideration, among
other things, the ratings, if available, of their equity and debt securities,
their reputation in the municipal securities markets, their net worth, their
efficiency in consummating transactions and any collateral arrangements, such as
letters of credit securing the puts written by them. Commercial banks normally
will be members of the Federal Reserve System, and other dealers will be members
of the National Association of Securities Dealers, Inc. or members of a national
securities exchange. Other put writers will have outstanding debt rated Aa or
better by Moody's Investors Services, Inc. ("Moody's") or AA or better by
Standard & Poor's Ratings Group ("S&P"), or will be of comparable quality in
Bankers Trust's opinion, or such put writers' obligations will be collateralized
and of comparable quality in Bankers Trust's opinion. The Board of Trustees has
directed Bankers Trust not to enter into put transactions with any put writer
that, in the judgment of Bankers Trust using the above-described criteria, is or
becomes a recognizable credit risk. The Trust is unable to predict whether all
or any portion of any loss sustained could subsequently be recovered from a put
writer in the event that a put writer should default on its obligation to
repurchase an underlying security.

         Foreign Securities: Special Considerations Concerning Eastern Europe.
The Global High Yield Securities Portfolio may invest in foreign securities
issued by Eastern European countries. 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 Commonwealth of Independent States (consisting of the
Republics of the former Union of Soviet Socialist Republics).





         The economic situation remains difficult for Eastern European countries
in transition from central planning, following what has already been a sizable
decline in output. The contraction now appears to be bottoming out in parts of
Eastern Europe. Following three successive years of output declines, there are
preliminary indications of a turnaround in the former Czech and Slovak Federal
Republic, Hungary and Poland; growth in private sector activity and strong
exports now appear to have contained the fall in output. A number of their
governments, including those of Hungary 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 a move toward free-market economies. But key aspects of the reform
and stabilization efforts have not yet been fully implemented, and there remain
risks of policy slippage. At present, no Eastern European country has a
developed stock market, but Poland, Hungary and the Czech Republic have small
securities markets in operation.

         In many other countries of the region, output losses have been even
larger. These declines reflect the adjustment difficulties during the early
stages of the transition, high rates of inflation, the compression of imports,
disruption in trade among the countries of the former Soviet Union, and
uncertainties about the reform process itself. Large-scale subsidies are
delaying industrial restructuring and are exacerbating the fiscal situation. A
reversal of these adverse factors is not anticipated in the near term, and
output is expected to decline further in most of these countries. In the Russian
Federation and most other countries of the former Soviet Union, economic
conditions are of particular concern because of economic instability due to
political unrest and armed conflicts in many regions. Further, no accounting
standards exist in Eastern European countries. Although certain Eastern 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 each Fund's
shareholders.

         Foreign Securities: Special Considerations Concerning 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 Latin American Equity Fund 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.

         The economies of Latin American countries may be predominantly based in
only a few industries, may be highly vulnerable to changes in local or global
trade conditions, and may suffer from extreme and volatile debt burdens or
inflation rates. Securities of issuers located in Latin America may have limited
marketability and may be subject to more abrupt or erratic price movements.

         Latin American Equity Portfolio invests in securities denominated in
currencies of Latin American countries. Accordingly, changes in the value of
these currencies against the U.S. dollar will 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's securities are denominated may have a
detrimental impact on the Fund'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. 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 Fund'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. Investment in
sovereign debt can involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearage on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt.

         Holders of sovereign debt, including the Portfolio, may be requested to
participate in the rescheduling of such debt and to extend further loans to
governmental entities. There is no bankruptcy proceeding by which defaulted
sovereign debt may be collected in whole or in part.

         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 1960's and 1970's, but slowed
dramatically (and in some instances was negative) in the 1980's 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 ("GDP") 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 rescheduled. Political turmoil, high
inflation, capital repatriation restrictions and nationalization have further
exacerbated conditions.






         Large budget deficits and a high level of state ownership in many
productive and service areas have given way to balanced budgets and
privatization in Mexico, Brazil, Chile and Argentina. Changes in political
leadership have encouraged the implementation of market oriented economic
policies such as balanced budgets. Privatization trade reform and monetary
reform have been among the steps taken to modernize the Latin American economies
and to regenerate growth in the region. However, 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 Portfolio'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 the
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 trade zone between Mexico and the U.S.
Various trade agreements have also been formed within the region such as the
Andean Pact, Mercosur and North American Free Trade Agreement (NAFTA). The
largest of these is NAFTA, which was implemented on January 1, 1994. Latin
American equity markets can be extremely volatile and in the past have shown
little correlation with the U.S. market. 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.

         Foreign Securities: Special Considerations Concerning the Pacific
Basin. Many Asian countries may be subject to a greater degree of social,
political and economic instability than is the case in the United States and
European countries. Such instability may result from (i) authoritarian
governments or military involvement in political and economic decision-making;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection.

         The economies of most of the Asian countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Community. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the securities markets of the Asian countries.

         Thailand has been transformed into one of the fastest growing stock
markets in the world. On February 23, 1991, the military staged its 17th coup
since the overthrow of the absolute monarchy in 1932. The newly appointed
government quickly focused on the economy and enacted major tax revisions,
slashing personal income tax and reducing taxes on imports. Most significantly,
it pushed through a 7% value added tax. Released from political consideration by
the coup, the Bank of Thailand was finally able to implement a monetary
tightening. As a result, interest rates rose and GDP declined to 7.7% from 10%
the previous year. The government continues to move ahead with new projects -
especially telecommunications, roads and port facilities - needed to refurbish
the country's overtaxed infrastructure. Nonetheless, political unrest coupled
with the shooting of anti-government demonstrators in May 1992 has caused many
international businesses to question Thailand's political stability.





         Hong Kong's impending return to Chinese dominion in 1997 has not
initially had a positive effect on its economic growth which was vigorous in the
1980's. However, authorities in Beijing have agreed to maintain a capitalist
system for 50 years that, along with Hong Kong's economic growth, continued to
further strong stock market returns. In preparation for 1997, Hong Kong has to
develop trade with China, where it is the largest foreign investor, while also
maintaining its long-standing export relationship with the United States.
Spending on infrastructure improvements is a significant priority of the
colonial government while the private sector continues to diversify abroad based
on its position as an established international trade center in the Far East.

         In terms of GDP, industrial standards and level of education, South
Korea is second only to Japan in Asia. It enjoys the benefits of a diversified
economy with well developed sectors in electronics, automotive, textiles and
shoe manufacturing, steel and shipbuilding among others. The driving force
behind the economy's dynamic growth has been the planned development of an
export-oriented economy in a vigorously entrepreneurial society. Real GDP grew
about 7.5% in 1991. Labor unrest was noticeably calmer, unemployment averaged a
low of 2.3%, and investment was strong. Inflation rates, however, are beginning
to challenge South Korea's strong economic performance. In addition, the
international situation between South and North Korea continues to improve. Both
Koreas joined the United Nations separately in late 1991, creating another forum
for negotiation and joint cooperation.

         Indonesia is a mixed economy with many socialist institutions and
central planning, but has recently placed emphasis on deregulation and private
enterprise. Like Thailand, Indonesia has extensive natural wealth, yet with a
large and rapidly increasingly population, it remains a poor country.
Agriculture, including forestry and fishing, is an important sector, accounting
for 21% of GDP and over 50% of the labor force. Once the world's largest rice
importer, Indonesia is now nearly self-sufficient.

         The Malaysian economy continued to perform well, growing at an average
annual rate of 9% from 1987 through 1991. This placed Malaysia as one of the
fastest growing economies in the Asian-Pacific region. Malaysia has become the
world's third-largest producer of semiconductor devices (after the U.S. and
Japan) and the world's largest exporter of semiconductor devices. More
remarkable is the country's ability to achieve rapid economic growth with
relative price stability (2% inflation over the past five years) as the
government followed prudent fiscal/monetary policies. Malaysia's high export
dependence level leaves it vulnerable to a recession in the OECD countries or a
fall in world commodity prices.

         Singapore has an open entrepreneurial economy with strong service and
manufacturing sectors and excellent international trading links derived from its
entrepot history. During the 1970's and early 1980's, the economy expanded
rapidly, achieving an average annual growth rate of 9%. Per capita GDP is among
the highest in Asia. Singapore holds a position as a major oil refining and
services center.

         Foreign Securities: Special Considerations Concerning China and China
Region. China's economic reform plan was designed to bring in foreign investment
capital and technological skills. The result has been a move towards a more
mixed economy away from the previous centrally planned economy. The process of
devolving responsibility for all aspects of enterprise to local management and
authorities continues, even though the system of socialism with Chinese
characteristics involves considerable influence by the central government on
production and marketing.

         In order to attract foreign investment, China has since 1978 designated
certain areas of the country where overseas investors can receive special
investment incentives and tax concessions. There are five Special Economic Zones
(Shenzhen, Shantou and Zhuhai in Guangdong Province, Xiamen in Fujian Province
and Hainan Island, which itself is a province). Fourteen coastal cities have
been designated as "open cities" and certain Open Economic Zones have been
established in coastal areas. Shanghai has established the Pudong New Area.
Twenty-seven High and New Technology Industrial Development Zones have been
approved where preferential treatment is given to enterprises which are
confirmed as technology intensive.





         China has had for many centuries a well deserved reputation for being
closed to foreigners, with trade with the outside world being carried on under
terms of extreme restriction and under central control. Such conditions were
maintained in the first thirty years of the Communist regime which began in
1949; however, there have been several stages of evolution, from the institution
of an industrialization program in the 1950s to a modernization policy
commencing in 1978 which combined economic development with the beginnings of
opening the country.

