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Business AddressONE CORPORATE DRIVESHELTON CT 064848006286039

Mailing AddressONE CORPORATE DRIVESHELTON CT 06484

SECURITIES AND EXCHANGE COMMISSION

FORM N-1A EL/ARegistration statements of open end management investment companies [amend]

Filing Date: 1997-06-04SEC Accession No. 0001035018-97-000007

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FILERAMERICAN SKANDIA ADVISOR FUNDS INCCIK:1035018| Fiscal Year End: 1231Type: N-1A EL/A | Act: 33 | File No.: 333-23017 | Film No.: 97619075

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As filed with the Securities and Exchange Commission on June 4, 1997

Securities Act File No. 333-23017Investment Company Act File No. 811-08085

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM N-1A

Registration Statement Under The Securities Act of 1933

Pre-Effective Amendment No. 2

and

Registration Statement Under The Investment Company Act of 1940

Amendment No. 2

AMERICAN SKANDIA ADVISOR FUNDS, INC.(Exact Name of Registrant as Specified in Charter)

One Corporate Drive, Shelton, Connecticut 06484(Address of Principal Executive Offices) (Zip Code)

(800) 628-6039(Registrant's Telephone Number, Including Area Code)

ERIC C. FREED, ESQ., SECRETARYAMERICAN SKANDIA ADVISOR FUNDS, INC.

One Corporate Drive, Shelton, Connecticut 06484(Name and Address of Agent for Service)

Copies to:

ROBERT K. FULTON, ESQ.WERNER & KENNEDY

1633 Broadway, 46th Floor, New York, New York 10019

Approximate Date of Proposed Public Offering:On or about July 1, 1997.

Registrant hereby elects to register an indefinite number ofshares under Rule 24f-2.

Pre-Effective Amendment No. 2 to Registration Statement on Form N-1A

CROSS REFERENCE SHEET

<TABLE><CAPTION>

<S> <C>Form N-1A Item Number: Part A Prospectus Caption:

1. Cover Page2. Expense Information3. (a)(b) *

(c)(d) Performance of the Funds4. Organization and Capitalization of the Company;

Investment Programs of the Funds; CertainRisk Factors and Investment Methods

5. (a)(b)(c)(d)(f) Management of the Funds(e) Other Information(g) Portfolio Transactions

5A. *6. (a)(b)(c)(d) Organization and Capitalization of the Company

(e) Other Information(f)(g) Dividends, Capital Gains and Taxes(h) How to Buy Shares; Special Information on the

"Master/Feeder" Fund Structure



7. (a) Other Information(b) Determination of Net Asset Value; How to Buy Shares(c) Special Investment Programs and Privileges(d)(e)(f)(g) How to Buy Shares

8. (a)(b)(d) How to Redeem Shares(c) Shareholder Account Rules and Policies

9. *

Part B Statement of Additional Information Caption:

10. Cover Page11. Cover Page12. General Information13. (a)(c) Investment Programs of the Funds

(b) Fundamental Investment Restrictions(d) Portfolio Transactions

14. Management of the Company15. (a)(b) Capital Stock of the Company & Principal Holders

of Securities(c) Management of the Company

16. (a)(b) See Prospectus; Investment Advisory &Administration Services; Management of the Company

(c)(e)(g)(i) *(d) Investment Advisory & Administration Services(f) See Prospectus; Distribution Arrangements(h) Other Information

17. (a)(c) Portfolio Transactions(b)(d)(e) *

18. (a) Capital Stock of the Company & Principal Holdersof Securities

(b) *19. (a)(c) Additional Information on the Purchase and Redemption of Shares

(b) Determination of Net Asset Value20. Additional Tax Considerations21. Distribution Arrangements22. Additional Performance Information23. Financial Statements

</TABLE>

Part C

Information required to be included in Part C is set forth under theappropriate Item, so numbered, in Part C to this Registration Statement.

* Not Applicable

19207-1

AMERICAN SKANDIA ADVISOR FUNDS, INC.

P R O S P E C T U SClass A, Class B, Class C and Class X Shares

[insert], 1997---------------------------------

ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND

ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND

ASAF FOUNDERS SMALL CAPITALIZATION FUND

ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND

ASAF JANUS CAPITAL GROWTH FUND

ASAF INVESCO EQUITY INCOME FUND

ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND

ASAF FEDERATED HIGH YIELD BOND FUND

ASAF TOTAL RETURN BOND FUND



ASAF JPM MONEY MARKET FUND------------------------------------------------------------------------

This Prospectus explains the basic information you should know beforeinvesting in the above funds. Five of the funds seek their respective investmentobjectives by investing all of their investable assets in a correspondingportfolio of American Skandia Master Trust which has an investment objectiveidentical to that of the investing fund. The investment experience of each ofthese funds directly corresponds with the investment experience of itscorresponding portfolio. Please read this Prospectus carefully and keep it forfuture reference. Additional information about the funds has been filed with theSecurities and Exchange Commission (the "Commission") in a Statement ofAdditional Information ("SAI"), dated [insert], 1997, which is incorporated byreference into this Prospectus. To obtain a copy of the SAI without charge, call1-800-SKANDIA or write to "American Skandia Advisor Funds, Inc." at P.O. Box8012, Boston, Massachusetts 02266-8012. The Commission maintains a Web site(http:/ /www.sec.gov) that contains the SAI, material incorporated by reference,and other information regarding American Skandia Advisor Funds, Inc. andAmerican Skandia Master Trust.

An investment in the ASAF JPM Money Market Fund is neither insured norguaranteed by the U.S. Government. While the ASAF JPM Money Market Fund seeks tomaintain a stable net asset value of $1.00 per share, there can be no assurancethat the fund will be able to achieve this goal.

Mutual fund shares are not deposits or obligations of, or guaranteed by, anybank or other depository institution. Shares are not insured by the FDIC, theFederal Reserve Board, or any other agency, and are subject to investment risk,including the possible loss of the principal amount invested.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES ANDEXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIESAND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THEACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS ACRIMINAL OFFENSE.

American Skandia Advisor Funds, Inc. (the "Company") is an open-endmanagement investment company comprised of ten diversified investment portfolios(each a "Fund" and together the "Funds"). Five of the Funds -- ASAF T. RowePrice International Equity Fund, ASAF Janus Capital Growth Fund, ASAF INVESCOEquity Income Fund, ASAF Total Return Bond Fund and ASAF JPM Money Market Fund(each a "Feeder Fund" and together the "Feeder Funds") -- invest all of theirinvestable assets in a corresponding portfolio (each a "Portfolio" and togetherthe "Portfolios") of American Skandia Master Trust (the "Trust"), an open-endmanagement investment company comprised of five diversified investmentportfolios. Each Portfolio invests in securities in accordance with aninvestment objective, investment policies and limitations identical to those ofits corresponding Feeder Fund. This "master/feeder" fund structure differs fromthat of the other Funds of the Company and many other investment companies whichdirectly invest and manage their own portfolio of securities. Those Funds of theCompany which currently are not organized under a "master/feeder" fund structure(the "Non-Feeder Funds") retain the right to invest all of their investableassets in a corresponding Portfolio of the Trust in the future. For additionalinformation regarding the "master/feeder" fund structure, see this Prospectusunder "Special Information on the 'Master/Feeder' Fund Structure."

American Skandia Investment Services, Incorporated ("ASISI" or the"Investment Manager") acts as the investment manager for both the Non-FeederFunds and the Portfolios. Currently, ASISI engages a sub-advisor ("Sub-advisor")for the investment management of each Non-Feeder Fund and Portfolio. Thefollowing table highlights certain features of each Fund (and correspondingPortfolio, where applicable):<TABLE><CAPTION>

<S> <C> <C> <C>

Fund/Portfolio: Sub-Advisor: Investment Goal: Investment Style:

Int'l Small Founders Asset Capital growth Invests primarily in securities of foreignCapitalization Management, Inc. companies with market capitalizations or

annual revenues of $1 billion or less.

Int'l Equity Rowe Price-Fleming Total return on assets Invests primarily in common stocks ofInternational, Inc. from long-term growth of established foreign companies which have



capital and income the potential for growth of capital orincome or both.

Small Capitalization Founders Asset Capital growth Invests primarily in common stocks of U.S.Management, Inc. companies with market capitalizations or

annual revenues of $1.5 billion or less.

Small Company Value T. Rowe Price Long-term capital growth Invests primarily in common stocks of U.S.Associates, Inc. companies with market capitalizations of $1

billion or less that appear to beundervalued.

Capital Growth Janus Capital Capital growth Invests primarily in common stocks.Corporation

Equity Income INVESCO Trust Company High current income and, Invests in securities which will provide asecondarily, capital growth relatively high yield and stable return and

which, over a period of years, may alsoprovide capital appreciation.

Strategic Balanced American Century Capital growth and current Invests in common stocks that areInvestment income considered to have better-than-averageManagement, Inc. prospects for appreciation and the

remainder in bonds and other fixed incomesecurities.

High Yield Bond Federated Investment High current income Invests primarily in lower-rated fixedCounseling income securities.

Total Return Bond Pacific Investment Maximize total return, Invests in fixed-income securities ofManagement Company consistent with varying maturities with an expected average

preservation of capital portfolio duration from three to six years.

Money Market J.P. Morgan Maximize current income Maintains a dollar-weighted averageInvestment and maintain high levels portfolio maturity of not more than 90 daysManagement, Inc. of liquidity and invests in high quality U.S.

dollar-denominated money market instruments.

</TABLE>

T A B L E O F C O N T E N T S

EXPENSE INFORMATION

Shareholder Transaction ExpensesAnnual Fund Operating ExpensesExpense Examples

INVESTMENT PROGRAMS OF THE FUNDS

ASAF Founders International Small Capitalization Fund ASAF T. RowePrice International Equity Fund ASAF Founders Small Capitalization FundASAF T. Rowe Price Small Company Value Fund ASAF Janus Capital GrowthFund ASAF INVESCO Equity Income Fund ASAF American Century StrategicBalanced Fund ASAF Federated High Yield Bond Fund ASAF Total ReturnBond Fund ASAF JPM Money Market Fund

CERTAIN RISK FACTORS AND INVESTMENT METHODS

PERFORMANCE OF THE FUNDS

HOW TO BUY SHARES

SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES

HOW TO REDEEM SHARES

HOW TO EXCHANGE SHARES

DETERMINATION OF NET ASSET VALUE

SHAREHOLDER ACCOUNT RULES AND POLICIES

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

SPECIAL INFORMATION ON THE "MASTER/FEEDER" FUND STRUCTURE

MANAGEMENT OF THE FUNDS



The Directors, Trustees and OfficersThe Investment ManagerThe Sub-AdvisorsFees and ExpensesThe Administrator

PORTFOLIO TRANSACTIONS

DIVIDENDS, CAPITAL GAINS AND TAXES

OTHER INFORMATION

EXPENSE INFORMATION

The maximum transaction costs and anticipated aggregate operatingexpenses associated with investing in Class A, Class B, Class C or Class Xshares of each Fund are reflected in the following tables:

SHAREHOLDER TRANSACTION EXPENSES:<TABLE><CAPTION>

High Yield Bond & Total Return Bond All Other Funds:Funds:

<S> <C> <C> <C> <C> <C> <C>Class A Class B & X Class C Class A Class B & X Class C

Maximum Sales Charge on Purchases(as % of offering price) 4.25% None None 5.00% None NoneMaximum Contingent Deferred SalesCharge(as % of lower of original purchase None(1) 6.00%(2) 1.00%(2) None(1)price or redemption proceeds) 6.00%(2) 1.00%(2)Redemption Fees None(3) None(3) None(3) None(3) None(3) None(3)Exchange Fees None None None None None None

ANNUAL FUND OPERATING EXPENSES (as % of average net assets):Total Expenses

12b-1 Distribution Other Expenses (after anyASAF Fund: Management Fee Fees(4) (after any reimbursement)(5)

reimbursement)(5)---------------------------------------------------------------------------------------------------------------------------

Int'l SmallCapitalization

Class A 1.10 0.50 0.50 2.10Class B, C & X 1.10 1.00 0.50 2.60

International EquityClass A 1.00 0.50 0.60 2.10Class B, C & X 1.00 1.00 0.60 2.60

Small CapitalizationClass A 0.90 0.50 0.30 1.70Class B, C & X 0.90 1.00 0.30 2.20

Small Company ValueClass A 1.00 0.50 0.25 1.75Class B, C & X 1.00 1.00 0.25 2.25

Capital GrowthClass A 1.00 0.50 0.20 1.70Class B, C& X 1.00 1.00 0.20 2.20

Equity IncomeClass A 0.75 0.50 0.30 1.55Class B, C & X 0.75 1.00 0.30 2.05

Strategic BalancedClass A 0.90 0.50 0.20 1.60Class B, C & X 0.90 1.00 0.20 2.10

High Yield BondClass A 0.70 0.50 0.30 1.50Class B, C & X 0.70 1.00 0.30 2.00

Total Return BondClass A 0.65 0.50 0.25 1.40Class B, C & X 0.65 1.00 0.25 1.90

Money MarketClass A 0.50 0.50 0.50 1.50Class B, C & X 0.50 1.00 0.50 2.00

</TABLE>

(1) Under certain circumstances, purchases of Class A shares not subject to an



initial sales charge will be subject to a contingent deferred sales charge("CDSC") if redeemed within 12 months of the calendar month of purchase. For anadditional discussion of the Class A CDSC, see this Prospectus under "How to BuyShares." (2) If you purchase Class B or X shares, you do not pay an initialsales charge but you may incur a CDSC if you redeem some or all of your Class Bor X shares before the end of the seventh year after which you purchased suchshares. The CDSC is 6%, 5%, 4%, 3%, 2%, 2%, and 1% for redemptions occurring inyears one through seven, respectively. No CDSC is charged after the seventhyear. If you purchase Class C shares, you do not pay an initial sales charge butyou may incur a CDSC if you redeem some or all of your Class C shares within 12months of the calendar month of purchase. For a discussion of the Class B, X andC CDSC, see this Prospectus under "How to Buy Shares." (3) A $10 fee may beimposed for wire transfers of redemption proceeds. For an additional discussionof wire redemptions, see this Prospectus under "How to Redeem Shares." (4) As aresult of distribution fees, a long-term investor in the Fund may pay more thanthe economic equivalent of the maximum front-end sales charge permitted by therules of the National Association of Securities Dealers, Inc. (5) Expenses shownare based on estimated amounts for the current fiscal year. The InvestmentManager has voluntarily agreed to reimburse each Fund until October 31, 1998 forits respective operating expenses (and, in the case of the Feeder Funds, theFeeder Fund's pro rata share of operating expenses of the Fund's correspondingPortfolio), exclusive of taxes, interest, brokerage commissions, distributionfees and extraordinary expenses, which in the aggregate exceed specifiedpercentages of the Fund's average net assets as follows: ASAF FoundersInternational Small Capitalization Fund -- 1.60%; ASAF T. Rowe PriceInternational Equity Fund -- 1.60%; ASAF Founders Small Capitalization Fund --1.20%; ASAF T. Rowe Price Small Company Value Fund -- 1.25%; ASAF Janus CapitalGrowth Fund -- 1.20%; ASAF INVESCO Equity Income Fund -- 1.05%; ASAF AmericanCentury Strategic Balanced Fund -- 1.10%; ASAF Federated High Yield Bond Fund --1.00%; ASAF Total Return Bond Fund -- 0.90%; and ASAF JPM Money Market Fund --1.00%. Such voluntary agreements may be discontinued at any time after October31, 1998. Absent these reimbursements, the estimated "other expenses" for allclasses of shares of the Funds would be: ASAF Founders International SmallCapitalization Fund -- 1.95%; ASAF T. Rowe Price International Equity Fund --1.48%; ASAF Founders Small Capitalization Fund -- 1.34%; ASAF T. Rowe PriceSmall Company Value Fund -- 1.32%; ASAF Janus Capital Growth Fund -- 1.03%; ASAFINVESCO Equity Income Fund -- 1.26%; ASAF American Century Strategic BalancedFund -- 1.48%; ASAF Federated High Yield Bond Fund -- 1.61%; ASAF Total ReturnBond Fund -- 1.29%; and ASAF JPM Money Market Fund -- 1.70%. Additionally,absent these reimbursements, the estimated "total expenses" for Class A sharesand Class B, C and X shares, respectively, of the Funds would be: ASAF FoundersInternational Small Capitalization Fund -- 3.55% and 4.05%; ASAF T. Rowe PriceInternational Equity Fund -- 2.98% and 3.48%; ASAF Founders Small CapitalizationFund -- 2.74% and 3.24%; ASAF T. Rowe Price Small Company Value Fund -- 2.82%and 3.32%; ASAF Janus Capital Growth Fund -- 2.53% and 3.03%; ASAF INVESCOEquity Income Fund -- 2.51% and 3.01%; ASAF American Century Strategic BalancedFund -- 2.88% and 3.38%; ASAF Federated High Yield Bond Fund -- 2.81% and 3.31%;ASAF Total Return Bond Fund -- 2.44% and 2.94; and ASAF JPM Money Market Fund --2.70% and 3.20%. For an additional discussion of Fund expense limitations, seethe Company's SAI under "Fund Expenses."