         The securities markets in the China region are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. A high proportion of the shares of many Chinese issuers may be held by a
limited number of persons and financial institutions, which may limit the number
of shares available for investment by the Portfolio. Similarly, volume and
liquidity in the bond markets in China are less than in the United States and,
at times, price volatility can be greater than in the United States. A limited
number of issuers in Chinese securities markets may represent a
disproportionately large percentage of market capitalization and trading value.
The limited liquidity of securities markets in China may also affect the
Portfolio's ability to acquire or dispose of securities at the price and time it
wishes to do so. Accordingly, during periods of rising securities prices in the
more illiquid Chinese securities markets, the Portfolio's ability to participate
fully in such price increases may be limited by its investment policy of
investing not more than 15% of its net assets in illiquid securities.
Conversely, the Portfolio's inability to dispose fully and promptly of positions
in declining markets will cause the Portfolio's net asset value to decline as
the value of the unsold positions is marked to lower prices. In addition, the
Chinese securities markets are susceptible to being influenced by large
investors trading significant blocks of securities.

         The Chinese, Hong Kong and Taiwan stock markets are undergoing a period
of growth and change which may result in trading volatility and difficulties in
the settlement and recording of transactions, and in interpreting and applying
the relevant law and regulations.

         China governmental actions can have a significant effect on the
economic conditions in China, which could adversely affect the value and
liquidity of the Portfolio's investments. Although the Chinese government has
recently begun to institute economic reform policies, there can be no assurances
that it will continue to pursue such policies or, if it does, that such policies
will succeed.

         The securities industry in China is not well developed. China has no
securities laws of nationwide applicability. The municipal securities
regulations adopted by Shanghai and Shenzhen municipalities are very new, as are
their respective securities exchanges and other self-regulatory organizations.
In addition, Chinese stockbrokers and other intermediaries may not perform as
well as their counterparts in the United States and other more developed
securities markets. The prices at which the Portfolio may acquire investments
may be affected by trading by persons with material non-public information and
by securities transactions by brokers in anticipation of transactions by the
Portfolio in particular securities.





         China does not have a comprehensive system of laws, although
substantial changes have occurred in this regard in recent years. The corporate
form of organization has only recently been permitted in China and national
regulations governing corporations were introduced only in May 1992. Prior to
the introduction of such regulations, Shanghai had adopted a set of corporate
regulations applicable to corporations located or listed in Shanghai, and the
relationship between the two sets of regulations is not clear. Consequently,
until a firmer legal basis is provided, even such fundamental corporate law
tenets as the limited liability status of Chinese issuers and their authority to
issue shares remain open to question. Laws regarding fiduciary duties of
officers and directors and the protection of shareholders are not well
developed. China's judiciary is relatively inexperienced in enforcing the laws
that exist, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even where adequate law exists in China, it may be
impossible to obtain swift and equitable enforcement of such law, or to obtain
enforcement of the judgment by a court of another jurisdiction. The bankruptcy
laws pertaining to state enterprises have rarely been used and are untried in
regard to an enterprise with foreign shareholders, and there can be no assurance
that such shareholders, including the Portfolio, would be able to realize the
value of the assets of the enterprise or receive payment in convertible
currency. As the Chinese legal system develops, the promulgation of new laws,
changes to existing laws and the preemption of local laws by national laws may
adversely affect foreign investors, including the Portfolio. The uncertainties
faced by foreign investors in China are exacerbated by the fact that many laws,
regulations and decrees of China are not publicly available, but merely
circulated internally.

         Exports continue to rise strongly, although China remains vulnerable to
United States economic conditions and possible trade sanctions, unless it
liberalizes current import restrictions and improves its human rights record.
However, imports are also expected to rise and may outstrip exports in terms of
growth rates.

         There are currently two officially recognized securities exchanges in
China -- The Shanghai Securities Exchange which opened in December 1990 and The
Shenzhen Stock Exchange which opened in July 1991. Shares traded on these
Exchanges are two types -- "A" shares which can be traded only by Chinese
investors and "B" shares which can be traded only by individuals and
corporations not resident in China.

         In Shanghai, all "B" shares are denominated in Chinese renminbi
("RMB"), but all transactions in "B" shares must be settled in U.S. dollars, and
all distributions made on "B" shares are payable in U.S. dollars, the exchange
rate being the weighted average exchange rate for the U.S. dollar as published
by the Shanghai Foreign Exchange Adjustment Centre.

         In Shenzhen, the purchase and sale prices for "B" shares are quoted in
Hong Kong dollars. Dividends and other lawful revenue derived from "B" shares
are calculated in RMB but payable in Hong Kong dollars, the rate of exchange
being the average rate published by Shenzhen Foreign Exchange Adjustment Centre.

         There are no foreign exchange restrictions on the repatriation of gains
made on or income derived from "B" shares, subject to the payment of taxes
imposed by China thereon.

         Company law relating to companies limited by shares and regulations
regarding the issuing of shares by equity joint ventures have not yet been
developed on a national basis. The Shenzhen municipality issued regulations in
1992 relating to joint stock companies, and the Shanghai municipality has a
draft joint stock company law under review. Regulations governing the trading of
securities on both the Shenzhen and the Shanghai stock exchanges have been
issued by each municipality; there is no national securities legislation as yet.





         Economies of countries in the China region may differ favorably or
unfavorably from the U.S. economy in such respects as rate of growth of gross
domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. As an export-driven economy,
the economy of China is affected by developments in the economies of its
principal trading partners. Revocation by the United States of China's "Most
Favored Nation" trading status, which the U.S. President and Congress reconsider
annually, would adversely affect the trade and economic development of China and
Hong Kong. Hong Kong and Taiwan have limited natural resources, resulting in
dependence on foreign sources for certain raw materials and economic
vulnerability to global fluctuations of price and supply.

                                 Rating Services

         The ratings of rating services represent their opinions as to the
quality of the securities that they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards
of quality. Although these ratings are an initial criterion for selection of
portfolio investments, Bankers Trust also makes its own evaluation of these
securities, subject to review by the Board of Trustees. After purchase by a
Portfolio, an obligation may cease to be rated or its rating may be reduced
below the minimum required for purchase by the Portfolio. Neither event would
require a Portfolio to eliminate the obligation from its portfolio, but Bankers
Trust will consider such an event in its determination of whether a Portfolio
should continue to hold the obligation.
A description of the ratings is included in the Funds' Prospectus.

                             Investment Restrictions

         The following investment restrictions are "fundamental policies" of
each Fund and each Portfolio and may not be changed with respect to the Fund or
the Portfolio without the approval of a "majority of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be. "Majority of the
outstanding voting securities" under the Investment Company Act of 1940, as
amended (the "1940 Act"), and as used in this SAI and the Prospectuses, means,
with respect to the Fund (or the Portfolio), the lesser of (i) 67% or more of
the outstanding voting securities of the Fund (or of the total beneficial
interests of the Portfolio) present at a meeting, if the holders of more than
50% of the outstanding voting securities of the Fund (or of the total beneficial
interests of the Portfolio) are present or represented by proxy or (ii) more
than 50% of the outstanding voting securities of the Fund (or of the total
beneficial interests of the Portfolio). Whenever the Trust is requested to vote
on a fundamental policy of a Portfolio, the Trust will hold a meeting of the
corresponding Fund's shareholders and will cast its vote as instructed by that
Fund's shareholders. Fund shareholders who do not vote will not affect the
Trust's votes at the Portfolio meeting. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees of the
Trust in the same proportion as the Fund shareholders who do, in fact, vote.






As a matter of fundamental  policy, no Portfolio (or Fund) may (except that no
investment  restriction of a Fund shall prevent a Fund from investing all of its
Assets in an open-end  investment  company with
substantially the same investment objectives):

         (1)  borrow money or mortgage or hypothecate assets of the Portfolio
              (Fund), except that in an amount not to exceed 1/3 of the current
              value of the Portfolio's (Fund's) net assets, it may borrow money
              (but only as a temporary measure for extraordinary or emergency
              purposes in the case of the Small Cap Portfolio (Fund), Capital
              Appreciation Portfolio (Fund), International Equity Portfolio
              (Fund), and Intermediate Tax Free Portfolio (Fund)), and enter
              into reverse repurchase agreements or dollar roll transactions,
              and except that it may pledge, mortgage or hypothecate not more
              than 1/3 of such assets to secure such borrowings (it is intended
              that money would be borrowed only from banks and only either to
              accommodate requests for the withdrawal of beneficial interests
              (redemption of shares) while effecting an orderly liquidation of
              portfolio securities or to maintain liquidity in the event of an
              unanticipated failure to complete a portfolio security transaction
              or other similar situations) or reverse repurchase agreements,
              provided that collateral arrangements with respect to options and
              futures, including deposits of initial deposit and variation
              margin, are not considered a pledge of assets for purposes of this
              restriction and except that assets may be pledged to secure
              letters of credit solely for the purpose of participating in a
              captive insurance company sponsored by the Investment Company
              Institute; for additional related restrictions, see clause (i)
              under the caption "Additional Restrictions" below (as an operating
              policy, the Portfolios may not engage in dollar-roll
              transactions);

         (2)  underwrite  securities  issued by other persons except insofar as 
              the Portfolios (Trust or the Funds) may technically be deemed an
              underwriter under the 1933 Act in selling a portfolio
              security;

                  
         (3)  make loans to other persons except: (a) through the lending of the
              Portfolio's (Fund's) portfolio securities and provided that any
              such loans not exceed 30% of the Portfolio's (Fund's) total assets
              (taken at market value); (b) through the use of repurchase
              agreements or the purchase of short-term obligations; or (c) by
              purchasing a portion of an issue of debt securities of types
              distributed publicly or privately;
                    

         (4)  purchase or sell real estate (including limited partnership
              interests but excluding securities secured by real estate or
              interests therein), interests in oil, gas or mineral leases,
              commodities or commodity contracts (except futures and option
              contracts) in the ordinary course of business (except that the
              Portfolio (Trust) may hold and sell, for the Portfolio's (Fund's)
              portfolio, real estate acquired as a result of the Portfolio's
              (Fund's) ownership of securities);

         (5)  concentrate its investments in any particular industry (excluding 
              U.S. government securities),  but if it is deemed appropriate for
              the achievement of a Portfolio's (Fund's) investment
              objective(s), up to 25% of its total assets may be invested in any
              one industry; and





         (6)  issue any senior security (as that term is defined in the 1940
              Act) if such issuance is specifically prohibited by the 1940 Act
              or the rules and regulations promulgated thereunder, provided that
              collateral arrangements with respect to options and futures,
              including deposits of initial deposit and variation margin, are
              not considered to be the issuance of a senior security for
              purposes of this restriction.

         As an operating policy, except as otherwise noted, no Portfolio will
invest in another open-end registered investment company. This operating policy
does not apply to the Intermediate Tax Free Portfolio, Capital Appreciation
Portfolio, or International Equity Portfolio.


         Additional Restrictions. In order to comply with certain statutes and
policies, each Portfolio (or the Trust, on behalf of each Fund) will not as a
matter of operating policy (except that no operating policy shall prevent a Fund
from investing all of its Assets in an open-end investment company with
substantially the same investment objectives):

                  (i) borrow money (including through reverse repurchase or
                  forward roll transactions) for any purpose in excess of 5%
                  (10% with respect to Intermediate Tax Free Portfolio (Fund))
                  of the Portfolio's (Fund's) total assets (taken at cost),
                  except that the Portfolio (Fund) may borrow for temporary or
                  emergency purposes up to 1/3 of its total assets;

                  (ii) pledge, mortgage or hypothecate for any purpose in excess
                  of 10% of the Portfolio's (Fund's) total assets (taken at
                  market value), provided that collateral arrangements with
                  respect to options and futures, including deposits of initial
                  deposit and variation margin, and reverse repurchase
                  agreements are not considered a pledge of assets for purposes
                  of this restriction;

                  (iii) purchase any security or evidence of interest therein on
                  margin, except that such short-term credit as may be necessary
                  for the clearance of purchases and sales of securities may be
                  obtained and except that deposits of initial deposit and
                  variation margin may be made in connection with the purchase,
                  ownership, holding or sale of futures;

                  (iv) except for Intermediate Tax Free Portfolio (Fund), sell
                  securities it does not own (short sales) such that the dollar
                  amount of such short sales at any one time exceeds 25% of the
                  net equity of the Portfolio (Fund), and the value of
                  securities of any one issuer in which the Portfolio (Fund) is
                  short exceeds the lesser of 2.0% of the value of the
                  Portfolio's (Fund's) net assets or 2.0% of the securities of
                  any class of any U.S. issuer and, provided that short sales
                  may be made only in those securities which are fully listed on
                  a national securities exchange or a foreign exchange (This
                  provision does not include the sale of securities that the
                  Portfolio (Fund) contemporaneously owns or where the Portfolio
                  has the right to obtain securities equivalent in kind and
                  amount to those sold, i.e., short sales against the box.) (the
                  Portfolios (Funds) currently do not engage in short selling);





                  (v) with respect to Intermediate Tax Free Portfolio (Fund),
                  (a) sell any security which it does not own unless by virtue
                  of its ownership of other securities it has at the time of
                  sale a right to obtain securities, without payment of further
                  consideration, equivalent in kind and amount to the securities
                  sold and provided that if such right is conditional the sale
                  is made upon the same conditions; and (b) make short sales of
                  securities or maintain a short position, unless at all times
                  when a short position is open it owns an equal amount of such
                  securities or securities convertible into or exchangeable,
                  without payment of any further consideration, for securities
                  of the same issue and equal in amount to, the securities sold
                  short, and unless not more than 10% of the Portfolio's
                  (Fund's) net assets (taken at market value) is represented by
                  such securities, or securities convertible into or
                  exchangeable for such securities, at any one time (the
                  Portfolio (Fund) has no current intention to engage in short
                  selling);

         (vi)     invest for the purpose of exercising control or management of
                  another company;

                  (vii) purchase securities issued by any investment company
                  except by purchase in the open market where no commission or
                  profit to a sponsor or dealer results from such purchase other
                  than the customary broker's commission, or except when such
                  purchase, though not made in the open market, is part of a
                  plan of merger or consolidation; provided, however, that
                  securities of any investment company will not be purchased for
                  the Portfolio (Fund) if such purchase at the time thereof
                  would cause: (a) more than 10% of the Portfolio's (Fund's)
                  total assets (taken at the greater of cost or market value) to
                  be invested in the securities of such issuers; (b) more than
                  5% of the Portfolio's (Fund's) total assets (taken at the
                  greater of cost or market value) to be invested in any one
                  investment company; or (c) more than 3% of the outstanding
                  voting securities of any such issuer to be held for the
                  Portfolio (Fund); provided further that, except in the case of
                  a merger or consolidation, the Portfolio (Fund) shall not
                  purchase any securities of any open-end investment company
                  unless (1) the Portfolio's investment adviser waives the
                  investment advisory fee with respect to assets invested in
                  other open-end investment companies and (2) the Portfolio
                  incurs no sales charge in connection with the investment;

                  (viii) except for Intermediate Tax Free Portfolio (Fund),
                  invest more than 10% of the Portfolio's (Fund's) total assets
                  (taken at the greater of cost or market value) in securities
                  (excluding Rule 144A securities) that are restricted as to
                  resale under the 1933 Act;

                  (ix) except for Intermediate Tax Free Portfolio (Fund), invest
                  more than 15% of the Portfolio's (Fund's) total assets (taken
                  at the greater of cost or market value) in (a) securities
                  (excluding Rule 144A securities) that are restricted as to
                  resale under the 1933 Act, and (b) securities that are issued
                  by issuers which (including predecessors) have been in
                  operation less than three years (other than U.S. government
                  securities), provided, however, that no more than 5% of the
                  Portfolio's (Fund's) total assets are invested in securities
                  issued by issuers which (including predecessors) have been in
                  operation less than three years;

                  (x) except for Intermediate Tax Free Portfolio (Fund), invest
                  more than 15% of the Portfolio's (Fund's) net assets (taken at
                  the greater of cost or market value) in securities that are
                  illiquid or not readily marketable (excluding Rule 144A
                  securities deemed by the Board of Trustees of the Portfolio
                  (Trust) to be liquid);





                  (xi) with respect to Intermediate Tax Free Portfolio (Fund),
                  invest more than 15% of the Portfolio's (Fund's) net assets
                  (taken at the greater of cost or market value) in securities
                  that are illiquid or not readily marketable not including (a)
                  Rule 144A securities that have been determined to be liquid by
                  the Board of Trustees; and (b) commercial paper that is sold
                  under section 4(2) of the 1933 Act which: (i) is not traded
                  flat or in default as to interest or principal; and (ii) is
                  rated in one of the two highest categories by at least two
                  nationally recognized statistical rating organizations and the
                  Portfolio's (Fund's) Board of Trustees have determined the
                  commercial paper to be liquid; or (iii) is rated in one of the
                  two highest categories by one nationally recognized
                  statistical rating agency and the Portfolio's (Fund's) Board
                  of Trustees have determined that the commercial paper is
                  equivalent quality and is liquid;

                  (xii) with respect to Intermediate Tax Free Portfolio, (a)
                  invest more than 10% of the Portfolio's (Fund's) total assets
                  (taken at the greater of cost or market value) in securities
                  that are restricted as to resale under the 1933 Act (other
                  than Rule 144A securities deemed liquid by the Portfolio's
                  (Fund's) Board of Trustees), and (b) no more than 5% of the
                  Portfolio's (Fund's) total assets will be invested in
                  securities issued by issuers which (including predecessors)
                  have been in operation less than three years;

                  (xiii) except for Capital Appreciation Portfolio (Fund) and
                  International Equity Portfolio (Fund), with respect to 75%
                  (50% in the case of Global High Yield Securities Portfolio
                  (Fund)) of the Portfolio's (Fund's) total assets, purchase
                  securities of any issuer if such purchase at the time thereof
                  would cause the Portfolio (Fund) to hold more than 10% of any
                  class of securities of such issuer, for which purposes all
                  indebtedness of an issuer shall be deemed a single class and
                  all preferred stock of an issuer shall be deemed a single
                  class, except that futures or option contracts shall not be
                  subject to this restriction;

                  (xiv)    with respect to Capital  Appreciation  Portfolio 
                  (Fund) and  International  Equity Portfolio  (Fund),  with 
                  respect to 75% of its assets,  invest more than 5% of its 
                  total assets in the securities (excluding U.S. government
                  securities) of any one issuer;

                  (xv) except for Capital Appreciation Portfolio (Fund) and
                  International Equity Portfolio (Fund), with respect to 75%
                  (50% in the case of Global High Yield Securities Portfolio
                  (Fund)) of the Portfolio's (Fund's) total assets, invest more
                  than 5% of its total assets in the securities (excluding U.S.
                  government securities) of any one issuer and in the case of
                  Global High Yield Securities Portfolio (Fund) invest more than
                  25% of its total assets in any one issuer;

                  (xvi) invest in securities issued by an issuer any of whose
                  officers, directors, trustees or security holders is an
                  officer or Trustee of the Portfolio (Trust), or is an officer
                  or director of the Adviser, if after the purchase of the
                  securities of such issuer for the Portfolio (Fund) one or more
                  of such persons owns beneficially more than 1/2 of 1% of the
                  shares or securities, or both, all taken at market value, of
                  such issuer, and such persons owning more than 1/2 of 1% of
                  such shares or securities together own beneficially more than
                  5% of such shares or securities, or both, all taken at market
                  value;





                  (xvii) invest in warrants (other than warrants acquired by the
                  Portfolio (Fund) as part of a unit or attached to securities
                  at the time of purchase) if, as a result, the investments
                  (valued at the lower of cost or market) would exceed 5% of the
                  value of the Portfolio's (Fund's) net assets or if, as a
                  result, more than 2% of the Portfolio's (Fund's) net assets
                  (with the exception of the Pacific Basin Equity Portfolio
                  (Fund) which may invest up to 10% of its net assets in
                  warrants) would be invested in warrants not listed on a
                  recognized United States or foreign stock exchange (New York
                  or American Stock Exchange with respect to the Intermediate
                  Tax Free Portfolio (Fund)), to the extent permitted by
                  applicable state securities laws;