Expenses shown for each of the Feeder Funds are based upon distributionand administration fees for the Fund and management fees and other expenses forthe Fund's corresponding Portfolio. The Directors of the Company believe thatthe aggregate per share expenses of the Feeder Funds and their correspondingPortfolios over the long term will be approximately equal to the expenses theFunds would incur if their assets were invested directly in the type ofsecurities held by their corresponding Portfolios. The Directors of the Companyalso believe that investment in the Portfolios by investors in addition to theFeeder Funds may enable the Portfolios to achieve economies of scale which couldreduce expenses. The expenses and, accordingly, the returns of other funds thatmay invest in the Portfolios may differ from the expenses and returns of theFeeder Funds. For additional information regarding the "master/feeder" fundstructure, see this Prospectus under "Special Information on the 'Master/Feeder'Fund Structure."

EXPENSE EXAMPLES:

Full Redemption. You would have paid the following expenses on a $1,000investment, assuming a hypothetical 5% annual return and full redemption of yourshares at the end of each period shown below:<TABLE><CAPTION>

1 Year 3 Years<S> <C> <C> <C> <C> <C> <C> <C> <C>ASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)--------- ------- ------- ------- ------- ------- ------- ------- -------

Int'l Small 70 87 37 87 113 122 82 124Capitalization

International Equity 70 87 37 87 113 122 82 124



Small Capitalization 67 83 33 83 102 110 70 111

Small Company Value 67 83 33 84 103 111 71 113

Capital Growth 67 83 33 83 102 110 70 111

Equity Income 65 81 31 82 97 105 65 107

Strategic Balanced 66 82 32 82 99 107 67 108

High Yield Bond 57 80 30 81 88 103 63 105

Total Return Bond 56 79 29 80 85 100 60 102

Money Market 65 80 30 81 96 103 63 105

No Redemption. You would have paid the following expenses on a $1,000investment, assuming a hypothetical 5% annual return and no redemption of yourshares at the end of each period shown below:

1 Year 3 YearsASAF Fund: Class A Class B Class C Class X(*) Class A Class B Class C Class X(*)--------- ------- ------- ------- ------- ------- ------- ------- -------

Int'l Small 70 27 27 27 113 82 82 84Capitalization

International Equity 70 27 27 27 113 82 82 84

Small Capitalization 67 23 23 23 102 70 70 71

Small Company Value 67 23 23 24 103 71 71 73

Capital Growth 67 23 23 23 102 70 70 71

Equity Income 65 21 21 22 97 65 65 67

Strategic Balanced 66 22 22 22 99 67 67 68

High Yield Bond 57 20 20 21 88 63 63 65

Total Return Bond 56 19 19 20 85 60 60 62

Money Market 65 20 20 21 96 63 63 65</TABLE>

(*) Expense examples for purchases of Class X shares of the Funds reflectthe shareholder's receipt of additional "bonus shares." For a discussion of theissuance of "bonus shares," see this Prospectus under "How to Buy Shares:Purchase of Class X Shares."

The above tables are provided to assist you in understanding thevarious costs and expenses that you would bear directly or indirectly as aninvestor in the Fund(s). THE EXAMPLES PROVIDED SHOULD NOT BE CONSIDERED AS AREPRESENTATION OF THE FUNDS' PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BEGREATER OR LESS THAN THOSE SHOWN. IN ADDITION, WHILE THE EXAMPLES ASSUME A 5%ANNUAL RETURN, EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN ANACTUAL RETURN THAT IS GREATER OR LESS THAN 5%.


The investment objective, policies and limitations for each of theFunds are described below and should be considered separately. The investmentobjective, policies and limitations of each Feeder Fund are identical to thoseof its corresponding Portfolio. As such, the following discussion of the FeederFunds, including references to the Directors of the Company, apply equally tothe Funds' corresponding Portfolios and the Trustees of the Trust. Each FeederFund seeks to meet its investment objective by investing all of its investableassets in a corresponding Portfolio of the Trust, which in turn invests directlyin a portfolio of securities in accordance with the investment objective,policies and limitations of its Feeder Fund.

While certain policies apply to all Funds and Portfolios, generallyeach Fund and Portfolio has a different investment objective and certainpolicies may vary. As a result, the risks, opportunities and returns ofinvesting in each Fund may differ. Those investment policies specificallylabeled as "fundamental" may not be changed without shareholder approval. Theinvestment objective of each Fund and Portfolio is not a fundamental policy andmay be changed by the Directors of the Company or the Trustees of the Trust,where applicable, without shareholder approval. The investment policies and



limitations of the Funds and Portfolios, unless otherwise specified, are notfundamental policies and may also be changed without shareholder approval.

There can be no assurance that the investment objective of any Fund orPortfolio will be achieved. Risks relating to various securities and instrumentsin which the Funds and Portfolios may invest are described in this Prospectusand the Company's SAI under "Certain Risk Factors and Investment Methods."Additional information about the investment objectives, policies andlimitations, as well as certain fundamental investment restrictions, of eachFund and Portfolio may be found in the Company's SAI under "Investment Programsof the Funds" and "Fundamental Investment Restrictions."

Subject to the approval of the Directors of the Company, the Companymay add one or more Funds and may cease to offer any one or more Funds in thefuture. Any such addition or cessation shall be subject to obtaining anyrequired regulatory approvals.

ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:

Investment Objective: The investment objective of the Fund is to seekcapital growth.

Investment Policies:

To achieve its objective, the Fund normally invests primarily insecurities issued by foreign companies which have market capitalizations orannual revenues of $1 billion or less. These securities may represent companiesin both established and emerging economies throughout the world.

At least 65% of the Fund's total assets normally will be invested inforeign securities representing a minimum of three countries. The Fund mayinvest in larger foreign companies or in U.S.-based companies if, in theSub-advisor's opinion, they represent better prospects for capital appreciation.

Risks of Investments in Small and Medium-Sized Companies. The Fundnormally will invest a significant proportion of its assets in the securities ofsmall and medium-sized companies. As used with respect to this Fund, small andmedium-sized companies are those which are still in the developing stages oftheir life cycles and are attempting to achieve rapid growth in both sales andearnings. Capable management and fertile operating areas are two of the mostimportant characteristics of such companies. In addition, these companies shouldemploy sound financial and accounting policies; demonstrate effective researchand successful product development and marketing; provide efficient service; andpossess pricing flexibility.

Investments in small and medium-sized companies involve greater riskthan is customarily associated with more established companies. These companiesoften have sales and earnings growth rates which exceed those of largecompanies. Such growth rates may in turn be reflected in more rapid share priceappreciation. However, smaller companies often have limited operating histories,product lines, markets, or financial resources, and they may be dependent uponone-person management. These companies may be subject to intense competitionfrom larger entities, and the securities of such companies may have limitedmarketability and may be subject to more abrupt or erratic movements in pricethan securities of larger companies or the market averages in general.Therefore, the net asset value of the Fund's shares may fluctuate more widelythan the popular market averages.

Foreign Securities. The Fund may invest without limit in AmericanDepositary Receipts ("ADRs") and foreign securities. The term "foreignsecurities" refers to securities of issuers, wherever organized, which, in thejudgment of the Sub-advisor, have their principal business activities outside ofthe United States. The determination of whether an issuer's principal activitiesare outside of the United States will be based on the location of the issuer'sassets, personnel, sales, and earnings, and specifically on whether more than50% of the issuer's assets are located, or more than 50% of the issuer's grossincome is earned, outside of the United States, or on whether the issuer's soleor principal stock exchange listing is outside of the United States. Foreignsecurities typically will be traded on the applicable country's principal stockexchange but may also be traded on regional exchanges or over-the-counter. For adiscussion of ADRs, see this Prospectus under "Certain Risk Factors andInvestment Methods."

Foreign investments of the Fund may include securities issued bycompanies located in countries not considered to be major industrializednations. Such countries are subject to more economic, political and businessrisk than major industrialized nations, and the securities they issue areexpected to be more volatile and more uncertain as to payment of interest andprincipal. The secondary market for such securities is expected to be lessliquid than for securities of major industrialized nations. Such countries mayinclude (but are not limited to): Argentina, Australia, Austria, Belgium,Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,



Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, SriLanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,Vietnam and the countries of the former Soviet Union. Investments may includesecurities created through the Brady Plan, a program under which heavilyindebted countries have restructured their bank debt into bonds.

Investments in foreign securities involve certain risks which are nottypically associated with U.S. investments. For a discussion of the specialrisks involved in investing in developing countries and certain risks involvedin investing in foreign securities, in general, including the risk of currencyfluctuations, see this Prospectus and the Company's SAI under "Certain RiskFactors and Investment Methods."

Foreign Currency Exchange Contracts. The Fund is permitted to useforward foreign currency contracts in connection with the purchase or sale of aspecific security. The Fund may conduct its foreign currency exchangetransactions on a spot (i.e., cash) basis at the spot rate prevailing in theforeign exchange currency market, or on a forward basis to "lock in" the U.S.dollar price of the security. By entering into a forward contract for thepurchase or sale, for a fixed amount of U.S. dollars, of the amount of foreigncurrency involved in the underlying transactions, the Fund attempts to protectitself against possible loss resulting from an adverse change in therelationship between the U.S. dollar and the applicable foreign currency duringthe period between the date on which the security is purchased or sold and thedate on which such payments are made or received.

In addition, the Fund may enter into forward contracts for hedgingpurposes. When the Sub-advisor believes that the currency of a particularforeign country may suffer a substantial decline against the U.S. dollar (orsometimes against another currency), the Fund may enter into forward contractsto sell, for a fixed-dollar or other currency amount, foreign currencyapproximating the value of some or all of the Fund's securities denominated inthat currency. The precise matching of the forward contract amounts and thevalue of the securities involved will not generally be possible. The futurevalue of such securities in foreign currencies changes as a consequence ofmarket movements in the value of those securities between the date on which thecontract is entered into and the date it expires.

The Fund generally will not enter into forward contracts with a termgreater than one year. In addition, the Fund generally will not enter intoforward contracts or maintain a net exposure to such contracts where thefulfillment of the contracts would require the Fund to deliver an amount offoreign currency in excess of the value of the Fund's securities or other assetsdenominated in that currency. Under normal circumstances, consideration of thepossibility of changes in currency exchange rates will be incorporated into theFund's long-term investment strategies. In the event that forward contracts areconsidered to be illiquid, the securities would be subject to the Fund'slimitation on investing in illiquid securities. For an additional discussion offoreign currency contracts and the risks involved therein, see this Prospectusand the Company's SAI under "Certain Risk Factors and Investment Methods."

Fixed-Income Securities. The Fund may invest in convertible securities,preferred stocks, bonds, debentures, and other corporate obligations when theSub-advisor believes that these investments offer opportunities for capitalappreciation. Current income will not be a substantial factor in the selectionof these securities.

The Fund will only invest in bonds, debentures, and corporateobligations (other than convertible securities and preferred stock) ratedinvestment grade (BBB or higher) at the time of purchase. Bonds in the lowestinvestment grade category (BBB) have speculative characteristics, with changesin the economy or other circumstances more likely to lead to a weakened capacityof the bonds to make principal and interest payments than would occur with bondsrated in higher categories. Convertible securities and preferred stockspurchased by the Fund may be rated in medium and lower categories by Moody's orS&P (Ba or lower by Moody's and BB or lower by S&P), but will not be rated lowerthan B. The Fund may also invest in unrated convertible securities and preferredstocks in instances in which the Sub-advisor believes that the financialcondition of the issuer or the protection afforded by the terms of thesecurities limits risk to a level similar to that of securities eligible forpurchase by the Fund rated in categories no lower than B. Securities rated B arereferred to as "high-risk" securities, generally lack characteristics of adesirable investment, and are deemed speculative with respect to the issuer'scapacity to pay interest and repay principal over a long period of time. At notime will the Fund have more than 5% of its total assets invested in anyfixed-income securities (not including convertible securities and preferredstock) which are unrated or are rated below investment grade either at the timeof purchase or as a result of a reduction in rating after purchase. For adescription of securities ratings, see the Appendix to the Company's SAI. For adiscussion of the special risks involved in investing in lower-rated debtsecurities, see this Prospectus and the Company's SAI under "Certain Risk



Factors and Investment Methods."

The fixed-income securities in which the Fund may invest are generallysubject to two kinds of risk: credit risk and market risk. Credit risk relatesto the ability of the issuer to meet interest or principal payments, or both, asthey come due. The ratings given a security by Moody's and S&P provide agenerally useful guide as to such credit risk. The lower the rating given asecurity by such rating service, the greater the credit risk such rating serviceperceives to exist with respect to such security. Increasing the amount of Fundassets invested in unrated or lower-grade securities, while intended to increasethe yield produced by those assets, also will increase the credit risk to whichthose assets are subject. Market risk relates to the fact that the market valuesof securities in which the Fund may invest generally will be affected by changesin the level of interest rates. An increase in interest rates will tend toreduce the market values of such securities, whereas a decline in interest rateswill tend to increase their values. Medium- and lower-rated securities (Baa orBBB and lower) and non-rated securities of comparable quality tend to be subjectto wider fluctuations in yields and market values than higher-rated securities.Medium-rated securities (those rated Baa or BBB) have speculativecharacteristics while lower-rated securities are predominantly speculative. TheFund is not required to dispose of straight debt securities whose ratings aredowngraded below Baa or BBB subsequent to the Fund's purchase of the securities,unless such a disposition is necessary to reduce the Fund's holdings of suchsecurities to less than 5% of its total assets. Relying in part on ratingsassigned by credit agencies in making investments will not protect the Fund fromthe risk that fixed-income securities in which it invests will decline in value,since credit ratings represent evaluations of the safety of principal, dividendand interest payments on preferred stocks and debt securities, not the marketvalues of such securities, and such ratings may not be changed on a timely basisto reflect subsequent events.

The Sub-advisor seeks to reduce overall risk associated with theinvestments of the Fund through diversification and consideration of relevantfactors affecting the value of securities. No assurance can be given, however,regarding the degree of success that will be achieved in this regard or in theFund achieving its investment objective.

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may invest up to 15% of the market value of its netassets, measured at the time of purchase, in securities which are not readilymarketable, including repurchase agreements maturing in more than seven days.Securities which are not readily marketable are those that, for whatever reason,cannot be disposed of within seven days in the ordinary course of business atapproximately the amount at which the Fund has valued the investment.