                  (xviii) write puts and calls on securities unless each of the
                  following conditions are met: (a) the security underlying the
                  put or call is within the investment policies of the Portfolio
                  (Fund) and the option is issued by the OCC, except for put and
                  call options issued by non-U.S. entities or listed on non-U.S.
                  securities or commodities exchanges; (b) the aggregate value
                  of the obligations underlying the puts determined as of the
                  date the options are sold shall not exceed 5% (50% with
                  respect to Intermediate Tax Free Portfolio (Fund)) of the
                  Portfolio's (Fund's) net assets; (c) the securities subject to
                  the exercise of the call written by the Portfolio (Fund) must
                  be owned by the Portfolio (Fund) at the time the call is sold
                  and must continue to be owned by the Portfolio (Fund) until
                  the call has been exercised, has lapsed, or the Portfolio
                  (Fund) has purchased a closing call, and such purchase has
                  been confirmed, thereby extinguishing the Portfolio's (Fund's)
                  obligation to deliver securities pursuant to the call it has
                  sold; and (d) at the time a put is written, the Portfolio
                  (Fund) establishes a segregated account with its custodian
                  consisting of cash or short-term U.S. government securities
                  equal in value to the amount the Portfolio (Fund) will be
                  obligated to pay upon exercise of the put (this account must
                  be maintained until the put is exercised, has expired, or the
                  Portfolio (Fund) has purchased a closing put, which is a put
                  of the same series as the one previously written); and

                  (xix) buy and sell puts and calls on securities, stock index
                  futures or options on stock index futures, or financial
                  futures or options on financial futures unless such options
                  are written by other persons and: (a) the options or futures
                  are offered through the facilities of a national securities
                  association or are listed on a national securities or
                  commodities exchange, except for put and call options issued
                  by non-U.S. entities or listed on non-U.S. securities or
                  commodities exchanges; (b) the aggregate premiums paid on all
                  such options which are held at any time do not exceed 20% of
                  the Portfolio's (Fund's) total net assets; and (c) the
                  aggregate margin deposits required on all such futures or
                  options thereon held at any time do not exceed 5% of the
                  Portfolio's (Fund's) total assets.

         There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken,
notwithstanding a later change in the market value of an investment, in net or
total assets or in the change of securities rating of the investment, or any
other later change.

         Each Fund will comply with the state securities laws and regulations of
all states in which it is registered. Each Portfolio will comply with the
permitted investments and investment limitations in the securities laws and
regulations of all states in which the corresponding Fund, or any other
registered investment company investing in the Portfolio, is registered.





                Portfolio Transactions and Brokerage Commissions

         The Adviser is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures for each Portfolio,
the selection of brokers, dealers and futures commission merchants to effect
transactions and the negotiation of brokerage commissions, if any.
Broker-dealers may receive brokerage commissions on portfolio transactions,
including options, futures and options on futures transactions and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker-dealer or futures commission merchant, including to the
extent and in the manner permitted by applicable law, Bankers Trust or its
subsidiaries or affiliates. Purchases and sales of certain portfolio securities
on behalf of a Portfolio are frequently placed by the Adviser with the issuer or
a primary or secondary market-maker for these securities on a net basis, without
any brokerage commission being paid by the Portfolio. Trading does, however,
involve transaction costs. Transactions with dealers serving as market-makers
reflect the spread between the bid and asked prices. Transaction costs may also
include fees paid to third parties for information as to potential purchasers or
sellers of securities. Purchases of underwritten issues may be made which will
include an underwriting fee paid to the underwriter.

         The Adviser seeks to evaluate the overall reasonableness of the
brokerage commissions paid (to the extent applicable) in placing orders for the
purchase and sale of securities for a Portfolio taking into account such factors
as price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio 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.

         The Adviser is authorized, consistent with Section 28(e) of the
Securities Exchange Act of 1934, as amended, when placing portfolio transactions
for a Portfolio with a broker to pay a brokerage commission (to the extent
applicable) in excess of that which another broker might have charged for
effecting the same transaction on account of the receipt of research, market or
statistical information. The term "research, market or statistical information"
includes advice as to the value of securities; the advisability of investing in,
purchasing or selling securities; 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.

         Consistent with the policy stated above, the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. and such other policies as
the Trustees of the Portfolio may determine, the Adviser may consider sales of
shares of the Trust and of other investment company clients of Bankers Trust as
a factor in the selection of broker-dealers to execute portfolio transactions.
Bankers Trust will make such allocations if commissions are comparable to those
charged by nonaffiliated, qualified broker-dealers for similar services.

     Higher  commissions may be paid to firms that provide research  services to
the extent permitted by law. Bankers Trust may use this research  information in
managing the Portfolio's assets, as well as the assets of other clients.

         Except for implementing the policies stated above, there is no
intention to place portfolio transactions with 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 security being traded
unless, after exercising care, it appears that more favorable results are
available otherwise.





         Although certain research, market and statistical information from
brokers and dealers can be useful to a Portfolio and to the Adviser, it is the
opinion of the management of the Portfolios 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
Portfolios, and not all such information is used by the Adviser in connection
with the Portfolios. 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
Portfolios.

         In certain instances there may be securities which are suitable for a
Portfolio as well as for one or more of the Adviser's other clients. Investment
decisions for a Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Portfolio is concerned. However, it is believed that
the ability of a Portfolio to participate in volume transactions will produce
better executions for the Portfolio.

         For the period from January 1, 1996 to September 30, 1996, and the
fiscal years ended December 31, 1995 and 1994, Intermediate Tax Free Portfolio
paid no brokerage commissions.

     Global High Yield  Securities  Portfolio paid no brokerage  commissions for
the fiscal  year ended  September  30,  1996,  $5,653 for the fiscal  year ended
September  30,  1995 and  paid no  brokerage  commissions  for the  period  from
December 14, 1993 (commencement of operations) through September 30, 1994.

     For the fiscal year ended  September  30, 1996,  the period from January 1,
1995 to September  30,  1995,  and the year ended  December  31,  1994,  Capital
Appreciation  Portfolio  paid  brokerage  commissions in the amount of $648,897,
$247,868 and $162,941, respectively.

     Small Cap Portfolio  paid  brokerage  commissions in the amount of $238,160
for the fiscal year ended September 30, 1996,  $70,603 for the fiscal year ended
September   30,  1995  and  $20,835  for  the  period  from   October  21,  1993
(commencement of operations) through September 30, 1994.

     For the fiscal year ended  September  30, 1996,  the period from January 1,
1995 to September 30, 1995, and the year ended December 31, 1994,  International
Equity Portfolio paid brokerage commissions in the amount of $603,995,  $132,894
and $110,580, respectively.

     Pacific Basin Equity Portfolio paid brokerage  commissions in the amount of
$323,957,  for the fiscal year ended September 30, 1996, $192,123 for the fiscal
year ended  September 30, 1995 and $139,363 for the period from November 1, 1993
(commencement of operations) through September 30, 1994.

     Latin American Equity Portfolio paid brokerage commissions in the amount of
$164,049 for the fiscal year ended  September 30, 1996,  $202,130 for the fiscal
year ended September 30, 1995, and $188,008 for the period from October 25, 1993
(commencement of operations) through September 30, 1994.





                             PERFORMANCE INFORMATION

                        Standard Performance Information

         From time to time, quotations of a Fund's performance may be included
         in advertisements, sales literature or shareholder reports.  These
         performance figures are calculated in the following manner:

         Yield: Yields for a Fund used in advertising are computed by dividing
         the Fund's interest and dividend income for a given 30-day or one-month
         period, net of expenses, by the average number of shares entitled to
         receive distributions during the period, dividing this figure by the
         Fund's net asset value per share at the end of the period, and
         annualizing the result (assuming compounding of income) in order to
         arrive at an annual percentage rate. Income is calculated for purpose
         of yield quotations in accordance with standardized methods applicable
         to all stock and bond mutual funds. Dividends from equity investments
         are treated as if they were accrued on a daily basis, solely for the
         purpose of yield calculations. In general, interest income is reduced
         with respect to bonds trading at a premium over their par value by
         subtracting a portion of the premium from income on a daily basis, and
         is increased with respect to bonds trading at a discount by adding a
         portion of the discount to daily income. Capital gains and losses
         generally are excluded from the calculation.

         Income calculated for the purposes of calculating a Fund's yield
         differs from income as determined for other accounting purposes.
         Because of the different accounting methods used, and because of the
         compounding assumed in yield calculations, the yield quoted for a Fund
         may differ from the rate of distributions of the Fund paid over the
         same period or the rate of income reported in the Fund's financial
         statements. For the 30-day period ended September 30, 1996, Global High
         Yield Fund's yield was 7.30%.

         Tax-Equivalent Yield:  The Intermediate Tax Free Fund's tax-equivalent 
         yield is equal to the Fund's yield divided by (1-Tax Rate).

         As of September 30, 1996, the  Intermediate  Tax Free Fund's tax
         equivalent  30-day SEC yield was 5.81%,  assuming a maximum Federal 
         tax rate of 31%. The Intermediate Tax Free Fund's 30-day
         SEC yield for the period ended September 30, 1996 was 4.01%.

         Total return: A Fund's average annual total return is calculated for
         certain periods by determining the average annual compounded rates of
         return over those periods that would cause an investment of $1,000
         (made at the maximum public offering price with all distributions
         reinvested) to reach the value of that investment at the end of the
         periods. A Fund may also calculate total return figures which represent
         aggregate performance over a period or year-by-year performance.














                                                                                        


                                                              Global High
                                                                 Yield        Capital
                                       Intermediate Tax        Securities     AppreciationFund3     Small Cap
                                          Free Fund1              Fund2                               Fund4
Total Return for the One Year
Ended September 30, 1996                   4.09%                 23.31%           12.35%               26.41%
Cumulative Total Return for the
Period From Commencement of
Operations Through September 30,
1996                                       23.39%                32.31%           89.09%               133.85%
Annualized Total Return for the
Period From Commencement of
Operations Through September 30,
1996                                       5.14%                 10.54%           19.58%               33.46%

         1Fund commenced operations on July 20, 1992
         2Fund commenced operations on December 14, 1993.
         3Fund commenced operations on March 9, 1993.
         4Fund commenced operations on October 21, 1993.

                                                                                           Latin
                                            International     Pacific Basin     American Equity
                                            Equity Fund1      Equity Fund2                         Fund3

         Total Return
         for 1 Year ended
         September 30, 1996                 13.21%            7.86%             26.00%

         Cumulative
         Total Return
         for the Period from
         Commencement of
         Operations through
         September 30, 1996                 83.28%            23.34%            8.91%

         Average Annual
         Total Return for
         the Period from
         Commencement of
         Operations through
         September 30, 1996                 15.69%            7.17%             2.95%


         1Fund commenced operations on August 4, 1992.
         2Fund commenced operations on November 1, 1993August 4, 1992.
         3Fund commenced operations on October 25, 1993.






         Performance Results: Any total return quotation provided for a Fund
         should not be considered as representative of the performance of the
         Fund in the future since the net asset value and public offering price
         of shares of the Fund will vary based not only on the type, quality and
         maturities of the securities held in the corresponding Portfolio, but
         also on changes in the current value of such securities and on changes
         in the expenses of the Fund and the corresponding Portfolio. These
         factors and possible differences in the methods used to calculate total
         return should be considered when comparing the total return of a Fund
         to total returns published for other investment companies or other
         investment vehicles. Total return reflects the performance of both
         principal and income.

                         Comparison of Fund Performance

         Comparison of the quoted nonstandardized performance of 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 effect 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 other mutual funds tracked by mutual fund rating services or to
unmanaged indices which may assume reinvestment of dividends but generally do
not reflect deductions for administrative and management costs. Evaluations of a
Fund's performance made by independent sources may also be used in
advertisements concerning the Fund. Sources for a Fund's performance information
could include the following:

         Asian Wall Street Journal, a weekly Asian newspaper that often reviews
U.S. mutual funds investing internationally.

     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.

         Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.

         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.





     Global  Investor,  a European  publication  that  periodically  reviews the
performance of U.S. mutual funds investing internationally.

         Investor's Daily, a daily newspaper that features financial, economic
and business news.

         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.

         Morningstar Inc., a publisher of financial information and mutual fund
research.

         New York Times, a nationally distributed newspaper which regularly
covers financial news.

         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.

         Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.

     U.S. News and World Report,  a national  business weekly that  periodically
reports mutual fund performance data.

         ValueLine, a biweekly publication that reports on the largest 15,000
mutual funds.

     Wall  Street  Journal,  a Dow  Jones  and  Company,  Inc.  newspaper  which
regularly covers financial news.

         Weisenberger 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 Women, a monthly publication that features a "Financial
Workshop" section reporting on the mutual fund/financial industry.

           VALUATION OF SECURITIES; REDEMPTIONS AND PURCHASES IN KIND

         Equity and debt securities (other than short-term debt obligations
maturing in 60 days or less), including listed securities and securities for
which price quotations are available, will normally be valued on the basis of
market valuations furnished by a pricing service. Such market valuations may
represent the last quoted price on the securities major trading exchange or may
be determined through use of matrix pricing. In matrix pricing, pricing services
may use various pricing models, involving comparable securities, historic
relative price movements, economic factors and dealer quotations.
Over-the-counter securities will normally be valued at the bid price. Short-term
debt obligations and money market securities maturing in 60 days or less are
valued at amortized cost, which approximates market.





         Securities for which market quotations are not readily available are
valued by Bankers Trust pursuant to procedures adopted by each Portfolio's Board
of Trustees. It is generally agreed that securities for which market quotations
are not readily available should not be valued at the same value as that carried
by an equivalent security which is readily marketable.

         The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
("FRR 1" (formerly Accounting Series Release No. 113)) which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1 such factors
would include consideration of the:

                  type of security involved, financial statements, cost at date
                  of purchase, size of holding, discount from market value of
                  unrestricted securities of the same class at the time of
                  purchase, special reports prepared by analysts, information as
                  to any transactions or offers with respect to the security,
                  existence of merger proposals or tender offers affecting the
                  security, price and extent of public trading in similar
                  securities of the issuer or comparable companies, and other
                  relevant matters.

     To the extent that a Portfolio purchases securities which are restricted as
to resale or for which current market quotations are not readily available,  the
Adviser of the  Portfolio  will value such  securities  based upon all  relevant
factors as outlined in FRR 1.

         The Trust, on behalf of each Fund, and each Portfolio reserve the
right, if conditions exist which make cash payments undesirable, to honor any
request for redemption or withdrawal by making payment in whole or in part in
readily marketable securities chosen by the Trust, or the Portfolio, as the case
may be, and valued as they are for purposes of computing the Fund's or the
Portfolio's net asset value, as the case may be (a redemption in kind). If
payment is made to a Fund shareholder in securities, an investor, including the
Fund, the shareholder may incur transaction expenses in converting these
securities into cash. The Trust, on behalf of each Fund, and each Portfolio have
elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of
which each Fund and each Portfolio are obligated to redeem shares or beneficial
interests, as the case may be, with respect to any one investor during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund or the Portfolio, as the case may be, at the beginning
of the period.

         Each Portfolio has agreed to make a redemption in kind to the
corresponding Fund whenever the Fund wishes to make a redemption in kind and
therefore shareholders of the Fund that receive redemptions in kind will receive
portfolio securities of the corresponding Portfolio and in no case will they
receive a security issued by the Portfolio. Each Portfolio has advised the Trust
that the Portfolio will not redeem in kind except in circumstances in which the
Fund is permitted to redeem in kind or unless requested by the Fund.





         Each investor in a Portfolio, including the corresponding Fund, may add
to or reduce its investment in the Portfolio on each day the Portfolio
determines its net asset value. At the close of each such business day, the
value of each investor's beneficial interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the percentage effective
for that day, which represents that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or withdrawals which are to be
effected as of the close of business on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of the close of business on such day plus or minus, as the case may be, the
amount of net additions to or withdrawals from the investor's investment in the
Portfolio effected as of the close of business on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of business on such day plus or minus, as the case may be, the amount of
net additions to or withdrawals from the aggregate investments in the Portfolio
by all investors in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's interest in the Portfolio as
the close of business on the following business day.

         Each Fund (except for Intermediate Tax Free Fund) may, at its own
option, accept securities in payment for shares. The securities delivered in
payment for shares are valued by the method described under "Net Asset Value" as
of the day the Fund receives the securities. This may be a taxable transaction
to the shareholder. (Consult your tax adviser for future tax guidance.)
Securities may be accepted in payment for shares only if they are, in the
judgment of Bankers Trust, appropriate investments for the Fund's corresponding
Portfolio. In addition, securities accepted in payment for shares must: (i) meet
the investment objective and policies of the acquiring Fund's corresponding
Portfolio; (ii) be acquired by the applicable Fund for investment and not for
resale (other than for resale to the Fund's corresponding Portfolio); (iii) be
liquid securities which are not restricted as to transfer either by law or
liquidity of the market; and (iv) if stock, have a value which is readily
ascertainable as evidenced by a listing on a stock exchange, over-the-counter
market or by readily available market quotations from a dealer in such
securities. Each Fund reserves the right to accept or reject at its own option
any and all securities offered in payment for its shares.

                   MANAGEMENT OF THE TRUST AND THE PORTFOLIOS

         Each Board of Trustees is composed of persons experienced in financial
matters who meet throughout the year to oversee the activities of the Funds or
Portfolios they represent. In addition, the Trustees review contractual
arrangements with companies that provide services to the Funds/Portfolios and
review the Funds' performance.

         The Trustees and officers of the Trust and Portfolios, their birthdate
and their principal occupations during the past five years are set forth below.
Their titles may have varied during that period. Unless otherwise indicated, the
address of each officer is Clearing Operations, P.O. Box 897, Pittsburgh,
Pennsylvania 05230-0897.





                              Trustees of the Trust

     S. LELAND DILL (birthdate:  March 28, 1930 ) -- Trustee; Retired; Director,
Coutts  Group;  Coutts  (U.S.A.)  International;   Coutts  Trust  Holdings  Ltd;
Director,  Zweig Series Trust; formerly Partner of KPMG Peat Marwick;  Director,
Vinters  International  Company Inc.;  General  Partner of Pemco (an  investment
company  registered  under the 1940 Act). His address is 5070 North Ocean Drive,
Singer Island, Florida 33404.

     KELVIN J. LANCASTER (birthdate:  December 10, 1924) -- Trustee;  Professor,
Department  of  Economics,  Columbia  University.  His  address is 35  Claremont
Avenue, New York, New York 10027.

         PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) -- Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services, John
Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen Road,
Weston, Massachusetts 02193.

     PHILIP W. COOLIDGE*  (birthdate:  September 2, 1951) -- Trustee;  Chairman,
Chief Executive Officer and President,  Signature  Financial Group, Inc. ("SFG")
(since December,  1988) and Signature (since April,  1989). His address is 6 St.
James Avenue, Boston, Massachusetts 02116.


                           Trustees of the Portfolios

         CHARLES P. BIGGAR (birthdate: October 14, 1930) -- Trustee; Retired;
Director of Chase/NBW Bank Advisory Board; Director, Batemen, Eichler, Hill
Richards Inc.; formerly Vice President of International Business Machines and
President of the National Services and the Field Engineering Divisions of IBM.
His address is 12 Hitching Post Lane, Chappaqua, New York 10514.

     S. LELAND DILL (birthdate:  March 28, 1930) -- Trustee; Retired;  Director,
Coutts  Group;  Coutts  (U.S.A.)  International;   Coutts  Trust  Holdings  Ltd;
Director,  Zweig Series Trust; formerly Partner of KPMG Peat Marwick;  Director,
Vinters  International  Company Inc.;  General  Partner of Pemco (an  investment
company  registered  under the 1940 Act). His address is 5070 North Ocean Drive,
Singer Island, Florida 33404.

         PHILIP SAUNDERS, JR. (birthdate: October 11, 1935) -- Trustee;
Principal, Philip Saunders Associates (Consulting); former Director of Financial
Industry Consulting, Wolf & Company; President, John Hancock Home Mortgage
Corporation; and Senior Vice President of Treasury and Financial Services, John
Hancock Mutual Life Insurance Company, Inc. His address is 445 Glen Road,
Weston, Massachusetts 02193.