The Fund may invest in Rule 144A securities (securities issued inofferings made pursuant to Rule 144A under the Securities Act of 1933). Rule144A securities may be resold to qualified institutional buyers as defined underRule 144A and may or may not be deemed to be readily marketable. Factorsconsidered in evaluating whether such a security is readily marketable includeeligibility for trading, trading activity, dealer interest, purchase interest,and ownership transfer requirements. The Sub-advisor is required to monitor thereadily marketable nature of each Rule 144A security no less frequently thanquarterly. For an additional discussion of Rule 144A securities and illiquid andrestricted securities, and the risks involved therein, see this Prospectus under"Certain Risk Factors and Investment Methods."

Borrowing. The Fund may borrow money from banks in amounts up to 331/3% of the Fund's total assets. If the Fund borrows money, its share price maybe subject to greater fluctuation until the borrowing is repaid. The Fund willattempt to minimize such fluctuations by not purchasing securities whenborrowings are greater than 5% of the value of the Fund's total assets. For anadditional discussion of the Fund's limitations on borrowing and certain risksinvolved in borrowing, see this Prospectus under "Certain Risk Factors andInvestment Methods" and the Company's SAI under "Fundamental InvestmentRestrictions."

Futures Contracts and Options. The Fund may enter into futurescontracts (or options thereon) for hedging purposes. The acquisition or sale ofa futures contract could occur, for example, if the Fund held or consideredpurchasing equity securities and sought to protect itself from fluctuations inprices without buying or selling those securities. The Fund may also enter intointerest rate and foreign currency futures contracts. Interest rate futurescontracts currently are traded on a variety of fixed-income securities. Foreigncurrency futures contracts currently are traded on the British pound, Canadiandollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.

An option is a right to buy or sell a security at a specified pricewithin a limited period of time. The Fund may write ("sell") covered calloptions on any or all of its portfolio securities from time to time as theSub-advisor shall deem appropriate. The extent of the Fund's option writingactivities will vary from time to time depending upon the Sub-advisor'sevaluation of market, economic and monetary conditions.



The Fund may purchase options on securities and stock indices. Optionson stock indices are similar to options on securities. However, because optionson stock indices do not involve the delivery of an underlying security, theoption represents the holder's right to obtain from the writer in cash a fixedmultiple of the amount by which the exercise price exceeds (in the case of aput) or is less than (in the case of a call) the closing value of the underlyingindex on the exercise date. The purpose of these transactions is not to generategain, but to "hedge" against possible loss. Therefore, successful hedgingactivity will not produce net gain to the Fund. The Fund may also purchase putand call options on futures contracts. An option on a futures contract providesthe holder with the right to enter into a "long" position in the underlyingfutures contract, in the case of a call option, or a "short" position in theunderlying futures contract, in the case of a put option, at a fixed exerciseprice to a stated expiration date. Upon exercise of the option by the holder, acontract market clearing house establishes a corresponding short position forthe writer of the option, in the case of a call option, or a corresponding longposition, in the case of a put option.

The Fund will not, as to any positions, whether long, short or acombination thereof, enter into futures and options thereon for which theaggregate initial margins and premiums exceed 5% of the fair market value of itstotal assets after taking into account unrealized profits and losses on optionsentered into. The Fund may buy and sell options on foreign currencies forhedging purposes in a manner similar to that in which futures on foreigncurrencies would be utilized. For an additional discussion of futures contractsand options and the risks involved therein, see this Prospectus and theCompany's SAI under "Certain Risk Factors and Investment Methods."

Temporary Investments. Up to 100% of the assets of the Fund may beinvested temporarily in U.S. government obligations, commercial paper, bankobligations, repurchase agreements, negotiable U.S. dollar-denominatedobligations of domestic and foreign branches of U.S. depository institutions,U.S. branches of foreign depository institutions, and foreign depositoryinstitutions, in cash, or in other cash equivalents, if the Sub-advisordetermines it to be appropriate for purposes of enhancing liquidity orpreserving capital in light of prevailing market or economic conditions. Whilethe Fund is in a defensive position, the opportunity to achieve capital growthwill be limited, and, to the extent that this assessment of market conditions isincorrect, the Fund will be foregoing the opportunity to benefit from capitalgrowth resulting from increases in the value of equity investments.

U.S. government obligations include Treasury bills, notes and bonds,and issues of United States agencies, authorities and instrumentalities. Somegovernment obligations, such as Government National Mortgage Associationpass-through certificates, are supported by the full faith and credit of theUnited States Treasury. Other obligations, such as securities of the FederalHome Loan Banks, are supported by the right of the issuer to borrow from theUnited States Treasury; and others, such as bonds issued by Federal NationalMortgage Association (a private corporation), are supported only by the creditof the agency, authority or instrumentality. The Fund also may invest inobligations issued by the International Bank for Reconstruction and Development(IBRD or "World Bank").

The Fund may also acquire certificates of deposit and bankers'acceptances of banks which meet criteria established by the Directors of theCompany, if any. A certificate of deposit is a short-term obligation of a bank.A bankers' acceptance is a time draft drawn by a borrower on a bank, usuallyrelating to an international commercial transaction.

The obligations of foreign branches of U.S. depository institutions maybe general obligations of the parent depository institution in addition to beingan obligation of the issuing branch. These obligations, and those of foreigndepository institutions, may be limited by the terms of the specific obligationand by governmental regulation. The payment of these obligations, both interestand principal, also may be affected by governmental action in the country ofdomicile of the institution or branch, such as imposition of currency controlsand interest limitations. In connection with these investments, the Fund will besubject to the risks associated with the holding of portfolio securitiesoverseas, such as possible changes in investment or exchange controlregulations, expropriation, confiscatory taxation, or political or financialinstability.

Obligations of U.S. branches of foreign depository institutions may begeneral obligations of the parent depository institution in addition to being anobligation of the issuing branch, or may be limited by the terms of a specificforeign regulation applicable to the depository institutions and by governmentregulation (both domestic and foreign).

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements withbanks or well-established securities dealers. All repurchase agreements enteredinto by the Fund will be fully collateralized and marked to market daily. The



Fund has not adopted any limits on the amount of its total assets that may beinvested in repurchase agreements which mature in less than seven days. For adiscussion of repurchase agreements and certain risks involved therein, see thisProspectus under "Certain Risk Factors and Investment Methods."

Portfolio Turnover. The Fund reserves the right to sell its securities,regardless of the length of time that they have been held, when it is determinedby the Sub-advisor that those securities have attained or are unable to meet theinvestment objective of the Fund. The Fund may engage in short-term trading andtherefore normally will have annual portfolio turnover rates which areconsidered to be high and may be greater than those of other investmentcompanies seeking capital appreciation. Portfolio turnover rates may alsoincrease as a result of the need for the Fund to effect significant amounts ofpurchases or redemptions of portfolio securities due to economic, market, orother factors that are not within the Sub-advisor's control. For a discussion ofportfolio turnover and its effects, see this Prospectus and the Company's SAIunder "Portfolio Transactions."

ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:

Investment Objective: The investment objective of the Fund is to seek a totalreturn on its assets from long-term growth of capital and income, principallythrough investments in common stocks of established, non-U.S. companies.Investments may be made solely for capital appreciation or solely for income orany combination of both for the purpose of achieving a higher overall return.Total return consists of capital appreciation or depreciation, dividend income,and currency gains or losses.


The Fund intends to diversify investments broadly among countries andto normally have at least three different countries represented in the Fund. TheFund may invest in countries of the Far East and Western Europe as well as SouthAfrica, Australia, Canada and other areas (including developing countries).Under unusual circumstances, the Fund may invest substantially all of its assetsin one or two countries.

In seeking its objective, the Fund will invest primarily in commonstocks of established foreign companies which have the potential for growth ofcapital or income or both. However, the Fund may also invest in a variety ofother equity-related securities, such as preferred stocks, warrants andconvertible securities, as well as corporate and governmental debt securities,when considered consistent with the Fund's investment objectives and program.Under normal market conditions, the Fund's investment in securities other thancommon stocks is limited to no more than 35% of total assets. Under exceptionaleconomic or market conditions abroad, the Fund may temporarily invest all or amajor portion of its assets in U.S. government obligations or debt obligationsof U.S. companies. The Fund will not purchase any debt security which at thetime of purchase is rated below investment grade. This would not prevent theFund from retaining a security downgraded to below investment grade afterpurchase.

The Fund may also invest its reserves in domestic as well as foreignmoney market instruments. Also, the Fund may enter into forward foreign currencyexchange contracts in order to protect against uncertainty in the level offuture foreign exchange rates.

In addition to the investments described below, the Fund's investmentsmay include, but are not limited to, American Depositary Receipts (ADRs), bonds,notes, other debt securities of foreign issuers, and the securities of foreigninvestment funds or trusts (including passive foreign investment companies).

Cash Reserves. While the Fund will remain primarily invested in commonstocks, it may, for temporary defensive measures, invest in cash reserveswithout limitation. The Fund may establish and maintain reserves as theSub-advisor believes is advisable to facilitate the Fund's cash flow needs(e.g., redemptions, expenses and purchases of portfolio securities) or fortemporary, defensive purposes. The Fund's reserves may be invested in domesticand foreign money market instruments rated within the top two credit categoriesby a national rating organization, or if unrated, of equivalent investmentquality as determined by the Sub-advisor.

Convertible Securities, Preferred Stocks, and Warrants. The Fund mayinvest in debt or preferred equity securities convertible into or exchangeablefor equity securities. Preferred stocks are securities that represent anownership interest in a corporation providing the owner with claims on thecompany's earnings and assets before common stock owners, but after bond owners.Warrants are options to buy a stated number of shares of common stock at aspecified price any time during the life of the warrants (generally, two or moreyears).

Foreign Currency Transactions. The Fund will normally conduct itsforeign currency exchange transactions either on a spot (i.e., cash) basis at



the spot rate prevailing in the foreign currency exchange market, or throughentering into forward contracts to purchase or sell foreign currencies. The Fundwill generally not enter into a forward contract with a term of greater than oneyear.

The Fund will generally enter into forward foreign currency exchangecontracts only under two circumstances. First, when the Fund enters into acontract for the purchase or sale of a security denominated in a foreigncurrency, it may desire to "lock in" the U.S. dollar price of the security.Second, when the Sub-advisor believes that the currency of a particular foreigncountry may suffer or enjoy a substantial movement against another currency, itmay enter into a forward contract to sell or buy the former foreign currency (oranother currency which acts as a proxy for that currency) approximating thevalue of some or all of the Fund's securities denominated in such foreigncurrency. Under certain circumstances, the Fund may commit a substantial portionor the entire value of its portfolio to the consummation of these contracts. TheSub-advisor will consider the effect such a commitment of its portfolio toforward contracts would have on the investment program of the Fund and theflexibility of the Fund to purchase additional securities. For a discussion offoreign currency contracts and the risks involved therein, see this Prospectusand the Company's SAI under "Certain Risk Factors and Investment Methods."

Futures Contracts and Options. The Fund may enter into stock index orcurrency futures contracts (or options thereon) to hedge a portion of the Fund,to provide an efficient means of regulating the Fund's exposure to the equitymarkets, or as a hedge against changes in prevailing levels of currency exchangerates. The Fund will not use futures contracts for leveraging purposes. Suchcontracts may be traded on U.S. or foreign exchanges. The Fund may write coveredcall options and purchase put and call options on foreign currencies,securities, and stock indices. The aggregate market value of the Fund'scurrencies or portfolio securities covering call or put options will not exceed25% of the Fund's total assets. The Fund will not commit more than 5% of itstotal assets to premiums when purchasing call or put options. For an additionaldiscussion of futures contracts and options and the risks involved therein, seethis Prospectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Hybrid Investments. The Fund may invest up to 10% of its total assetsin hybrid instruments. As part of its investment program and to maintain greaterflexibility, the Fund may invest in these instruments, which have thecharacteristics of futures, options and securities. Such instruments may take avariety of forms, such as debt instruments with interest or principal paymentsdetermined by reference to the value of a currency, security index or commodityat a future point in time. The risks of such investments would reflect both therisks of investing in futures, options, currencies, and securities, includingvolatility and illiquidity. Under certain conditions, the redemption value of ahybrid instrument could be zero. For a discussion of hybrid investments and therisks involved therein, see the Company's SAI under "Certain Risk Factors andInvestment Methods."

Passive Foreign Investment Companies. The Fund may purchase thesecurities of certain foreign investment funds or trusts called passive foreigninvestment companies. Such trusts have been the only or primary way to invest incertain countries. In addition to bearing their proportionate share of theFund's expenses (management fees and operating expenses), shareholders will alsoindirectly bear similar expenses of such trusts.

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may acquire illiquid securities (no more than 15% ofnet assets). The Fund will not invest more than 10% of its total assets inrestricted securities (other than securities eligible for resale under Rule 144Aof the Securities Act of 1933). For a discussion of illiquid and restrictedsecurities, and the risks involved therein, see this Prospectus under "CertainRisk Factors and Investment Methods."

Lending of Portfolio Securities. For the purpose of realizingadditional income, the Fund may lend securities with a value of up to 33 1/3% ofits total assets to broker-dealers, institutional investors, or other persons.Any such loan will be continuously secured by collateral at least equal to thevalue of the security loaned. For an additional discussion of the Fund'slimitations on lending and certain risks involved in lending, see thisProspectus under "Certain Risk Factors and Investment Methods" and the Company'sSAI under "Fundamental Investment Restrictions."

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements with awell-established securities dealer or a bank which is a member of the FederalReserve System. For a discussion of repurchase agreements and certain risksinvolved therein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

Borrowing. For a discussion of the Fund's limitations on borrowing andcertain risks involved in borrowing, see this Prospectus under "Certain Risk



Factors and Investment Methods" and the Company's SAI under "FundamentalInvestment Restrictions."

ASAF FOUNDERS SMALL CAPITALIZATION FUND:



To achieve its objective, the Fund normally will invest at least 65% ofits total assets in common stocks of U.S. companies with market capitalizationsor annual revenues of $1.5 billion or less. Market capitalization is a measureof the size of a company and is based upon the total market value of a company'soutstanding equity securities. Ordinarily, the common stocks of the U.S.companies selected for this Fund will not be listed on a national securitiesexchange but will be traded in the over-the-counter market.

Risks of Investments in Small and Medium-Sized Companies. The Fundnormally will invest a significant proportion of its assets in the securities ofsmall and medium-sized companies. As used with respect to this Fund, small andmedium-sized companies are those which are still in the developing stages oftheir life cycles and are attempting to achieve rapid growth in both sales andearnings. Capable management and fertile operating areas are two of the mostimportant characteristics of such companies. In addition, these companies shouldemploy sound financial and accounting policies; demonstrate effective researchand successful product development and marketing; provide efficient service; andpossess pricing flexibility.

Investments in small and medium-sized companies involve greater riskthan is customarily associated with more established companies. These companiesoften have sales and earnings growth rates which exceed those of largecompanies. Such growth rates may in turn be reflected in more rapid share priceappreciation. However, smaller companies often have limited operating histories,product lines, markets, or financial resources, and they may be dependent uponone-person management. These companies may be subject to intense competitionfrom larger entities, and the securities of such companies may have limitedmarketability and may be subject to more abrupt or erratic movements in pricethan securities of larger companies or the market averages in general.Therefore, the net asset value of the Fund's shares may fluctuate more widelythan the popular market averages.