     PHILIP W. COOLIDGE*  (birthdate:  September 2, 1951) -- Trustee;  Chairman,
Chief Executive Officer and President,  SFG (since December, 1988) and Signature
(since April,  1989). His address is 6 St. James Avenue,  Boston,  Massachusetts
02116.







     *  Indicates  an  "interested  person" (as defined in the 1940 Act) for the
Trust.





                      Officers of the Trust and Portfolios

         Unless otherwise specified, each officer listed below holds the same
position with the Trust and each Portfolio.

         RONALD M. PETNUCH (birthdate: February 27, 1960) -- President and
Treasurer; Senior Vice President, Federated Services Company ("FSC"); formerly,
Director of Proprietary Client Services, Federated Administrative Services
("FAS"), and Associate Corporate Counsel, Federated Investors ("FI").

     CHARLES L. DAVIS,  JR.  (birthdate:  March 23, 1960) -- Vice  President and
Assistant Treasurer; Vice President, FAS.

     JAY S. NEUMAN (birthdate: April 22, 1950) -- Secretary;  Corporate Counsel,
FI.

     Messrs.  Coolidge,  Petnuch,  Davis, and Neuman also hold similar positions
for other investment  companies for which Signature or Edgewood or an affiliate,
respectively, serves as the principal underwriter.

     *  Indicates  an  "interested  person" (as defined in the 1940 Act) for the
Trust.

         No person who is an officer or director of Bankers Trust is an officer
or Trustee of the Trust or the Portfolios. No director, officer or employee of
Edgewood or any of its affiliates will receive any compensation from the Trust
or the Portfolios for serving as an officer or Trustee of the Trust or a
Portfolio.

     Intermediate  Tax Free Fund incurred  Trustees fees equal to $2,002 for the
fiscal year ended September 30, 1996. For the same period, Intermediate Tax Free
Portfolio incurred Trustees fees equal to $1,866.

     Global High Yield  Securities  Fund incurred  Trustees fees equal to $2,862
for the fiscal year ended  September 30, 1996. For the same period,  Global High
Yield Securities Portfolio incurred Trustees fees equal to $2,638.

     Capital  Appreciation  Fund incurred  Trustees fees equal to $2,902 for the
fiscal year ended September 30, 1996. For the same period,  Capital Appreciation
Portfolio incurred Trustees fees equal to $2,628.

     Small Cap Fund  incurred  Trustees fees equal to $2,855 for the fiscal year
ended  September 30, 1996.  For the same period,  Small Cap  Portfolio  incurred
Trustees fees equal to $2,718.

     International  Equity Fund  incurred  Trustees fees equal to $2,875 for the
fiscal year ended September 30, 1996 . For the same period, International Equity
Portfolio incurred Trustees fees equal to $3,004.

     Pacific  Basin Equity Fund  incurred  Trustees fees equal to $2,875 for the
fiscal year ended September 30, 1996. For the same period,  Pacific Basin Equity
Portfolio incurred Trustees fees equal to $2,654.

     Latin American  Equity Fund incurred  Trustees fees equal to $2,767 for the
fiscal year ended September 30, 1996. For the same period, Latin American Equity
Portfolio incurred Trustees fees equal to $2,904.





         The following table reflects fees paid to the Trustees of the Trust and
Portfolio for the year ended September 30, 1996.

                           Trustee Compensation Table

                           Aggregate                 Total Compensation
Name of Person,   Compensation              from Fund Complex*
Position          from Trust                Paid to Trustees


S. Leland Dill,              $10,000                      $23,000
Trustee of Trust
and Portfolios

Kelvin J. Lancaster,         $13,000                      $23,000
Trustee of Trust

Philip Saunders, Jr,         $13,000                      $23,000
Trustee of Trust
and Portfolios

Philip W. Coolidge,          none                         none
Trustee of Trust
and Portfolios

Charles P. Biggar,           none                         none
Trustee of Portfolios

* Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid Funds,
BT Advisor Funds, BT Investment Portfolios, Cash Management Portfolio, Treasury
Money Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio,
International Equity Portfolio, Utility Portfolio, Short Intermediate US
Government Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio and Capital Appreciation
Portfolio.

         Bankers Trust reimbursed the Funds and Portfolios for a portion of
their Trustees fees for the period above. See "Investment Adviser" and
"Administrator" below.

         As of December 31, 1996, the Trustees and Officers of the Trust and the
Portfolios owned in the aggregate less than 1% of the shares of any Fund or the
Trust (all series taken together).

         As of December 31, 1996, the following shareholders of record owned 5%
or more of the outstanding shares of Intermediate Tax Free Fund: Donaldson
Lufkin Jenrette Securities Corporation, Inc., Jersey City, NJ, owned
approximately 136,317 (6.65%) shares; Batrus & Co., New York, NY, owned
approximately 179,533 (8.75%) shares; Infid & Co., New York, NY, owned
approximately 356,829 (17.04%) shares and Henry Shotmeyer, Sr., New York, NY,
owned approximately 551,074 (26.88%) shares.

     As of December 31, 1996, the following  shareholders  of record owned 5% or
more of the outstanding  shares of Global High Yield Securities  Fund:  Batrus &
Co., New York, NY, owned  approximately  111,827 (5.71%) shares and Infid & Co.,
New York, NY, owned approximately 1,634,638 (83.49%) shares.





     As of December 31, 1996, the following  shareholders  of record owned 5% or
more of the outstanding  shares of Capital  Appreciation Fund: Batrus & Co., New
York, NY, owned  approximately  1,363,613  (32.91%)  shares and Infid & Co., New
York, NY, owned approximately 1,1719,184 (41.49%) shares.

         As of December 31, 1996, the following shareholders of record owned 5%
or more of the outstanding shares of Small Cap Fund: Big Woods Partners II,
Rochester, NY, owned approximately 528,788 (5.11%) shares; Charles Schwab & Co.,
San Francisco, CA, owned approximately 676,448 (6.54%) shares; Batrus & Co., New
York, NY, owned approximately 1,780,137 (17.22%) shares; Infid & Co., New York,
NY, owned approximately 2,387,089 (23.09%) shares and Bankers Trust Co.; Jersey
City, NJ, acting as Trustee, owned approximately 3,345,851 (32.36%) shares.

         As of December 31, 1996, the following shareholders of record owned 5%
or more of the outstanding shares of International Equity Fund: Bankers Trust
Co., Jersey City, NJ, acting as Trustee, owned approximately 1,182,693 (9.90%)
shares; Batrus & Co., New York, NY, owned approximately 1,754,393 (14.69%)
shares; Charles Schwab & Co., San Francisco, CA, owned approximately 1,967,593
(16.48%) shares and Infid & Co., New York, NY, owned approximately 3,224,028
(27.00%) shares.

     As of December 31, 1996, the following  shareholders  of record owned 5% or
more of the outstanding  shares of Pacific Basin Equity Fund:  Batrus & Co., New
York, NY, owned approximately 571,948 (21.73%) shares and Infid & Co., New York,
NY, owned approximately 1,539,491 (58.50%) shares.

     As of December 31, 1996, the following  shareholders  of record owned 5% or
more of the outstanding  shares of Latin American Equity Fund: Batrus & Co., New
York, NY, owned approximately 154,978 (8.36%) shares;  Charles Schwab & Co., San
Francisco,  CA, owned approximately 464,092 (25.04%) shares and Infid & Co., New
York, NY, owned approximately 926,714 (50.00%) shares.

                               Investment Adviser

         Under the terms of each Portfolio's investment advisory agreement with
Bankers Trust (the "Advisory Agreement"), Bankers Trust manages the Portfolio
subject to the supervision and direction of the Board of Trustees of the
Portfolio. Bankers Trust will: (i) act in strict conformity with each
Portfolio's Declaration of Trust, the 1940 Act and the Investment Advisers Act
of 1940, as the same may from time to time be amended; (ii) manage each
Portfolio in accordance with the Portfolio's investment objectives, restrictions
and policies; (iii) make investment decisions for each Portfolio; and (iv) place
purchase and sale orders for securities and other financial instruments on
behalf of each Portfolio.

         Bankers Trust bears all expenses in connection with the performance of
services under each Advisory Agreement. The Trust and each Portfolio bears
certain other expenses incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of Trustees of the Trust or the
Portfolio who are not officers, directors or employees of Bankers Trust,
Edgewood or any of their affiliates; SEC fees and state Blue Sky qualification
fees; charges of custodians and transfer and dividend disbursing agents; certain
insurance premiums; outside auditing and legal expenses; costs of maintenance of
corporate existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings of shareholders, officers and Trustees of the Trust or the
Portfolio; and any extraordinary expenses.





         For the period from January 1, 1996 to September 30, 1996, and the
years ended December 31, 1995 and 1994, Bankers Trust earned $67,313, $96,572,
and $117,549, respectively, in compensation for investment advisory services
provided to Intermediate Tax Free Portfolio. During the same periods, Bankers
Trust reimbursed $23,842, $18,572, and $41,555, respectively, to that Portfolio
to cover expenses.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from December 14, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $156,634, $141,692, and $66,073, respectively, in
compensation for investment advisory services provided to Global High Yield
Securities Portfolio. During the same periods, Bankers Trust reimbursed $86,070,
$78,840, and $48,741, respectively, to that Portfolio to cover expenses.

         For the fiscal year ended September 30, 1996, the period from January
1, 1995 to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust accrued $1,225,764, $482,453, and $329,399, respectively, in compensation
for investment advisory services provided to Capital Appreciation Portfolio.
During the same periods, Bankers Trust reimbursed $319,524, $131,702, and
$114,930, respectively, to that Portfolio to cover expenses.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from October 21, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $1,293,449, $389,015, and $69,420, respectively, in
compensation for investment advisory services provided to Small Cap Portfolio.
During the same periods, Bankers Trust reimbursed $331,176, $111,862, and
$41,110, respectively, to that Portfolio to cover expenses.