Fixed Income Securities. The Fund may invest in convertible securities,preferred stocks, bonds, debentures, and other corporate obligations when theSub-advisor believes that these investments offer opportunities for capitalappreciation. Current income will not be a substantial factor in the selectionof these securities. Bonds, debentures, and corporate obligations (other thanconvertible securities and preferred stock) purchased by the Fund will be ratedinvestment grade at the time of purchase (Baa or higher by Moody's InvestorsService, Inc. ("Moody's") or BBB or higher by Standard & Poor's ("S&P")). Bondsin the lowest investment grade category (Baa or BBB) may have speculativecharacteristics, with changes in the economy or other circumstances more likelyto lead to a weakened capacity of the bonds to make principal and interestpayments than would occur with bonds rated in higher categories. Convertiblesecurities and preferred stocks purchased by the Fund may be rated in medium andlower categories by Moody's or S&P (Ba or lower by Moody's and BB or lower byS&P), but will not be rated lower than B. The Fund may also invest in unratedconvertible securities and preferred stocks in instances in which theSub-advisor believes that the financial condition of the issuer or theprotection afforded by the terms of the securities limits risk to a levelsimilar to that of securities eligible for purchase by the Fund rated incategories no lower than B. Securities rated B are referred to as "high risk"securities, generally lack characteristics of a desirable investment, and aredeemed speculative with respect to the issuer's capacity to pay interest andrepay principal over a long period of time. At no time will the Fund have morethan 5% of its assets invested in any fixed-income securities (not includingconvertible securities and preferred stock) which are unrated or are rated belowinvestment grade either at the time of purchase or as a result of a reduction inrating after purchase. For a description of securities ratings, see the Appendixto the Company's SAI. For a discussion of the special risks involved inlower-rated debt securities, see this Prospectus and the Company's SAI under"Certain Risk Factors and Investment Methods."

The fixed-income securities in which the Fund may invest are generallysubject to two kinds of risk: credit risk and market risk. Credit risk relatesto the ability of the issuer to meet interest or principal payments, or both, asthey come due. The ratings given a security by Moody's and S&P provide agenerally useful guide as to such credit risk. The lower the rating given asecurity by such rating service, the greater the credit risk such rating serviceperceives to exist with respect to such security. Increasing the amount of Fundassets invested in unrated or lower-grade securities, while intended to increasethe yield produced by those assets, also will increase the credit risk to whichthose assets are subject. Market risk relates to the fact that the market values



of securities in which the Fund may invest generally will be affected by changesin the level of interest rates. An increase in interest rates will tend toreduce the market values of such securities, whereas a decline in interest rateswill tend to increase their values. Medium- and lower-rated securities (Baa orBBB and lower) and non-rated securities of comparable quality tend to be subjectto wider fluctuations in yields and market values than higher-rated securities.Medium-rated securities (those rated Baa or BBB) have speculativecharacteristics while lower-rated securities are predominantly speculative. TheFund is not required to dispose of straight debt securities whose ratings aredowngraded below Baa or BBB subsequent to the Fund's purchase of the securities,unless such a disposition is necessary to reduce the Fund's holdings of suchsecurities to less than 5% of its total assets. Relying in part on ratingsassigned by credit agencies in making investments will not protect the Fund fromthe risk that fixed-income securities in which it invests will decline in value,since credit ratings represent evaluations of the safety of principal, dividendand interest payments on preferred stocks and debt securities, not the marketvalues of such securities, and such ratings may not be changed on a timely basisto reflect subsequent events.

The Sub-advisor seeks to reduce overall risk associated with theinvestments of the Fund through diversification and consideration of relevantfactors affecting the value of securities. No assurance can be given, however,regarding the degree of success that will be achieved in this regard or in theFund achieving its investment objective.

Foreign Securities. The Fund may invest in dollar-denominated AmericanDepositary Receipts ("ADRs") which are traded on exchanges or over-the-counterin the United States without limit, and in foreign securities. The term "foreignsecurities" refers to securities of issuers, wherever organized, which, in thejudgment of the Sub-advisor, have their principal business activities outside ofthe United States. The determination of whether an issuer's principal activitiesare outside of the United States will be based on the location of the issuer'sassets, personnel, sales, and earnings, and specifically on whether more than50% of the issuer's assets are located, or more than 50% of the issuer's grossincome is earned, outside of the United States, or on whether the issuer's soleor principal stock exchange listing is outside of the United States. Foreignsecurities typically will be traded on the applicable country's principal stockexchange but may also be traded on regional exchanges or over-the-counter. For adiscussion of ADRs, see this Prospectus under "Certain Risk Factors andInvestment Methods."

Foreign investments of the Fund may include securities issued bycompanies located in countries not considered to be major industrializednations. Such countries are subject to more economic, political and businessrisk than major industrialized nations, and the securities they issue areexpected to be more volatile and more uncertain as to payment of interest andprincipal. The secondary market for such securities is expected to be lessliquid than for securities of major industrialized nations. Such countries mayinclude (but are not limited to): Argentina, Australia, Austria, Belgium,Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Croatia, Czech Republic,Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,Ireland, Italy, Israel, Jordan, Malaysia, Mexico, Netherlands, New Zealand,Nigeria, North Korea, Norway, Pakistan, Paraguay, Peru, Philippines, Poland,Portugal, Singapore, Slovak Republic, South Africa, South Korea, Spain, SriLanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, Uruguay, Venezuela,Vietnam and the countries of the former Soviet Union. Investments may includesecurities created through the Brady Plan, a program under which heavilyindebted countries have restructured their bank debt into bonds. Since the Fundwill pay dividends in dollars, it may incur currency conversion costs. The Fundwill not invest more than 25% of its total assets in any one foreign country.

Investments in foreign securities involve certain risks which are nottypically associated with U.S. investments. For a discussion of the specialrisks involved in investing in developing countries and certain risks involvedin investing in foreign securities, in general, including the risk of currencyfluctuations, see this Prospectus and the Company's SAI under "Certain RiskFactors and Investment Methods."

Foreign Currency Exchange Contracts. The Fund is permitted to useforward foreign currency contracts in connection with the purchase or sale of aspecific security. The Fund may conduct its foreign currency exchangetransactions on a spot (i.e., cash) basis at the spot rate prevailing in theforeign exchange currency market, or on a forward basis to "lock in" the U.S.dollar price of the security. By entering into a forward contract for thepurchase or sale, for a fixed amount of U.S. dollars, of the amount of foreigncurrency involved in the underlying transactions, the Fund attempts to protectitself against possible loss resulting from an adverse change in therelationship between the U.S. dollar and the applicable foreign currency duringthe period between the date on which the security is purchased or sold and thedate on which such payments are made or received.

In addition, the Fund may enter into forward contracts for hedgingpurposes. When the Sub-advisor believes that the currency of a particular



foreign country may suffer a substantial decline against the U.S. dollar (orsometimes against another currency), the Fund may enter into forward contractsto sell, for a fixed dollar or other currency amount, foreign currencyapproximating the value of some or all of the Fund's securities denominated inthat currency. The precise matching of the forward contract amounts and thevalue of the securities involved will not generally be possible. The futurevalue of such securities in foreign currencies changes as a consequence ofmarket movements in the value of those securities between the date on which thecontract is entered into and the date it expires.

The Fund generally will not enter into forward contracts with a termgreater than one year. In addition, the Fund generally will not enter intoforward contracts or maintain a net exposure to such contracts where thefulfillment of the contracts would require the Fund to deliver an amount offoreign currency in excess of the value of the Fund's securities or other assetsdenominated in that currency. Under normal circumstances, consideration of thepossibility of changes in currency exchange rates will be incorporated into theFund's long-term investment strategies. In the event that forward contracts areconsidered to be illiquid, the securities would be subject to the Fund'slimitation on investing in illiquid securities. For an additional discussion offoreign currency contracts and the risks involved therein, see this Prospectusand the Company's SAI under "Certain Risk Factors and Investment Methods."

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may invest up to 15% of the market value of its netassets, measured at the time of purchase, in securities which are not readilymarketable, including repurchase agreements maturing in more than seven days.Securities which are not readily marketable are those that, for whatever reason,cannot be disposed of within seven days in the ordinary course of business atapproximately the amount at which the Fund has valued the investment.

The Fund may invest in Rule 144A securities (securities issued inofferings made pursuant to Rule 144A under the Securities Act of 1933). Rule144A securities may be resold to qualified institutional buyers as defined underRule 144A and may or may not be deemed to be readily marketable. Factorsconsidered in evaluating whether such a security is readily marketable includeeligibility for trading, trading activity, dealer interest, purchase interest,and ownership transfer requirements. The Sub-advisor is required to monitor thereadily marketable nature of each Rule 144A security no less frequently thanquarterly. For an additional discussion of Rule 144A securities and illiquid andrestricted securities, and the risks involved therein, see this Prospectus under"Certain Risk Factors and Investment Methods."

Borrowing. The Fund may borrow money from banks in amounts up to 331/3% of the Fund's total assets. If the Fund borrows money, its share price maybe subject to greater fluctuation until the borrowing is repaid. The Fund willattempt to minimize such fluctuations by not purchasing securities whenborrowings are greater than 5% of the value of the Fund's total assets. For anadditional discussion of the Fund's limitations on borrowing and certain risksinvolved in borrowing, see this Prospectus under "Certain Risk Factors andInvestment Methods" and the Company's SAI under "Fundamental InvestmentRestrictions."

Futures Contracts and Options. The Fund may enter into futurescontracts (or options thereon) for hedging purposes. The acquisition or sale ofa futures contract could occur, for example, if the Fund held or consideredpurchasing equity securities and sought to protect itself from fluctuations inprices without buying or selling those securities. The Fund may also enter intointerest rate and foreign currency futures contracts. Interest rate futurescontracts currently are traded on a variety of fixed-income securities. Foreigncurrency futures contracts currently are traded on the British pound, Canadiandollar, Japanese yen, Swiss franc, German mark and on Eurodollar deposits.

An option is a right to buy or sell a security at a specified pricewithin a limited period of time. The Fund may write ("sell") covered calloptions on any or all of its portfolio securities from time to time as theSub-advisor shall deem appropriate. The extent of the Fund's option writingactivities will vary from time to time depending upon the Sub-advisor'sevaluation of market, economic and monetary conditions.

The Fund may purchase options on securities and stock indices. Optionson stock indices are similar to options on securities. However, because optionson stock indices do not involve the delivery of an underlying security, theoption represents the holder's right to obtain from the writer in cash a fixedmultiple of the amount by which the exercise price exceeds (in the case of aput) or is less than (in the case of a call) the closing value of the underlyingindex on the exercise date. The purpose of these transactions is not to generategain, but to "hedge" against possible loss. Therefore, successful hedgingactivity will not produce net gain to the Fund. The Fund may also purchase putand call options on futures contracts. An option on a futures contract providesthe holder with the right to enter into a "long" position in the underlyingfutures contract, in the case of a call option, or a "short" position in theunderlying futures contract, in the case of a put option, at a fixed exercise



price to a stated expiration date. Upon exercise of the option by the holder, acontract market clearing house establishes a corresponding short position forthe writer of the option, in the case of a call option, or a corresponding longposition, in the case of a put option.

The Fund will not, as to any positions, whether long, short or acombination thereof, enter into futures and options thereon for which theaggregate initial margins and premiums exceed 5% of the fair market value of itstotal assets after taking into account unrealized profits and losses on optionsentered into. The Fund may buy and sell options on foreign currencies forhedging purposes in a manner similar to that in which futures on foreigncurrencies would be utilized. For an additional discussion of futures contractsand options and the risks involved therein, see this Prospectus and theCompany's SAI under "Certain Risk Factors and Investment Methods."

Temporary Investments. Up to 100% of the assets of the Fund may beinvested temporarily in U.S. government obligations, commercial paper, bankobligations, repurchase agreements, negotiable U.S. dollar-denominatedobligations of domestic and foreign branches of U.S. depository institutions,U.S. branches of foreign depository institutions, and foreign depositoryinstitutions, cash, or in other cash equivalents, if the Sub-advisor determinesit to be appropriate for purposes of enhancing liquidity or preserving capitalin light of prevailing market or economic conditions. While the Fund is in adefensive position, the opportunity to achieve capital growth will be limited,and, to the extent that this assessment of market conditions is incorrect, theFund will be foregoing the opportunity to benefit from capital growth resultingfrom increases in the value of equity investments.

U.S. government obligations include Treasury bills, notes and bonds,and issues of United States agencies, authorities and instrumentalities. Somegovernment obligations, such as Government National Mortgage Associationpass-through certificates, are supported by the full faith and credit of theUnited States Treasury. Other obligations, such as securities of the FederalHome Loan Banks, are supported by the right of the issuer to borrow from theUnited States Treasury; and others, such as bonds issued by Federal NationalMortgage Association (a private corporation), are supported only by the creditof the agency, authority or instrumentality. The Fund also may invest inobligations issued by the International Bank for Reconstruction and Development(IBRD or "World Bank").

The Fund may also acquire certificates of deposit and bankers'acceptances of banks which meet criteria established by the Directors of theCompany, if any. A certificate of deposit is a short-term obligation of a bank.A bankers' acceptance is a time draft drawn by a borrower on a bank, usuallyrelating to an international commercial transaction.

The obligations of foreign branches of U.S. depository institutions maybe general obligations of the parent depository institution in addition to beingan obligation of the issuing branch. These obligations, and those of foreigndepository institutions, may be limited by the terms of the specific obligationand by governmental regulation. The payment of these obligations, both interestand principal, also may be affected by governmental action in the country ofdomicile of the institution or branch, such as imposition of currency controlsand interest limitations. In connection with these investments, the Fund will besubject to the risks associated with the holding of portfolio securitiesoverseas, such as possible changes in investment or exchange controlregulations, expropriation, confiscatory taxation, or political or financialinstability.

Obligations of U.S. branches of foreign depository institutions may begeneral obligations of the parent depository institution in addition to being anobligation of the issuing branch, or may be limited by the terms of a specificforeign regulation applicable to the depository institutions and by governmentregulation (both domestic and foreign).

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements withbanks or well-established securities dealers. All repurchase agreements enteredinto by the Fund will be fully collateralized and marked to market daily. TheFund has not adopted any limits on the amount of its total assets that may beinvested in repurchase agreements which mature in less than seven days. For adiscussion of repurchase agreements and certain risks involved therein, see thisProspectus under "Certain Risk Factors and Investment Methods."

Portfolio Turnover. The Fund reserves the right to sell its securities,regardless of the length of time that they have been held, when it is determinedby the Sub-advisor that those securities have attained or are unable to meet theinvestment objective of the Fund. The Fund may engage in short-term trading andtherefore normally will have annual portfolio turnover rates which areconsidered to be high and may be greater than those of other investmentcompanies seeking capital appreciation. Portfolio turnover rates may alsoincrease as a result of the need for the Fund to effect significant amounts ofpurchases or redemptions of portfolio securities due to economic, market, or



other factors that are not within the Sub-advisor's control. For a discussion ofportfolio turnover and its effects, see this Prospectus and the Company's SAIunder "Portfolio Transactions."

ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:

Investment Objective: The investment objective of the Fund is to providelong-term capital growth by investing primarily in small-capitalization stocksthat appear to be undervalued.


Reflecting a value approach to investing, the Fund will seek the stocksof companies whose current stock prices do not appear to adequately reflecttheir underlying value as measured by assets, earnings, cash flow, or businessfranchises. The Fund will invest at least 65% of its total assets in companieswith a market capitalization of $1 billion or less that appear undervalued byvarious measures, such as price/earnings or price/book value ratios.

Although the Fund will invest primarily in U.S. common stocks, it mayalso purchase other types of securities, for example, foreign securities,convertible stocks and bonds, and warrants when considered consistent with theFund's investment objective and policies. The Fund may also engage in a varietyof investment management practices, such as buying and selling futures andoptions.

In managing the Fund, the Sub-advisor will apply a value investmentapproach. Value investors seek to buy a stock (or other security) when its priceis low relative to its perceived worth. They hope to identify companies whosestocks are currently out of favor or are not followed closely by stock analysts.Often these stocks have above-average yields and offer the potential for capitalappreciation as other investors recognize their intrinsic value and drive uptheir prices. Some of the principal measures used to identify such stocks are:

(i) Price/Earnings Ratio. Dividing a stock's price by its earnings pershare generates a price/earnings or P/E ratio. A stock with a P/E that issignificantly below that of its peers, the market as a whole, or its ownhistorical norm may represent an attractive opportunity.

(ii) Price/Book Value Ratio. This ratio, calculated by dividing astock's price by its book value per share, indicates how a stock is pricedrelative to the accounting (i.e., book) value of the company's assets. A ratiobelow the market, that of its competitors, or its own historic norm couldindicate an undervalued situation.

(iii) Dividend Yield. Value investors look for undervalued assets. Astock's dividend yield is found by dividing its annual dividend by its shareprice. A yield significantly above a stock's own historic norm or that of itspeers may suggest an investment opportunity.

(iv) Price/Cash Flow. Dividing a stock's price by the company's cashflow per share, rather than its earnings or book value, provides a more usefulmeasure of value in some cases. A ratio below that of the market or of its peerssuggests the market may be incorrectly valuing the company's cash flow forreasons that may be temporary.

(v) Undervalued Assets. This analysis compares a company's stock pricewith its underlying asset values, its projected value in the private (as opposedto public) market, or its expected value if the company or parts of it were soldor liquidated.

(vi) Restructuring Opportunities. The market can react favorably to theannouncement or the successful implementation of a corporate restructuring,financial reengineering, or asset redeployment. Such events can result in anincrease in a company's stock price. A value investor may try to anticipatethese actions and invest before the market places an appropriate value on anyactual or expected changes.

Risks of a Value Approach to Small-Cap Investing. Small companies --those with a capitalization (market value) of $1 billion or less -- may offergreater potential for capital appreciation since they are often overlooked orundervalued by investors. Small-capitalization stocks are less actively followedby stock analysts than are larger-capitalization stocks, and less information isavailable to evaluate small-cap stock prices. As a result, compared withlarger-capitalization stocks, there may be greater variations between thecurrent stock price and the estimated underlying value, which could representgreater opportunity for appreciation.

Investing in small companies involves greater risk as well as greateropportunity than is customarily associated with more established companies.Stocks of small companies may be subject to more abrupt or erratic pricemovements than larger company securities. Small companies often have limitedproduct lines, markets, or financial resources, and their management may lack



depth and experience. In addition, a value approach to investing includes therisks that 1) the market will not recognize a security's intrinsic value for anunexpectedly long time, and 2) a stock that is judged to be undervalued isactually appropriately priced due to intractable or fundamental problems thatare not yet apparent.

Common and Preferred Stocks. Stocks represent shares of ownership in acompany. Generally, preferred stock has a specified dividend and ranks afterbonds and before common stocks in its claim on income for dividend payments andon assets should the company be liquidated. After other claims are satisfied,common stockholders participate in company profits on a pro rata basis; profitsmay be paid out in dividends or reinvested in the company to help it grow.Increases and decreases in earnings are usually reflected in a company's stockprice, so common stocks generally have the greatest appreciation anddepreciation potential of all corporate securities. While most preferred stockspay a dividend, the Fund may purchase preferred stock where the issuer hasomitted, or is in danger of omitting, payment of its dividend.Such investments would be made primarily for their capital appreciationpotential.

Convertible Securities and Warrants. The Fund may invest in debt orpreferred equity securities convertible into or exchangeable for equitysecurities. Traditionally, convertible securities have paid dividends orinterest at rates higher than common stocks but lower than nonconvertiblesecurities. They generally participate in the appreciation or depreciation ofthe underlying stock into which they are convertible, but to a lesser degree. Inrecent years, convertibles have been developed which combine higher or lowercurrent income with options and other features. Warrants are options to buy astated number of shares of common stock at a specified price anytime during thelife of the warrants (generally, two or more years).

Foreign Securities. The Fund may invest up to 20% of its total assets(excluding reserves) in foreign securities. These include nondollar-denominatedsecurities traded outside of the U.S. and dollar-denominated securities offoreign issuers traded in the U.S. (such as ADRs). Some of the countries inwhich the Fund may invest may be considered to be developing and may involvespecial risks. For a discussion of these risks as well as the risks involved ininvesting in foreign securities, in general, see this Prospectus and theCompany's SAI under "Certain Risk Factors and Investment Methods."

Foreign Currency Transactions. Investors in foreign securities may"hedge" their exposure to potentially unfavorable currency changes by purchasinga contract to exchange one currency for another on some future date at aspecified exchange rate. In certain circumstances, a "proxy currency" may besubstituted for the currency in which the investment is denominated, a strategyknown as "proxy hedging." For a discussion of foreign currency contracts,certain risks involved therein, and the risks of currency fluctuationsgenerally, see this Prospectus and the Company's SAI under "Certain RisksFactors and Investment Methods."

Fixed Income Securities. The Fund may invest in debt securities of anytype without regard to quality or rating. Such securities would be purchased incompanies that meet the investment criteria for the Fund. The price of a bondfluctuates with changes in interest rates, rising when interest rates fall andfalling when interest rates rise.

High-Yield/High-Risk Investing. The Fund will not purchase anoninvestment-grade debt security (or junk bond) if immediately after suchpurchase the Fund would have more than 5% of its total assets invested in suchsecurities. For a discussion of the risks involved in investing in high-yieldlower-rated debt securities, see this Prospectus and the Company's SAI under"Certain Risk Factors and Investment Methods."

Hybrid Instruments. The Fund may invest up to 10% of its total assetsin hybrid instruments. Hybrids can have volatile prices and limited liquidityand their use by the Fund may not be successful. These instruments (a type ofpotentially high-risk derivative) can combine the characteristics of securities,futures, and options. For example, the principal amount, redemption, orconversion terms of a security could be related to the market price of somecommodity, currency, or securities index. Such securities may bear interest orpay dividends at below market (or even relatively nominal) rates. Under certainconditions, the redemption value of such an investment could be zero. For adiscussion of hybrid investments, see the Company's SAI under "Certain RiskFactors and Investment Methods."

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may acquire illiquid securities (no more than 15% ofnet assets). For a discussion of illiquid securities and the risks involvedtherein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

Private Placements (Restricted Securities). These securities are solddirectly to a small number of investors usually institutions. Unlike public



offerings, such securities are not registered with the Commission. Althoughcertain of these securities may be readily sold, for example under Rule 144A,the sale of others may involve substantial delays and additional costs. Subjectto guidelines promulgated by the Directors of the Company, the Fund will notinvest more than 15% of its net assets in illiquid securities, but not more than10% of its total assets in restricted securities (other than Rule 144Asecurities). For a discussion of illiquid and restricted securities, and therisks involved therein, see this Prospectus and the Company's SAI under "CertainRisk Factors and Investment Methods."

Cash Position. The Fund will hold a certain portion of its assets inU.S. and foreign dollar-denominated money market securities, includingrepurchase agreements, in the two highest rating categories, maturing in oneyear or less. For temporary, defensive purposes, the Fund may invest withoutlimitation in such securities. This reserve position provides flexibility inmeeting redemptions, expenses, and the timing of new investments and serves as ashort-term defense during periods of unusual market volatility.

Borrowing. The Fund can borrow money from banks as a temporary measurefor emergency purposes, to facilitate redemption requests, or for other purposesconsistent with the Fund's investment objective and program. Such borrowings maybe collateralized with Fund assets, subject to restrictions. For an additionaldiscussion of the Fund's limitations on borrowing and certain risks involved inborrowing, see this Prospectus under "Certain Risk Factors and InvestmentMethods" and the Company's SAI under "Fundamental Investment Restrictions."

Futures and Options. The Fund may enter into futures contracts (oroptions thereon) to hedge all or a portion of its portfolio, as a hedge againstchanges in prevailing levels of interest rates or currency exchange rates, or asan efficient means of adjusting its exposure to the bond, stock, and currencymarkets. The Fund will not use futures contracts for leveraging purposes. TheFund may also write call and put options and purchase put and call options onsecurities, financial indices, and currencies. The aggregate market value of theFund's securities or currencies covering call or put options will not exceed 25%of the Fund's net assets. For an additional discussion of futures contracts andoptions and the risks involved therein, see this Prospectus under "Certain RiskFactors and Investment Methods."

Lending of Portfolio Securities. For the purpose of realizingadditional income, the Fund may lend securities with a value of up to 33 1/3% ofits total assets to broker-dealers, institutional investors, or other persons.Any such loan will be continuously secured by collateral at least equal to thevalue of the security loaned. For an additional discussion of the Fund'slimitations on lending and certain risks involved in lending, see thisProspectus under "Certain Risk Factors and Investment Methods" and the Company'sSAI under "Fundamental Investment Restrictions."

ASAF JANUS CAPITAL GROWTH FUND:

Investment Objective: The investment objective of the Fund is to seek growth ofcapital. Realization of income is not a significant investment consideration andany income realized on the Fund's investments, therefore, will be incidental tothe Fund's objective.


The Fund will pursue its objective by investing primarily in commonstocks. Common stock investments will be in industries and companies that theSub-advisor believes are experiencing favorable demand for their products andservices, and which operate in a favorable competitive and regulatoryenvironment. Although the Sub-advisor expects to invest primarily in equitysecurities, the Sub-advisor may increase the Fund's cash position withoutlimitation when the Sub-advisor is of the opinion that appropriate investmentopportunities for capital growth with desirable risk/reward characteristics areunavailable. The Fund may also invest to a lesser degree in preferred stocks,convertible securities, warrants, and debt securities when the Fund perceives anopportunity for capital growth from such securities or so that the Fund mayreceive a return on its idle cash. Debt securities that the Fund may purchaseinclude corporate bonds and debentures (not to exceed 5% of net assets in bondsrated below investment grade), government securities, mortgage- and asset-backedsecurities, zero-coupon bonds, indexed/structured notes, high-grade commercialpaper, certificates of deposit and repurchase agreements. For a discussion ofrisks involved in lower-rated securities, mortgage-backed and asset-backedsecurities and zero coupon bonds, see this Prospectus and the Company's SAIunder "Certain Risk Factors and Investment Methods."

Although it is the general policy of the Fund to purchase and holdsecurities for capital growth, changes in the Fund will be made as theSub-advisor deems advisable. For example, portfolio changes may result fromliquidity needs, securities having reached a price objective, or by reason ofdevelopments not foreseen at the time of the original investment decision.Portfolio changes may be effected for other reasons. In such circumstances,investment income will increase and may constitute a large portion of the return



on the Fund and the Fund will not participate in the market advances or declinesto the extent that it would if it were fully invested.

Because investment changes usually will be made without reference tothe length of time a security has been held, a significant number of short-termtransactions may result. To a limited extent, the Fund may also purchaseindividual securities in anticipation of relatively short-term price gains, andthe rate of portfolio turnover will not be a determining factor in the sale ofsuch securities. However, certain tax rules may restrict the Fund's ability tosell securities in some circumstances when the security has been held for lessthan three months. Increased portfolio turnover necessarily results incorrespondingly higher brokerage costs for the Fund.

The Fund may invest in "special situations" from time to time. A"special situation" arises when, in the opinion of the Sub-advisor, thesecurities of a particular company will be recognized and appreciate in valuedue to a specific development, such as a technological breakthrough, managementchange or new product at that company. Investment in "special situations"carries an additional risk of loss in the event that the anticipated developmentdoes not occur or does not attract the expected attention.

Foreign Securities. The Fund may also purchase securities of foreignissuers, including foreign equity and debt securities and depositary receipts.Foreign securities are selected on a stock-by-stock basis without regard to anydefined allocation among countries or geographic regions. However, certainfactors such as expected levels of inflation, government policies influencingbusiness conditions, the outlook for currency relationships, and prospects foreconomic growth among countries, regions or geographic areas may warrant greaterconsideration in selecting foreign stocks. No more than 25% of the Fund's assetsmay be invested in foreign securities denominated in foreign currency and notpublicly traded in the United States. For a discussion of depositary receiptsand the risks involved in investing in foreign securities, including the risk ofcurrency fluctuations, see this Prospectus and the Company's SAI under "CertainRisk Factors and Investment Methods."

Futures, Options and Other Derivative Instruments. Subject to certainlimitations, the Fund may purchase and write options on securities, financialindices, and foreign currencies, and may invest in futures contracts onsecurities, financial indices, and foreign currencies ("futures contracts"),options on futures contracts, forward contracts and swaps and swap-relatedproducts. These instruments will be used primarily to hedge the Fund's positionsagainst potential adverse movements in securities prices, foreign currencymarkets or interest rates. To a limited extent, the Fund may also use derivativeinstruments for non-hedging purposes such as increasing the Fund's income orotherwise enhancing return. The Fund will not use futures contracts and optionsfor leveraging purposes. There can be no assurance, however, that the use ofthese instruments by the Fund will assist it in achieving its investmentobjective. The use of futures, options, forward contracts and swaps involvesinvestment risks and transaction costs to which the Fund would not be subjectabsent the use of these strategies. The Sub-advisor may, from time to time, atits own expense, call upon the experience of experts to assist it inimplementing these strategies. The Fund may also use a variety of currencyhedging techniques, including forward currency contracts, to manage exchangerate risk with respect to investments exposed to foreign currency fluctuations.For an additional discussion of futures and options transactions and the risksinvolved therein, see this Prospectus and the Company's SAI under "Certain RiskFactors and Investment Methods."

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements, whichinvolve the purchase of a security by the Fund and a simultaneous agreement(generally with a bank or dealer) to repurchase the security from the Fund at aspecified date or upon demand. The Fund's repurchase agreements will at alltimes be fully collateralized. Pursuant to an exemptive order granted by theCommission, the Fund and other funds advised by the Sub-advisor may invest inrepurchase agreements and other money market instruments through a joint tradingaccount. For a discussion of repurchase agreements and the risks involvedtherein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

Reverse Repurchase Agreements. The Fund is permitted to enter intoreverse repurchase agreements. In a reverse repurchase agreement, the Fund sellsa security and agrees to repurchase it at a mutually agreed upon date and price.For a discussion of reverse repurchase agreements and the risks involvedtherein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

When-Issued, Delayed Delivery and Forward Transactions. The Fund maypurchase securities on a when-issued or delayed delivery basis, which generallyinvolves the purchase of a security with payment and delivery due at some timein the future. The Fund does not earn interest on such securities untilsettlement and bears the risk of market value fluctuations in between thepurchase and settlement dates. For an additional discussion of when-issued



securities and certain risks involved therein, see the Company's SAI under"Certain Risk Factors and Investment Methods."

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may also invest up to 15% of its net assets insecurities that are considered illiquid because of the absence of a readilyavailable market or due to legal or contractual restrictions. Securitieseligible for resale under Rule 144A of the Securities Act of 1933, andcommercial paper issued under Section 4(2) of the Securities Act of 1933, couldbe deemed "liquid" when saleable in a readily available market. For a discussionof illiquid securities and the risks involved therein, see this Prospectus under"Certain Risk Factors and Investment Methods."

Lower-Rated High-Yield Bonds. The Fund may invest no more than 5% ofits net assets (at the time of investment) in lower-rated high-yield bonds. Fora discussion of these instruments and the risks involved therein, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Borrowing. Subject to the Fund's restrictions on borrowing, the Fundmay also borrow money from banks. For a discussion of the Fund's limitations onborrowing and certain risks involved in borrowing, see this Prospectus under"Certain Risk Factors and Investment Methods" and the Company's SAI under"Fundamental Investment Restrictions."

Portfolio Turnover. The Fund may have higher portfolio turnover than othermutual funds with similar investment objectives. For a discussion of portfolioturnover and its effects, see this Prospectus and the Company's SAI under"Portfolio Transactions."ASAF INVESCO EQUITY INCOME FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income while following sound investment practices. Capital growthpotential is an additional, but secondary, consideration in the selection ofportfolio securities.


The Fund seeks to achieve its objective by investing in securitieswhich will provide a relatively high yield and stable return and which, over aperiod of years, may also provide capital appreciation. The Fund normally willinvest at least 65% of its assets in dividend-paying, marketable common stocksof domestic and foreign issuers. Up to 10% of the Fund's assets may be investedin equity securities that do not pay regular dividends. The Fund also willinvest in convertible bonds, preferred stocks and debt securities. In periods ofuncertain market and economic conditions, as determined by the Directors of theCompany, the Fund may depart from the basic investment objective and assume adefensive position with up to 50% of its assets temporarily invested in highquality corporate bonds, or notes and government issues, or held in cash.