         For the fiscal year ended September 30, 1996, the period from January
1, 1995 to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust accrued $759,552, $322,696, and $322,489 respectively, in compensation for
investment advisory services provided to International Equity Portfolio. During
the same periods, Bankers Trust reimbursed $229,297, $108,743, and $117,653 ,
respectively, to that Portfolio to cover expenses.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from November 1, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $211,122, $173,591, and $116,020, respectively, in
compensation for investment advisory services provided to Pacific Basin Equity
Portfolio. During the same periods, Bankers Trust reimbursed $30,450, $47,338,
and $40,461, respectively, to that Portfolio to cover expenses.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from October 25, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $151,004, $173,145, and $102,872, respectively, in
compensation for investment advisory services provided to Latin American Equity
Portfolio. During the same periods, Bankers Trust reimbursed $46,928, $138,351,
and $81,307, respectively, to that Portfolio to cover expenses.





         Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolios, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolios that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolios, Bankers Trust will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by a Portfolio is
a customer of Bankers Trust, its parent or its subsidiaries or affiliates and,
in dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.

         Each Fund's prospectus contains disclosure as to the amount of Bankers
Trust's investment advisory and administration and services fees, including
waivers thereof. Bankers Trust may not recoup any of its waived investment
advisory or administration and services fees. Such waivers by Bankers Trust
shall stay in effect for at least 12 months.

                             Sub-Investment Adviser

         Bankers Trust has entered into a sub-investment advisory agreement (the
"Sub-Advisory Agreement") with BT Fund Managers International Limited ("BT Fund
Managers International") a wholly owned subsidiary of Bankers Trust Australia
Limited ("BTAL") in Sydney. BTAL is a wholly owned subsidiary of Bankers Trust
New York Corporation. Under the Sub-Advisory Agreement, Bankers Trust may
receive investment advice and research services with respect to companies based
in the Pacific Basin and may grant BT Fund Managers International investment
management authority as well as the authority to buy and sell securities if
Bankers Trust believes it would be beneficial to the Portfolio.

         BTAL, which was granted a banking license in 1986, is the parent of
Bankers Trust Australia Group which has offices is Sydney, Melbourne, Perth,
Brisbane, Adelaide, London and Hong Kong. A representative office of Bankers
Trust Company was opened in Australia in 1966 and Australian merchant banking
operations commences in 1969. A related organization, Bankers Trust New Zealand
Limited, was established in 1986. Although BTAL has not previously served as
investment adviser for a registered investment company, BTAL provides investment
services for a range of clients.

                                  Administrator

         Under the administration and services agreements, Bankers Trust is
obligated on a continuous basis to provide such administrative services as the
Board of Trustees of the Trust and each Portfolio reasonably deem necessary for
the proper administration of the Trust or a Portfolio. Bankers Trust will
generally assist in all aspects of the Funds' and Portfolios' operations; supply
and maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and recordkeeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationery and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.





         Pursuant to a sub-administration agreement (the "Sub-Administration
Agreement"), FSC performs such sub-administration duties for the Trust and the
Portfolios as from time to time may be agreed upon by Bankers Trust and FSC. The
Sub-Administration Agreement provides that FSC will receive such compensation as
from time to time may be agreed upon by FSC and Bankers Trust. All such
compensation will be paid by Bankers Trust.

         For the period from January 1, 1996 to September 30, 1996, and the
years ended December 31, 1995 and 1994, Bankers Trust earned $67,185, $96,355,
and $117,245, respectively, in compensation for administrative and other
services provided to the Intermediate Tax Free Fund. During the same periods,
Bankers Trust reimbursed $40,323, $48,616, and $63,823, respectively, to cover
expenses. For the period from January 1, 1996 to September 30, 1996, and the
years ended December 31, 1995 and 1994, Bankers Trust earned $8,414, $12,072,
and $14,693, respectively, in compensation for administrative and other services
provided to Intermediate Tax Free Portfolio.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from December 14, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $185,042, $167,703, and $78,503, respectively, in
compensation for administrative and other services provided to Global High Yield
Securities Fund. During the same periods, Bankers Trust reimbursed $109,939,
$74,013, and $40,342, respectively, to cover expenses. For the same periods,
Bankers Trust received $39,158, $35,342, and $16,518, respectively, in
compensation for administrative and other services provided to Global High Yield
Securities Portfolio.

         For the fiscal year ended September 30, 1996, the period from January
1, 1995 to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust accrued $405,364, $229,796, and $165,092, respectively, in compensation
for administrative and other services provided to the Capital Appreciation Fund.
During the same periods, Bankers Trust reimbursed $57,379, $48,877, and $79,097,
respectively, to cover expenses. For the fiscal year ended September 30, 1996,
the period from January 1, 1995 to September 30, 1995, and the year ended
December 31, 1994, Bankers Trust received $188,579, $74,224, and $50,677,
respectively, in compensation for administrative and other services provided to
Capital Appreciation Portfolio.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from October 21, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $1,285,892, $388,661, and $69,395, respectively, in
compensation for administrative and other services provided to Small Cap Fund.
During the same periods, Bankers Trust reimbursed $109,960, $92,321, and
$51,004, respectively, to cover expenses. For the same periods, Bankers Trust
received $198,992, $59,848, and $10,680, respectively, in compensation for
administrative and other services provided to Small Cap Portfolio.

         For the fiscal year ended September 30, 1996, the period from January
1, 1995 to September 30, 1995, and the year ended December 31, 1994, Bankers
Trust accrued $982,662, $421,538, and $421,138, respectively, in compensation
for administrative and other services provided to the International Equity Fund.
During the same periods, Bankers Trust reimbursed $74,494, $52,956, and $66,603,
respectively, to cover expenses. For the fiscal year ended September 30, 1996,
the period from January 1, 1995 to September 30, 1995, and the year ended
December 31, 1994, Bankers Trust received $175,281, $74,468, and $74,420,
respectively, in compensation for administrative and other services provided to
International Equity Portfolio.

         For the fiscal years ended September 30, 1996 and 1995, and the period
from November 1, 1993 (commencement of operations) through September 30, 1994,
Bankers Trust accrued $210,057, $173,407, and $115,972, respectively, in
compensation for administrative and other services provided to Pacific Basin
Equity Fund. During the same periods, Bankers Trust reimbursed $56,703, $72,263,
and $51,932, respectively, to cover expenses. For the same periods, Bankers
Trust received $70,374, $57,864, and $38,673, respectively, in compensation for
administrative and other services provided to Pacific Basin Equity Portfolio.





         For the fiscal years ended September 30, 1996 and 1995, and the period
from October 25, 1993 (commencement of operations) through September 30, 1994,
Banker Trust accrued $143,318, $162,746, and $97,763, respectively, in
compensation for administrative and other services provided to Latin American
Equity Fund. During the same periods, Bankers Trust reimbursed $53,312, $63,765,
and $49,325, respectively, to cover expenses. For the same periods, Bankers
Trust received $30,201, $34,629, and $20,574, respectively, in compensation for
administrative and other services provided to Latin American Equity Portfolio.

         Bankers Trust has agreed that if in any fiscal year the aggregate
expenses of any Fund and its respective Portfolio (including fees pursuant to
the Advisory Agreement, but excluding interest, taxes, brokerage and, if
permitted by the relevant state securities commissions, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over a Fund,
Bankers Trust will reimburse the Fund for the excess expense to the extent
required by state law. As of the date of this SAI, the most restrictive annual
expense limitation applicable to any Fund is 2.50% of the Fund's first $30
million of average annual net assets, 2.00% of the next $70 million of average
annual net assets and 1.50% of the remaining average annual net assets.

                          Custodian and Transfer Agent

         Bankers Trust, 280 Park Avenue, New York, New York 10017, serves as
Custodian for the Trust and for each Portfolio pursuant to the administration
and services agreements. As Custodian, it holds the Funds' and each Portfolio's
assets. Bankers Trust also serves as transfer agent of the Trust and of each
Portfolio pursuant to the respective administration and services agreement.
Under its transfer agency agreement with the Trust, Bankers Trust maintains the
shareholder account records for each Fund, handles certain communications
between shareholders and the Trust and causes to be distributed any dividends
and distributions payable by the Trust. Bankers Trust may be reimbursed by the
Funds or the Portfolios for its out-of-pocket expenses. Bankers Trust will
comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.

                                   Use of Name

         The Trust and Bankers Trust have agreed that the Trust may use "BT" as
part of its name for so long as Bankers Trust serves as investment adviser to
the Portfolios. The Trust has acknowledged that the term "BT" is used by and is
a property right of certain subsidiaries of Bankers Trust and that those
subsidiaries and/or Bankers Trust may at any time permit others to use that
term.

         The Trust may be required, on 60 days' notice from Bankers Trust at any
time, to abandon use of the acronym "BT" as part of its name. If this were to
occur, the Trustees would select an appropriate new name for the Trust, but
there would be no other material effect on the Trust, its shareholders or
activities.






                           Banking Regulatory Matters

         Bankers Trust has been advised by its counsel that in its opinion
Bankers Trust may perform the services for the Portfolios contemplated by the
Advisory Agreements and other activities for the Funds and the Portfolios
described in the Prospectuses and this SAI without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. However,
counsel has pointed out that future changes in either Federal or state statutes
and regulations concerning the permissible activities of banks or trust
companies, as well as future judicial or administrative decisions or
interpretations of present and future statutes and regulations, might prevent
Bankers Trust from continuing to perform those services for the Trust and the
Portfolios. State laws on this issue may differ from the interpretations of
relevant Federal law and banks and financial institutions may be required to
register as dealers pursuant to state securities law. If the circumstances
described above should change, the Boards of Trustees would review the
relationships with Bankers Trust and consider taking all actions necessary in
the circumstances.

                       Counsel and Independent Accountants

     Willkie Farr & Gallagher,  One Citicorp Center,  153 East 53rd Street,  New
York, New York  10022-4669,  serves as Counsel to the Trust and each  Portfolio.
Coopers & Lybrand L.L.P.,  1100 Main Street,  Suite 900,  Kansas City,  Missouri
64105 acts as Independent Accountants of the Trust and each Portfolio.

                            ORGANIZATION OF THE TRUST

         Shares of the Trust do not have cumulative voting rights, which means
that holders of more than 50% of the shares voting for the election of Trustees
can elect all Trustees. Shares are transferable but have no preemptive,
conversion or subscription rights. Shareholders generally vote by Fund, except
with respect to the election of Trustees and the ratification of the selection
of independent accountants.

         Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by the Trust, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.

         The Trust was organized under the name BT Tax-Free Investment Trust and
assumed its current name of BT Investment Funds on May 16, 1988.

         Except as described below, whenever the Trust is requested to vote on a
fundamental policy of the Portfolio, the Trust will hold a meeting of the Fund's
shareholders and will cast its vote as instructed by the Fund's shareholders.
Fund shareholders who do not vote will not affect the Trust's votes at the
Portfolio meeting. The percentage of the Trust's votes representing Fund
shareholders not voting will be voted by the Trustees of the Trust in the same
proportion as the Fund shareholders who do, in fact, vote.






         Except as described below, whenever the Fund is requested to vote on
matters pertaining to the Portfolio, the Fund will hold a meeting of its
shareholders and will cast its votes proportionately as instructed by Fund
shareholders. However, subject to applicable statutory and regulatory
requirements, the Fund would not request a vote of its shareholders with respect
to (a) any proposal relating to the Portfolio, which proposal, if made with
respect to the Fund, would not require the vote of the shareholders of the Fund,
or (b) any proposal with respect to the Portfolio that is identical in all
material respects to a proposal that has previously been approved by
shareholders of the Fund. Any proposal submitted to holders in the Portfolio,
and that is not required to be voted on by shareholders of the Fund, would
nonetheless be voted on by the Trustees of the Trust.

                                    TAXATION

                              Taxation of the Funds

         The Trust intends to qualify annually and to elect each Fund to be
treated as a regulated investment company under the Code.

         As a regulated investment company, each Fund will not be subject to
U.S. Federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. The Funds intend to
distribute to their shareholders, at least annually, substantially all of their
investment company taxable income and net capital gains, and therefore do not
anticipate incurring Federal income tax liability.

         Each Fund shareholder will also receive, if appropriate, various
written notices after the close of the Fund's prior taxable year as to the
Federal income status of his dividends and distributions which were received
from the Fund during the Fund's prior taxable year. Shareholders should consult
their tax advisers as to any state and local taxes that may apply to these
dividends and distributions. The dollar amount of dividends excluded from
Federal income taxation and the dollar amount subject to such income taxation,
if any, will vary for each shareholder depending upon the size and duration of
each shareholder's investment in the Fund. To the extent that the Fund earns
taxable net investment income, the Fund intends to designate as taxable
dividends the same percentage of each dividend as its taxable net investment
income bears to its total net investment income earned. Therefore, the
percentage of each dividend designated as taxable, if any, may vary.

Intermediate Tax Free Portfolio

         Tax-Exempt Interest. Investment in the Intermediate Tax Free Fund would
not be suitable for tax-exempt institutions, qualified retirement plans, H.R. 10
plans and individual retirement accounts since such investors would not gain any
additional tax benefit from the receipt of tax-exempt income.





         Because the Intermediate Tax Free Fund will distribute exempt-interest
dividends, all or a portion of any interest on indebtedness incurred by a
shareholder to purchase or carry shares of the Fund will not be deductible for
Federal personal income tax purposes. In addition, the Code may require a
shareholder of the Fund, if he receives exempt-interest dividends, to treat as
taxable income a portion of certain otherwise nontaxable social security and
railroad retirement benefit payments. Furthermore, that portion of any
exempt-interest dividend paid by the Fund which represents income from private
activity bonds held by the Fund may not retain its tax-exempt status in the
hands of a shareholder who is a "substantial user" of a facility financed by
such bonds, or a "related person" thereof. Moreover, as noted in the Prospectus
of the Fund, (i) some or all of the Fund's dividends and distributions may be
specific preference items, or a component of an adjustment item, for purposes of
the Federal individual and corporate alternative minimum taxes and (ii) the
receipt of the Fund's dividends and distributions may affect a corporate
shareholder's Federal "environmental" tax liability. In addition, the receipt of
Fund dividends and distributions may affect a foreign corporate shareholder's
Federal "branch profits" tax liability and a Subchapter S corporate
shareholder's Federal "excess net passive income" tax liability. Shareholders
should consult their own tax advisers as to whether they are (i) "substantial
users" with respect to a facility or "related" to such users within the meaning
of the Code and (ii) subject to a Federal alternative minimum tax, the federal
"environmental" tax, the Federal "branch profits" tax or the Federal "excess net
passive income" tax.

         In the case of the Intermediate Tax Free Fund, these statements will
also designate the amount of exempt-interest dividends that is a specific
preference item for purposes of the Federal individual and corporate alternative
minimum taxes.

Global High Yield Securities Portfolio, Pacific Basin Equity Portfolio
         and Latin American Equity Portfolio

         Foreign Securities. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to determine
the effective rate of foreign tax in advance since the amount of the Portfolio's
assets to be invested in various countries will vary.

         If the Portfolio is liable for foreign taxes, and if more than 50% of
the value of the Portfolio's total assets at the close of its taxable year
consists of stocks or securities of foreign corporations, it may make an
election pursuant to which certain foreign taxes paid by it would be treated as
having been paid directly by shareholders of the entities, such as the
corresponding Fund, which have invested in the Portfolio. Pursuant to such
election, the amount of foreign taxes paid will be included in the income of the
corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such Fund shareholder will be notified after the
close of the Portfolio's taxable year whether the foreign taxes paid will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid to each such country and (b) the
portion which represents income derived from sources within each such country.

         The amount of foreign taxes for which a shareholder may claim a credit
in any year will generally be subject to a separate limitation for "passive
income," which includes, among other items of income, dividends, interest and
certain foreign currency gains. Because capital gains realized by the Portfolio
on the sale of foreign securities will be treated as U.S. source income, the
available credit of foreign taxes paid with respect to such gains may be
restricted by this limitation.





                           Taxation of the Portfolios

         The Portfolios are not subject to Federal income taxation. Instead, the
Fund and other investors investing in a Portfolio must take into account, in
computing their Federal income tax liability, their share of the Portfolio's
income, gains, losses, deductions, credits and tax preference items, without
regard to whether they have received any cash distributions from the Portfolio.

         Distributions received by a Fund (other than Intermediate Tax Free
Fund) from the corresponding Portfolio generally will not result in the Fund
recognizing any gain or loss for Federal income tax purposes, except that: (1)
gain will be recognized to the extent that any cash distributed exceeds the
Fund's basis in its interest in the Portfolio prior to the distribution; (2)
income or gain may be realized if the distribution is made in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio; and (3) loss may be recognized
if the distribution is made in liquidation of the Fund's entire interest in the
Portfolio and consists solely of cash and/or unrealized receivables. A Fund's
basis in its interest in the corresponding Portfolio generally will equal the
amount of cash and the basis of any property which the Fund invests in the
Portfolio, increased by the Fund's share of income from the Portfolio, and
decreased by the amount of any cash distributions and the basis of any property
distributed from the Portfolio.

                                 Other Taxation

         The Trust is organized as a Massachusetts business trust and, under
current law, neither the Trust nor any Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that the Fund
continues to qualify as a regulated investment company under Subchapter M of the
Code. The investment by each Fund in the corresponding Portfolio does not cause
the Fund to be liable for any income or franchise tax in the State of New York.

     Each  Portfolio  is organized  as a New York trust.  Each  Portfolio is not
subject  to any  income  or  franchise  tax  in the  State  of New  York  or the
Commonwealth of Massachusetts.

     Fund  shareholders  may be subject  to state and local  taxes on their Fund
distributions.  Shareholders  are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.


                              FINANCIAL STATEMENTS

         The financial statements for each Fund or Portfolio for the period
ended September 30, 1996, are incorporated herein by reference to the Annual
Report to shareholders for each Fund dated September 30, 1996. A copy of a
Fund's Annual Report may be obtained without charge by contacting the respective
Fund.






             Investment Adviser of each Portfolio and Administrator
                              BANKERS TRUST COMPANY

                                   Distributor
                             EDGEWOOD SERVICES, INC.

                          Custodian and Transfer Agent
                              BANKERS TRUST COMPANY

                             Independent Accountants
                            COOPERS & LYBRAND L.L.P.

                                     Counsel
                            WILLKIE FARR & GALLAGHER


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

         No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectuses, its
Statements of Additional Information or the Trust's official sales literature in
connection with the offering of the Trust's shares and, if given or made, such
other information or representations must not be relied on as having been
authorized by the Trust. Neither the Prospectuses nor this Statement of
Additional Information constitutes an offer in any state in which, or to any
person to whom, such offer may not lawfully be made.
                              --------------------

















    CUSIP # 055922801 CUSIP # 055922777 CUSIP # 055922819 CUSIP # 055922769
CUSIP# 055922868 CUSIP # 055922736 CUSIP # 055922785 COMBINV400 (7/97)     

EX-99.COVER

                               BT INVESTMENT FUNDS

                               Federated Investors
                            Federated Investors Tower
                       Pittsburgh, Pennsylvania 15222-3779

                                 (412) 288-1900

                                  July 18, 1997



EDGAR Operations Branch
Securities and Exchange Commission
Division of Investment Management
450 Fifth Street, Northwest
Washington, DC 20549

       RE:    BT INVESTMENT FUNDS (the "Trust")
          Intermediate Tax Free Fund
          Global High Yield Securities Fund
          Capital Appreciation Fund
          Small Cap Fund
          International Equity Fund
          Pacific Basin Fund
          Latin American Equity Fund (the "Funds")
              1933 Act File No. 33-7404
              1940 Act File No. 811-4760

Dear Sir or Madam:

         Pursuant to Rule 497(e) of the Securities Act of 1933, the definitive
Statement of Additional Information of the Trust, with respect to the Funds,
dated January 31, 1997 (Revised July 18, 1997), is hereby electronically
transmitted. It has been electronically redlined to indicate changes from the
Trust's currently effective Statement of Additional Information. This Statement
of Additional Information is a reprint to update certain obsolete language.

                                                        Very truly yours,



                                                        /s/ Mark R. Thompson
                                                        Mark R. Thompson
                                                        Compliance Analyst



Enclosures