The Fund's investments in common stocks may, of course, decline invalue. To minimize the risk this presents, the Sub-advisor only invests incommon stocks and equity securities of domestic and foreign issuers which aremarketable; and will not invest more than 5% of the Fund's assets in thesecurities of any one company or more than 25% of the Fund's assets in any oneindustry.

Debt Securities. The Fund's investments in debt securities willgenerally be subject to both credit risk and market risk. Credit risk relates tothe ability of the issuer to meet interest or principal payments, or both, asthey come due. Market risk relates to the fact that the market values of debtsecurities in which the Fund invests generally will be affected by changes inthe level of interest rates. An increase in interest rates will tend to reducethe market values of debt securities, whereas a decline in interest rates willtend to increase their values. Although the Sub-advisor will limit the Fund'sdebt security investments to securities it believes are not highly speculative,both kinds of risk are increased by investing in debt securities rated below thetop four grades by Standard & Poor's Corporation ("Standard & Poor's) or Moody'sInvestors Services, Inc. ("Moody's") and unrated debt securities, other thanGovernment National Mortgage Association modified pass-through certificates.

In order to decrease its risk in investing in debt securities, the Fundwill invest no more than 15% of its assets in debt securities rated below AAA,AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's, and in noevent will the Fund ever invest in a debt security rated below Caa by Moody's orCCC by Standard & Poor's. Lower rated bonds by Moody's (categories Ba, B, Caa)are of poorer quality and may have speculative characteristics. Bonds rated Caamay be in default or there may be present elements of danger with respect toprincipal or interest. Lower rated bonds by Standard & Poor's (categories BB, B,CCC) include those which are regarded, on balance, as predominantly speculativewith respect to the issuer's capacity to pay interest and repay principal inaccordance with their terms; BB indicates the lowest degree of speculation andCCC a high degree of speculation. While such bonds will likely have some quality



and protective characteristics, these are outweighed by large uncertainties ormajor risk exposures to adverse conditions.For a description securities ratings, see the Appendix to the Company's SAI.

While the Sub-advisor will monitor all of the debt securities in theFund for the issuers' ability to make required principal and interest paymentsand other quality factors, the Sub-advisor may retain in the Fund a debtsecurity whose rating is changed to one below the minimum rating required forpurchase of such a security. For a discussion of the special risks involved inlower-rated bonds, see this Prospectus and the Company's SAI under "Certain RiskFactors and Investment Methods."

Portfolio Turnover. There are no fixed limitations regarding portfolioturnover. The rate of portfolio turnover may fluctuate as a result of constantlychanging economic conditions and market circumstances. Securities initiallysatisfying the Fund's basic objectives and policies may be disposed of when theyare no longer suitable. As a result, the Fund's annual portfolio turnover ratemay be higher than that of other investment companies seeking current incomewith capital growth as a secondary consideration. For a discussion of portfolioturnover and its effects, see this Prospectus and the Company's SAI under"Portfolio Transactions."

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements withrespect to debt instruments eligible for investment by the Fund. Theseagreements are entered into with member banks of the Federal Reserve System,registered broker-dealers, and registered government securities dealers whichare deemed creditworthy. A repurchase agreement is a means of investing moneysfor a short period. In a repurchase agreement, the Fund acquires a debtinstrument (generally a security issued by the U.S. Government or an agencythereof, a banker's acceptance or a certificate of deposit) subject to resale tothe seller at an agreed upon price and date (normally, the next business day).In the event that the original seller defaults on its obligation to repurchasethe security, the Fund could incur costs or delays in seeking to sell suchsecurity. To minimize risk, the securities underlying each repurchase agreementwill be maintained with the Fund's custodian in an amount at least equal to therepurchase price under the agreement (including accrued interest), and suchagreements will be effected only with parties that meet certain creditworthinessstandards established by the Directors of the Company. The Fund will not enterinto a repurchase agreement maturing in more than seven days if as a result morethan 15% of the Fund's net assets would be invested in such repurchaseagreements and other illiquid securities. The Fund has not adopted any limit onthe amount of its total assets that may be invested in repurchase agreementsmaturing in seven days or less.

Lending Portfolio Securities. The Fund also may lend its securities toqualified brokers, dealers, banks, or other financial institutions. Thispractice permits the Fund to earn income, which, in turn, can be invested inadditional securities to pursue the Fund's investment objective. Loans ofsecurities by the Fund will be collateralized by cash, letters of credit, orsecurities issued or guaranteed by the U.S. Government or its agencies, equal toat least 100% of the current market value of the loaned securities, determinedon a daily basis. Lending securities involves certain risks, the mostsignificant of which is the risk that a borrower may fail to return a portfoliosecurity. The Sub-advisor monitors the creditworthiness of borrowers in order tominimize such risks. The Fund will not lend any security if, as a result of suchloan, the aggregate value of securities then on loan would exceed 33 1/3% of theFund's total net assets (taken at market value). For an additional discussion ofthe Fund's limitations on lending and certain risks involved in lending, seethis Prospectus under "Certain Risk Factors and Investment Methods" and theCompany's SAI under "Fundamental Investment Restrictions."

Foreign Securities. The Fund may invest up to 25% of its total assetsin foreign securities. Investments in securities of foreign companies and inforeign markets involve certain additional risks not associated with investmentsin domestic companies and markets. The Fund may invest in countries consideredto be developing which may involve special risks. For a discussion of theserisks and the risks of investing in foreign securities, in general, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Illiquid Securities. Subject to guidelines promulgated by the Directorsof the Company, the Fund may invest up to 15% of its net assets in securitiesthat are illiquid by virtue of legal or contractual restrictions on resale orthe absence of a readily available market. The Directors, or the InvestmentManager or the Sub-advisor acting pursuant to authority delegated by theDirectors, may determine that a readily available market exists for securitieseligible for resale pursuant to Rule 144A under the Securities Act of 1933, orany successor to that rule, and therefore that such securities are not subjectto the foregoing limitation. For a discussion of restricted securities and therisks involved therein, see this Prospectus under "Certain Risk Factors andInvestment Methods."



Borrowing. For a discussion of the Fund's limitations on borrowing andcertain risks involved in borrowing, see this Prospectus under "Certain RiskFactors and Investment Methods" and the Company's SAI under "FundamentalInvestment Restrictions."

ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:

Investment Objective: The investment objective of the Fund is to seekcapital growth and current income.


It is the Sub-advisor's intention to maintain approximately 60% of theFund's assets in common stocks that are considered by the Sub-advisor to havebetter-than-average prospects for appreciation and the remainder in bonds andother fixed income securities.

Equity Investments. With the equity portion of the Fund, theSub-advisor seeks capital growth by investing in securities, primarily commonstocks, that meet certain fundamental and technical standards of selection(relating primarily to earnings and revenue acceleration) and have, in theopinion of the Sub-advisor, better-than-average potential for appreciation. Solong as a sufficient number of such securities are available, the Sub-advisorintends to keep the equity portion of the Fund fully invested in thesesecurities regardless of the movement of stock prices generally. The Fund maypurchase securities only of companies that have a record of at least three yearscontinuous operation.

The Sub-advisor selects, for the equity portion of the Fund, securitiesof companies whose earnings and revenue trends meet the Sub-advisor's standardsof selection. The size of the companies in which the Fund invests tends to giveit its own characteristics of volatility and risk. These differences come aboutbecause developments such as new or improved products or methods, which would berelatively insignificant to a large company, may have a substantial impact onthe earnings and revenues of a small company and create a greater demand and ahigher value for its shares. However, a new product failure which could readilybe absorbed by a large company can cause a rapid decline in the value of theshares of a smaller company. Hence, it could be expected that the volatility ofthe Fund will be impacted by the size of companies in which it invests.

Fixed Income Investments. The Sub-advisor intends to maintainapproximately 40% of the Fund's assets in fixed income securities, approximately80% of which will be invested in domestic fixed income securities andapproximately 20% of which will be invested in foreign fixed income securities.This percentage will fluctuate from time to time and may be higher or lowerdepending on the mix the Sub-advisor believes will provide the most favorableoutlook for achieving the Fund's objectives. A minimum of 25% of the Fund'sassets will be invested in fixed income senior securities.

The fixed income portion of the Fund will include U.S. Treasurysecurities, securities issued or guaranteed by the U.S. government or a foreigngovernment, or an agency or instrumentality of the U.S. or a foreign government,and non-convertible debt obligations issued by U.S. or foreign corporations. TheFund may also invest in mortgage-related and other asset-backed securities. Aswith the equity portion of the Fund, the bond portion of the Fund will bediversified among the various types of fixed income investment categoriesdescribed above. The Sub-advisor's strategy is to actively manage the Fund byinvesting the Fund's assets in sectors it believes are undervalued (relative tothe other sectors) and which represent better relative long-term investmentopportunities.

The value of fixed income securities fluctuates based on changes ininterest rates, currency values and the credit quality of the issuer. TheSub-advisor will actively manage the Fund, adjusting the weighted averageportfolio maturity as necessary in response to expected changes in interestrates. During periods of rising interest rates, the weighted average maturity ofthe Fund may be moved to the shorter end of its maturity range in order toreduce the effect of bond price declines on the Fund's net asset value. Wheninterest rates are falling and bond prices are rising, the weighted averageportfolio maturity may be moved toward the longer end of its maturity range.

Debt securities that comprise part of the Fund's fixed income portfoliowill primarily be limited to "investment grade" obligations. However, the Fundmay invest up to 10% of its fixed income assets in "high yield" securities."Investment grade" means that at the time of purchase, such obligations arerated within the four highest categories by a nationally recognized statisticalrating organization for example, at least Baa by Moody's Investors Service, Inc.("Moody's") or BBB by Standard & Poor's Corporation ("S&P"), or, if not rated,are of equivalent investment quality as determined by the Sub-advisor. Accordingto Moody's, bonds rated Baa are medium-grade and possess some speculativecharacteristics. A BBB rating by S&P indicates S&P's belief that a securityexhibits a satisfactory degree of safety and capacity for repayment, but is morevulnerable to adverse economic conditions and changing circumstances. "High



yield" securities, sometimes referred to as "junk bonds," are higher risk,non-convertible debt obligations that are rated below investment gradesecurities, or are unrated, but with similar credit quality. For a descriptionof securities ratings, see the Appendix to the Company's SAI.

There are no credit or maturity restrictions on the fixed incomesecurities in which the high yield portion of the Fund may be invested. Debtsecurities rated lower than Baa by Moody's or BBB by S&P or their equivalent areconsidered by many to be predominantly speculative. Changes in economicconditions or other circumstances are more likely to lead to a weakened capacityto make principal and interest payments on such securities than is the case withhigher quality debt securities. Regardless of rating levels, all debt securitiesconsidered for purchase by the Fund are analyzed by the Sub-advisor todetermine, to the extent reasonably possible, that the planned investment issound, given the investment objective of the Fund. For an additional discussionof lower-rated securities and certain risks involved therein, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Under normal market conditions, the maturities of fixed-incomesecurities in which the Fund invests will range from 2 to 30 years.

In determining the allocation of assets among U.S. and foreign capitalmarkets, the Sub-advisor considers the condition and growth potential of thevarious economies; the relative valuations of the markets; and social,political, and economic factors that may affect the markets. In selectingsecurities in foreign currencies, the Sub-advisor considers, among otherfactors, the impact of foreign exchange rates relative to the U.S. dollar valueof such securities. The Sub-advisor may seek to hedge all or a part of theFund's foreign currency exposure through the use of forward foreign currencycontracts or options thereon.

Foreign Securities. The Fund may invest up to 25% of its assets in thesecurities of foreign issuers, including debt securities of foreign governmentsand their agencies primarily from developed markets, when these securities meetits standards of selection. The Fund may make such investments either directlyin foreign securities, or by purchasing depositary receipts ("DRs") for foreignsecurities. DRs are securities listed on exchanges or quoted in theover-the-counter market in one country but represent the shares of issuersdomiciled in other countries. DRs may be sponsored or unsponsored. Directinvestments in foreign securities may be made either on foreign securitiesexchanges or in the over-the-counter markets.

The Fund may invest in common stocks, convertible securities, preferredstocks, bonds, notes and other debt securities of foreign issuers, and debtsecurities of foreign governments and their agencies. The credit qualitystandards applicable to domestic securities purchased by the Fund are alsoapplicable to its foreign securities investments. For a discussion of certainrisks involved in investing in foreign securities, see this Prospectus and theCompany's SAI under "Certain Risk Factors and Investment Methods."

Forward Currency Exchange Contracts. Some of the foreign securitiesheld by the Fund may be denominated in foreign currencies. Other securities,such as DRs, may be denominated in U.S. dollars, but have a value that isdependent on the performance of a foreign security, as valued in the currency ofits home country. As a result, the value of the Fund may be affected by changesin the exchange rates between foreign currencies and the U.S. dollar, as well asby changes in the market values of the securities themselves. The performance offoreign currencies relative to the U.S. dollar may be a factor in the overallperformance of the Fund.

To protect against adverse movements in exchange rates betweencurrencies, the Fund may, for hedging purposes only, enter into forward currencyexchange contracts and buy put and call options relating to currency futurescontracts. A forward currency exchange contract obligates the Fund to purchaseor sell a specific currency at a future date at a specific price. An option is acontractual right to acquire a financial asset, such as a security, thesecurities of a market index, a foreign currency or a foreign currency exchangecontract, at a specified price at the end of a specified term. The Fund mayelect to enter into a forward currency exchange contract with respect to aspecific purchase or sale of a security, or with respect to the Fund's positionsgenerally. By entering into a forward currency exchange contract with respect tothe specific purchase or sale of a security denominated in a foreign currency,the Fund can "lock in" an exchange rate between the trade and settlement datesfor that purchase or sale. This practice is sometimes referred to as"transaction hedging." The Fund may enter into transaction hedging contractswith respect to all or a substantial portion of its foreign securities trades.

When the Sub-advisor believes that a particular currency may decline invalue compared to the U.S. dollar, the Fund may enter into forward currencyexchange contracts to sell the value of some or all of the Fund's securitieseither denominated in, or whose value is tied to, that currency. This practiceis sometimes referred to as "portfolio hedging." The Fund may not enter into a



portfolio hedging transaction where it would be obligated to deliver an amountof foreign currency in excess of the aggregate value of its portfolio securitiesor other assets denominated in, or whose value is tied to, that currency. TheFund will make use of the portfolio hedging to the extent deemed appropriate bythe Sub-advisor. However, it is anticipated that the Fund will enter intoportfolio hedges much less frequently than transaction hedges.

If the Fund enters into a forward contract, the Fund, when required,will instruct its custodian bank to segregate cash or other liquid assets in aseparate account in an amount sufficient to cover its obligation under thecontract. Those assets will be valued at market daily, and if the value of thesegregated securities declines, additional cash or securities will be added sothat the value of the account is not less than the amount of the Fund'scommitment. At any given time, no more than 10% of the Fund's assets will becommitted to a segregated account in connection with portfolio hedgingtransactions.

Predicting the relative future values of currencies is very difficult,and there is no assurance that any attempt to protect the Fund against adversecurrency movements through the use of forward currency exchange contracts willbe successful. In addition, the use of forward currency exchange contracts tendsto limit the potential gains that might result from a positive change in therelationships between the foreign currency and the U.S. dollar. For anadditional discussion of foreign currency exchange contracts, certain risksinvolved therein and the risks of currency fluctuations generally, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Mortgage-Related and Other Asset-Backed Securities. The Fund maypurchase mortgage-related and other asset-backed securities. Mortgagepass-through securities are securities representing interests in "pools" ofmortgages in which payments of both interest and principal on the securities aregenerally made monthly, in effect "passing through" monthly payments made by theindividual borrowers on the residential mortgage loans that underlie thesecurities (net of fees paid to the issuer or guarantor of the securities).

Payment of principal and interest on some mortgage pass-throughsecurities (but not the market value of the securities themselves) may beguaranteed by the full faith and credit of the U.S. government in the case ofsecurities guaranteed by the Government National Mortgage Association (GNMA), orguaranteed by agencies or instrumentalities of the U.S. government in the caseof securities guaranteed by the Federal National Mortgage Association (FNMA) orthe Federal Home Loan Mortgage Corporation (FHLMC), which are supported only bythe discretionary authority of the U.S. government to purchase the agency'sobligations.

Mortgage pass-through securities created by nongovernmental issuers(such as commercial banks, savings and loan institutions, private mortgageinsurance companies, mortgage bankers and other secondary market issuers) may besupported by various forms of insurance or guarantees, including individualloan, title, pool and hazard insurance and letters of credit, which may beissued by governmental entities, private insurers, or the mortgage poolers.

The Fund may also invest in collateralized mortgage obligations (CMOs).CMOs are mortgage-backed securities issued by government agencies;single-purpose, stand-alone financial subsidiaries; trusts established byfinancial institutions; or similar institutions. The Fund may buy CMOs that are:(i) collateralized by pools of mortgages in which payment of principal andinterest of each mortgage is guaranteed by an agency or instrumentality of theU.S. government; (ii) collateralized by pools of mortgages in which payment ofprincipal and interest are guaranteed by the issuer, and the guarantee iscollateralized by U.S. government securities; or (iii) securities in which theproceeds of the issue are invested in mortgage securities and payments ofprincipal and interest are supported by the credit of an agency orinstrumentality of the U.S. government. For a discussion of certain risksinvolved in mortgage related and other asset-back securities, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Portfolio Turnover. Investment decisions to purchase and sellsecurities are based on the anticipated contribution of the security in questionto the Fund's objectives. The rate of portfolio turnover is irrelevant when theSub-advisor believes a change is in order to achieve those objectives andaccordingly, the annual portfolio turnover rate cannot be anticipated. Theportfolio turnover of the Fund may be higher than other mutual funds withsimilar investment objectives. For a discussion of portfolio turnover and itseffects, see this Prospectus and the Company's SAI under "PortfolioTransactions."

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may invest in repurchase agreements when suchtransactions present an attractive short-term return on cash that is nototherwise committed to the purchase of securities pursuant to the investment



policies of the Fund.

The Fund will limit repurchase agreement transactions to securitiesissued by the U.S. government, its agencies and instrumentalities, and willenter into such transactions with those banks and securities dealers who aredeemed creditworthy pursuant to criteria adopted by the Directors of theCompany. The Fund will invest no more than 15% of its assets in repurchaseagreements maturing in more than seven days. For a discussion of repurchaseagreements and certain risks involved therein, see this Prospectus under"Certain Risk Factors and Investment Methods."

Derivative Securities. To the extent permitted by its investmentobjectives and policies, the Fund may invest in securities that are commonlyreferred to as "derivative" securities. Generally, a derivative is a financialarrangement the value of which is based on, or "derived" from, a traditionalsecurity, asset, or market index. Certain derivative securities are moreaccurately described as "index/structured" securities. Index/structuredsecurities are derivative securities whose value or performance is linked toother equity securities (such as depositary receipts), currencies, interestrates, indices or other financial indicators ("reference indices").

Some "derivatives" such as mortgage-related and other asset-backedsecurities are in many respects like any other investment, although they may bemore volatile or less liquid than more traditional debt securities.

There are many different types of derivatives and many different waysto use them. Futures and options are commonly used for traditional hedgingpurposes to attempt to protect a fund from exposure to changing interest rates,securities prices, or currency exchange rates and for cash management purposesas a low-cost method of gaining exposure to a particular securities marketwithout investing directly in those securities.

The Fund may not invest in a derivative security unless the referenceindex or the instrument to which it relates is an eligible investment for theFund. For example, a security whose underlying value is linked to the price ofoil would not be a permissible investment since the Fund may not invest in oiland gas leases or futures. The return on a derivative security may increase ordecrease, depending upon changes in the reference index or instrument to whichit relates.

There are a range of risks associated with derivative investments,including: the risk that the underlying security, interest rate, market index orother financial asset will not move in the direction the Sub-advisoranticipates; the possibility that there may be no liquid secondary market, orthe possibility that price fluctuation limits may be imposed by the exchange,either of which may make it difficult or impossible to close out a position whendesired; the risk that adverse price movements in an instrument can result in aloss substantially greater than the Fund's initial investment; and the risk thatthe counterparty will fail to perform its obligations. For a discussion ofcertain risks involved in investing in derivative securities, including futuresand options contracts, see this Prospectus and the Company's SAI under "CertainRisk Factors and Investment Methods."

Portfolio Securities Lending. In order to realize additional income,the Fund may lend its portfolio securities to persons not affiliated with it andwho are deemed to be creditworthy. Such loans must be secured continuously bycash collateral maintained on a current basis in an amount at least equal to themarket value of the securities loaned, or by irrevocable letters of credit.During the existence of the loan, the Fund must continue to receive theequivalent of the interest and dividends paid by the issuer on the securitiesloaned and interest on the investment of the collateral. The Fund must have theright to call the loan and obtain the securities loaned at any time on fivedays' notice, including the right to call the loan to enable the Fund to votethe securities. Such loans may not exceed one-third of the Fund's total assetstaken at market. Interest on loaned securities may not exceed 10% of the annualgross income of the Fund (without offset for realized capital gains).

When-Issued Transactions. The Fund may sometimes purchase new issues ofsecurities on a when-issued basis without limit when, in the opinion of theSub-advisor, such purchases will further the investment objectives of the Fund.For a discussion of when-issued securities and certain risks involved therein,see the Company's SAI under "Certain Risk Factors and Investment Methods."

Short Sales. The Fund may engage in short sales if, at the time of theshort sale, the Fund owns or has the right to acquire an equal amount of thesecurity being sold short at no additional cost. These transactions allow theFund to hedge against price fluctuations by locking in a sale price forsecurities it does not wish to sell immediately.

The Fund may make a short sale when it wants to sell the security itowns at a current attractive price but also wishes to defer recognition of gainor loss for federal income tax purposes, and for purposes of satisfying certaintests applicable to regulated investment companies under the Internal Revenue



Code and Regulations.

Rule 144A Securities. The Fund may, from time to time, purchase Rule144A securities when they present attractive investment opportunities thatotherwise meet the Fund's criteria for selection. Rule 144A securities aresecurities that are privately placed with and traded among qualifiedinstitutional buyers rather than the general public. Although Rule 144Asecurities are considered "restricted securities," they are not necessarilyilliquid.

With respect to securities eligible for resale under Rule 144A, theStaff of the Commission has taken the position that the liquidity of suchsecurities in the portfolio of a fund offering redeemable securities is aquestion of fact for the board of directors to determine, such determination tobe based upon a consideration of the readily available trading markets and thereview of any contractual restrictions. Accordingly, the Directors of theCompany are responsible for developing and establishing the guidelines andprocedures for determining the liquidity of Rule 144A securities. As allowed byRule 144A, the Directors of the Company have delegated the day-to-day functionof determining the liquidity of Rule 144A securities to the Sub-advisor. TheDirectors retain the responsibility to monitor the implementation of theguidelines and procedures they have adopted.

Since the secondary market for such securities is limited to certainqualified institutional investors, the liquidity of such securities may belimited accordingly and the Fund may, from time to time, hold a Rule 144Asecurity that is illiquid. In such an event, the Sub-advisor will considerappropriate remedies to minimize the effect on the Fund's liquidity. The Fundmay not invest more than 15% of its assets in illiquid securities (securitiesthat may not be sold within seven days at approximately the price used indetermining the net asset value of Fund shares). For an additional discussion ofRule 144A securities and illiquid and restricted securities, and the risksinvolved therein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."


ASAF FEDERATED HIGH YIELD BOND FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income by investing primarily in fixed income securities. The fixedincome securities in which the Fund intends to invest are lower-rated corporatedebt obligations. Lower-rated debt obligations are generally considered to behigh risk investments.


The Fund will invest at least 65% of its assets in lower-rated (BBB orlower) corporate debt obligations. Under normal circumstances, the Fund will notinvest more than 10% of the value of its total assets in equity securities. Thefixed income securities in which the Fund may invest include, but are notlimited to: preferred stocks, bonds, debentures, notes, equipment leasecertificates and equipment trust certificates.

Other permitted investments for the Fund currently include, but are notlimited to, the following: commercial paper; obligations of the United States;notes, bonds, and discount notes of the following U.S. government agencies orinstrumentalities: Federal Home Loan Banks, Federal National MortgageAssociation, Government National Mortgage Association, Federal Farm CreditBanks, Tennessee Valley Authority, Export-Import Bank of the United States,Commodity Credit Corporation, Federal Financing Bank, Student Loan MarketingAssociation, Federal Home Loan Mortgage Corporation, or National Credit UnionAdministration; time and savings deposits (including certificates of deposit) incommercial or savings banks whose deposits are insured by the Bank InsuranceFund ("BIF"), or the Savings Association Insurance Fund ("SAIF"), includingcertificates of deposit issued by and other time deposits in foreign branches ofBIF-insured banks; bankers' acceptances issued by a BIF-insured bank, or issuedby the bank's Edge Act subsidiary and guaranteed by the bank, with remainingmaturities of nine months or less. The total acceptances of any bank held by theFund cannot exceed 0.25 of 1% of such bank's total deposits according to thebank's last published statement of condition preceding the date of acceptance;and general obligations of any state, territory, or possession of the UnitedStates, or their political subdivisions, so long as they are either (1) rated inone of the four highest grades by nationally recognized statistical ratingorganizations or (2) issued by a public housing agency and backed by the fullfaith and credit of the United States.

The corporate debt obligations in which the Fund may invest aregenerally rated BBB or lower by Standard & Poor's Corporation ("Standard &Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are



not rated but are determined by the Sub-advisor to be of comparable quality. Fora description of securities ratings, see the Appendix to the Company's SAI.There is no lower limit with respect to rating categories for securities inwhich the Fund may invest.

Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." Thecorporate debt obligations in which the Fund invests are usually not in thethree highest rating categories of a nationally recognized rating organization(AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are inthe lower rating categories or are unrated but are of comparable quality andhave speculative characteristics or are speculative. Lower-rated or unratedbonds are commonly referred to as "junk bonds." There is no minimal acceptablerating for a security to be purchased or held in the Fund, and the Fund may,from time to time, purchase or hold securities rated in the lowest ratingcategory or securities in default.

Lower-rated securities will usually offer higher yields thanhigher-rated securities. However, there is more risk of loss of principal andinterest associated with these investments. This is because of reducedcreditworthiness and increased risk of default. Lower-rated securities generallytend to reflect short-term corporate and market developments to a greater extentthan higher-rated securities which react primarily to fluctuations in thegeneral level of interest rates. Short-term corporate and market developmentsaffecting the prices or liquidity of lower-rated securities could includeadverse news affecting major issuers, underwriters, or dealers in lower-ratedsecurities. In addition, since there are fewer investors in lower-ratedsecurities, it may be harder to sell the securities at an optimum time.

As a result of these factors, lower-rated securities tend to have moreprice volatility and carry more risk to principal and income than higher-ratedsecurities. An economic downturn may adversely affect the value of somelower-rated bonds. Such a downturn may especially affect highly leveragedcompanies or companies in cyclically sensitive industries, where deteriorationin a company's cash flow may impair its ability to meet its obligation to payprincipal and interest to bondholders in a timely fashion. From time to time, asa result of changing conditions, issuers of lower-rated bonds may seek or may berequired to restructure the terms and conditions of the securities they haveissued. As a result of these restructurings, holders of lower-rated securitiesmay receive less principal and interest than they had bargained for at the timesuch bonds were purchased. In the event of a restructuring, the Fund may bearadditional legal or administrative expenses in order to maximize recovery froman issuer.

The secondary trading market for lower-rated bonds is generally lessliquid than the secondary trading market for higher-rated bonds. Certaininstitutions, including federally insured savings and loan associations, may notlegally purchase and hold lower-rated bonds, which could have an adverse impacton the overall liquidity of the market. Adverse publicity and the perception ofinvestors relating to issuers, underwriters, dealers or underlying businessconditions, whether or not warranted by fundamental analysis, may also affectthe price or liquidity of lower-rated bonds. On occasion, therefore, it maybecome difficult to price or dispose of a particular security in the Fund. Foran additional discussion of the risks involved in lower-rated securities, seethis Prospectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Illiquid and Restricted Securities. Subject to guidelines promulgatedby the Directors of the Company, the Fund may acquire securities which aresubject to legal or contractual delays, restrictions and costs on resale. As amatter of investment policy which can be changed without shareholder approval,the Fund will not invest more than 15% of its net assets in illiquid securities,which include certain private placements not determined to be liquid undercriteria established by the Directors of the Company and repurchase agreementsproviding for settlement in more than seven days after notice. Securitieseligible for resale under Rule 144A of the Securities Act of 1933, andcommercial paper issued under Section 4(2) of the Securities Act of 1933, couldbe deemed "liquid" when saleable in a readily available market. For anadditional discussion of illiquid and restricted securities, and the risksinvolved therein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

When-Issued and Delayed Delivery Transactions. The Fund may purchasesecurities on a when-issued or delayed delivery basis. In when-issued anddelayed delivery transactions, the Fund relies on the seller to complete thetransaction. The seller's failure to complete the transaction may cause the Fundto miss a price or yield considered to be advantageous. For an additionaldiscussion of these transactions and certain risks involved therein, see theCompany's SAI under "Certain Risk Factors and Investment Methods."

Temporary Investments. The Fund may also invest all or a part of itsassets temporarily in cash or cash items during time of unusual marketconditions for defensive purposes or to maintain liquidity. Cash items mayinclude, but are not limited to: certificates of deposit; commercial paper



(generally lower-rated); short-term notes; obligations issued or guaranteed asto principal and interest by the U.S. government or any of its agencies orinstrumentalities; and repurchase agreements.

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements andcertain securities in which the Fund invests may be purchased pursuant torepurchase agreements. For an additional discussion of repurchase agreements andthe risks involved therein, see this Prospectus under "Certain Risk Factors andInvestment Methods."

Lending Portfolio Securities. In order to generate additional income,the Fund may lend portfolio securities on a short-term or long-term basis tobroker/dealers, banks, or other institutional borrowers of securities. The Fundwill only enter into loan arrangements with broker/dealers, banks, or otherinstitutions which the Sub-advisor has determined are creditworthy underguidelines established by the Directors of the Company and will receivecollateral in the form of cash or U.S. government securities equal to at least100% of the value of the securities loaned. For an additional discussion of theFund's limitations on lending and certain risks involved in lending, see thisProspectus under "Certain Risk Factors and Investment Methods" and the Company'sSAI under "Fundamental Investment Restrictions."


Zero Coupon Bonds. The Fund may, from time to time, own zero couponbonds or pay-in-kind securities. A zero coupon bond makes no periodic interestpayments and the entire obligation becomes due only upon maturity. Pay-in-kindsecurities make periodic payments in the form of additional securities (asopposed to cash). The price of zero coupon bonds and pay-in-kind securities aregenerally more sensitive to fluctuations in interest rates than are conventionalbonds. Additionally, federal tax law requires that interest on zero coupon bondsand pay-in-kind securities be reported as income to the Fund even though theFund received no cash interest until the maturity or payment date of suchsecurities.

Many corporate debt obligations, including many lower-rated bonds,permit the issuers to call the security and thereby redeem their obligationsearlier than the stated maturity dates. Issuers are more likely to call bondsduring periods of declining interest rates. In these cases, if the Fund owns abond which is called, the Fund will receive its return of principal earlier thanexpected and would likely be required to reinvest the proceeds at lower interestrates, thus reducing income to the Fund. For an additional discussion of zerocoupon bonds, see the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Foreign Securities. The Fund may invest up to 10% of its total assetsin foreign securities which are not publicly traded in the United States. For adiscussion of the risks involved in investing in foreign securities, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Reducing Risks of Lower-Rated Securities. The Sub-advisor believes thatthe risks of investing in lower-rated securities may be reduced. There can,however, be no assurances that such risks will actually be reduced by thefollowing methods. The professional portfolio management techniques used by theSub-advisor to attempt to reduce these risks include:

Credit Research. The Sub-advisor will perform its own creditanalysis in addition to using nationally recognized rating organizations andother sources, including discussions with the issuer's management, the judgmentof other investment analysts, and its own informed judgment. The Sub-advisor'scredit analysis will consider the issuer's financial soundness, itsresponsiveness to changes in interest rates and business conditions, and itsanticipated cash flow, interest, or dividend coverage and earnings. Inevaluating an issuer, the Sub-advisor places special emphasis on the estimatedcurrent value of the issuer's assets rather than historical cost.

Diversification. The Sub-advisor invests in securities of many differentissuers, industries, and economic sectors to reduce portfolio risk.

Economic Analysis. The Sub-advisor will analyze currentdevelopments and trends in the economy and in the financial markets. Wheninvesting in lower-rated securities, timing and selection are critical, andanalysis of the business cycle can be important.

ASAF TOTAL RETURN BOND FUND:

Investment Objective: The investment objective of the Fund is to maximize totalreturn, consistent with preservation of capital. The Sub-advisor will seek to



employ prudent investment management techniques, especially in light of thebroad range of investment instruments in which the Fund may invest.


In selecting securities for the Fund, the Sub-advisor will utilizeeconomic forecasting, interest rate anticipation, credit and call risk analysis,foreign currency exchange rate forecasting, and other security selectiontechniques. The proportion of the Fund's assets committed to investment insecurities with particular characteristics (such as maturity, type and couponrate) will vary based on the Sub-advisor's outlook for the U.S. and foreigneconomies, the financial markets and other factors. The Fund will invest atleast 65% of its assets in the following types of securities which may be issuedby domestic or foreign entities and denominated in U.S. dollars or foreigncurrencies: securities issued or guaranteed by the U.S. Government, its agenciesor instrumentalities; corporate debt securities, including convertiblesecurities and commercial paper; mortgage and other asset-backed securities;inflation-indexed bonds issued by both governments and corporations; variableand floating rate debt securities; bank certificates of deposit, fixed timedeposits and bankers' acceptances; repurchase agreements and reverse repurchaseagreements; obligations of foreign governments or their subdivisions, agenciesand instrumentalities, international agencies or supranational entities; andforeign currency exchange-related securities, including foreign currencywarrants.

The Fund will invest in fixed-income securities of varying maturitieswith a portfolio duration from three to six years. The average portfolioduration of the Fund will normally vary within a three- to six-year time framebased upon the Sub-advisor's forecast for interest rates. The Sub-advisor basesits analysis of the average duration of the bond market on bond market indiceswhich it believes to be representative, and other factors. The Fund may investup to 10% of its assets in fixed income securities that are rated belowinvestment grade but rated B or higher by Moody's Investors Services, Inc.("Moody's") or Standard & Poor's Corporation ("S&P") (or, if unrated, determinedby the Sub-advisor to be of comparable quality). The Fund will maintain anoverall dollar-weighted average quality of at least A (as rated by Moody's orS&P). In the event that ratings services assign different ratings to the samesecurity, the Sub-advisor will determine which rating it believes best reflectsthe security's quality and risk at that time, which may be the higher of theseveral assigned ratings. Securities rated B are judged to be predominantlyspeculative with respect to their capacity to pay interest and repay principalin accordance with the terms of the obligations. The Sub-advisor will seek toreduce the risks associated with investing in such securities by limiting theFund's holdings in such securities and by the depth of its own credit analysis.For a discussion of the risks involved in lower-rated high-yield bonds, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods." For a description of securities ratings, see the Appendix to theCompany's SAI.

The Fund may invest up to 20% of its assets in securities denominatedin foreign currencies, and may invest beyond this limit in U.S.dollar-denominated securities of foreign issuers. Fund holdings will beconcentrated in areas of the bond market (based on quality, sector, coupon ormaturity) which the Sub-advisor believes to be relatively undervalued.

The Fund may buy or sell interest rate futures contracts, options oninterest rate futures contracts and options on debt securities for the purposeof hedging against changes in the value of securities which the Fund owns oranticipates purchasing due to anticipated changes in interest rates. The Fundmay engage in foreign currency transactions. Foreign currency exchangetransactions may be entered into the purpose of hedging against foreign currencyexchange risk arising from the Fund's investment or anticipated investment insecurities denominated in foreign currencies.

The Fund may enter into swap agreements for the purposes of attemptingto obtain a particular investment return at a lower cost to the Fund than if theFund had invested directly in an instrument that provided that desired return.In addition, the Fund may purchase and sell securities on a when-issued anddelayed delivery basis and enter into forward commitments to purchasesecurities; lend its securities to brokers, dealers and other financialinstitutions to earn income; and borrow money for investment purposes.

The "total return" sought by the Fund will consist of interest anddividends from underlying securities, capital appreciation reflected inunrealized increases in value of portfolio securities or realized from thepurchase and sale of securities, and use of futures and options or gains fromfavorable changes in foreign currency exchange rates. Generally, over the longterm, the total return obtained by a portfolio investing primarily in fixedincome securities is not expected to be as great as that obtained by a portfolioinvesting in equity securities. At the same time, the market risk and volatilityof a fixed income portfolio is expected to be less than that of an equityportfolio, so that a fixed income portfolio is generally considered to be a moreconservative investment. The change in the market value of fixed income



securities (and therefore their capital appreciation or depreciation) is largelya function of changes in the current level of interest rates. When interestrates are falling, a portfolio with a shorter duration generally will notgenerate as high a level of total return as a portfolio with a longer duration.Conversely, when interest rates are rising, a portfolio with a shorter durationwill generally outperform longer duration portfolios. When interest rates areflat, shorter duration portfolios generally will not achieve as high a level ofreturn as longer duration portfolios (assuming that long-term interest rates arehigher than short-term interest rates, which is commonly the case). With respectto the composition of any fixed-income portfolio, the longer the duration of theportfolio, the greater the potential for total return, with, however, greaterattendant market risk and price volatility than for a portfolio with a shorterduration. The market value of securities denominated in currencies other thanU.S. dollars also may be affected by movements in foreign currency exchangerates.

The Fund's investments include, but are not limited to, the following:

U.S. Government Securities. U.S. Government securities are obligationsof, or guaranteed by, the U.S. Government, its agencies or instrumentalities.Some U.S. Government securities, such as Treasury bills, notes and bonds, andsecurities guaranteed by the Government National Mortgage Association ("GNMA"),are supported by the full faith and credit of the United States; others, such asthose of the Federal Home Loan Banks, are supported by the right of the issuerto borrow from the U.S. Treasury; others, such as those of the Federal NationalMortgage Association ("FNMA"), are supported by the discretionary authority ofthe U.S. Government to purchase the agency's obligations; and still others, suchas the Student Loan Marketing Association, are supported only by the credit ofthe instrumentality.

Corporate Debt Securities. Corporate debt securities include corporatebonds, debentures, notes and other similar corporate debt instruments, includingconvertible securities. Debt securities may be acquired with warrants attached.Corporate income-producing securities may also include forms of preferred orpreference stock. The rate of return or return of principal on some debtobligations may be linked or indexed to the level of exchange rates between theU.S. dollar and a foreign currency or currencies. Investment in corporate debtsecurities that are below investment grade (rated below Baa (Moody's) or BBB(S&P)) are described as "speculative" both by Moody's and S&P. For a descriptionof the special risks involved with lower-rated high-yield bonds, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods." For a description of securities ratings, see the Appendix to theCompany's SAI.

Variable and Floating Rate Securities. Variable and floating ratesecurities provide for a periodic adjustment in the interest rate paid on theobligations. The terms of such obligations must provide that interest rates areadjusted periodically based upon an interest rate adjustment index as providedin the respective obligations. The adjustment intervals may be regular, andrange from daily up to annually, or may be event based, such as based on achange in the prime rate.

The Fund may invest in floating rate debt instruments ("floaters"). Theinterest rate on a floater is a variable rate which is tied to another interestrate, such as a money-market index or Treasury bill rate. The interest rate on afloater resets periodically, typically every six months. While, because of theinterest rate reset feature, floaters provide the Fund with a certain degree ofprotection against rises in interest rates, the Fund will participate in anydeclines in interest rates as well.

The Fund may also invest in inverse floating rate debt instruments("inverse floaters"). The interest rate on an inverse floater resets in theopposite direction from the market rate of interest to which the inverse floateris indexed. An inverse floating rate security may exhibit greater pricevolatility than a fixed rate obligation of similar credit quality. The Fund willnot invest more than 5% of its net assets in any combination of inverse floater,interest only, or principal only securities.

Inflation-Indexed Bonds. Inflation-indexed bonds are fixed incomesecurities whose principal value is periodically adjusted according to the rateof inflation. The interest rate on these bonds is generally fixed at issuance ata rate lower than typical bonds. Over the life of an inflation-indexed bond,however, interest will be paid based on a principal value which is adjusted forinflation. For example, if the Fund purchased an inflation-indexed bond with apar value of $1,000 and a 3% real rate of return coupon (payable 1.5%semi-annually), and inflation over the first six months was 1%, the mid-year parvalue of the bond would be $1,010 and the first semi-annual interest paymentwould be $15.15 ($1,010 times 1.5%).

Repayment of the original bond principal upon maturity (as adjusted forinflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds,even during a period of deflation. However, the current market value of thebonds is not guaranteed, and will fluctuate. The Fund may also invest in other



inflation related bonds which may or may not provide a similar guarantee. If aguarantee of principal is not provided, the adjusted principal value of the bondrepaid at maturity may be less than the original principal.

The value of inflation-indexed bonds is expected to change in responseto changes in real interest rates (which are nominal interest rates adjusted forinflation). If inflation were to rise at a faster rate than nominal interestrates, real interest rates would decline, leading to an increase in value ofinflation-indexed bonds. In contrast, if nominal interest rates increased at afaster rate than inflation, real interest rates would rise, leading to adecrease in value of inflation-indexed bonds.

While these securities are expected to be protected from long-terminflationary trends, short-term increases in inflation may lead to a decline invalue. If interest rates rise due to reasons other than inflation (for example,due to changes in currency exchange rates), investors in these securities maynot be protected to the extent that the increase is not reflected in the bond'sinflation measure.

The U.S. Treasury has only recently begun issuing inflation-indexedbonds. As such, there is no trading history of these securities, and there canbe no assurance that a liquid market in these instruments will develop, althoughone is expected. There also can be no assurance that the U.S. Treasury willissue any particular amount of inflation-indexed bonds. Certain foreigngovernments, such as the United Kingdom, Canada and Australia, have a longerhistory of issuing inflation-indexed bonds, and there may be a more liquidmarket in certain of these countries for these securities.

Any increase in the principal amount of an inflation-indexed bond willbe considered taxable ordinary income, even though investors do not receivetheir principal until maturity. For information about the possible taxconsequences of investing in inflation-indexed bonds, see this Prospectus under"Dividends, Capital Gains and Taxes."

Mortgage-Related and Other Asset-Backed Securities. The Fund may investall of its assets in mortgage-related and other asset-backed securities,including mortgage pass-through securities and collateralized mortgageobligations. The value of some mortgage- or asset-backed securities in which theFund invests may be particularly sensitive to changes in prevailing interestrates, and, like the other investments of the Fund, the ability of the Fund tosuccessfully utilize these instruments may depend in part upon the ability ofthe Sub-advisor to forecast interest rates and other economic factors correctly.For a description of these securities and the special risks involved therein,see this Prospectus and the Company's SAI under "Certain Risk Factors andInvestment Methods" and the Company's SAI under "Investment Programs of theFunds: ASAF Total Return Bond Fund."

Repurchase Agreements. For the purpose of achieving income, the Fundmay enter into repurchase agreements, subject to guidelines promulgated by theDirectors of the Company. The Fund will not invest more than 15% of its netassets (taken at current market value) in repurchase agreements maturing in morethan seven days. For a discussion of repurchase agreements and the risksinvolved therein, see this Prospectus under "Certain Risk Factors and InvestmentMethods."

Reverse Repurchase Agreements, Dollar Rolls and Other Borrowings. Areverse repurchase agreement may for some purposes be considered borrowing thatinvolves the sale of a security by the Fund and its agreement to repurchase theinstrument at a specified time and price. The Fund may also enter into dollarrolls, in which the Fund sells mortgage-backed or other securities for deliveryin the current month and simultaneously contracts to purchase substantiallysimilar securities on a specified future date. In the case of dollar rollsinvolving mortgage-backed securities, the mortgage-backed securities that arepurchased will be of the same type and will have the same interest rate as thosesold, but will be supported by different pools of mortgages. The Fund forgoesprincipal and interest paid during the roll period on the securities sold in adollar roll, but the Fund is compensated by the difference between the currentsales price and the lower price for the future purchase as well as by anyinterest earned on the proceeds of the securities sold. The Fund also could becompensated through the receipt of fee income equivalent to a lower forwardprice. The Fund will maintain a segregated account consisting of cash or otherliquid assets to cover its obligations under reverse repurchase agreements anddollar rolls.

Reverse repurchase agreements and dollar rolls will be subject to theFund's limitations on borrowings, which will restrict the aggregate of suchtransactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.Such practices will tend to exaggerate the effect on net asset value of anyincrease or decrease in the value of the Fund and may cause the Fund toliquidate portfolio positions when it would not be advantageous to do so. Apartfrom transactions involving reverse repurchase agreements and dollar rolls, theFund will not borrow money, except for temporary administrative purposes. For anadditional discussion of reverse repurchase agreements and the risks involved



therein, see this Prospectus under "Certain Risk Factors and InvestmentMethods." For an additional discussion of the Fund's limitations on borrowingand certain risks involved in borrowing, see this Prospectus under "Certain RiskFactors and Investment Methods" and the Company's SAI under "FundamentalInvestment Restrictions."

Lending Portfolio Securities. For the purpose of achieving income, theFund may lend its portfolio securities, provided (1) the loan is securedcontinuously by collateral consisting of U.S. Government securities or cash orcash equivalents (cash, U.S. Government securities, negotiable certificates ofdeposit, bankers' acceptances or letters of credit) maintained on a dailymark-to-market basis in an amount at least equal to the current market value ofthe securities loaned, (2) the Fund may at any time call the loan and obtain thereturn of securities loaned, (3) the Fund will receive any interest or dividendsreceived on the loaned securities, and (4) the aggregate value of the securitiesloaned will not at any time exceed one-third of the total assets of the Fund.For an additional discussion of the Fund's limitations on lending and certainrisks involved in lending, see this Prospectus under "Certain Risk Factors andInvestment Methods" and the Company's SAI under "Fundamental InvestmentRestrictions."

When-Issued or Delayed-Delivery Transactions. The Fund may purchase orsell securities on a when-issued or delayed delivery basis. These transactionsinvolve a commitment by the Fund to purchase or sell securities for apredetermined price or yield, with payment and delivery taking place more thanseven days in the future, or after a period longer than the customary settlementperiod for that type of security. When delayed delivery purchases areoutstanding, the Fund will set aside and maintain until the settlement date, ina segregated account, cash or other liquid assets in an amount sufficient tomeet the purchase price. Typically, no income accrues on securities purchased ona delayed delivery basis prior to the time delivery of the securities is made,although the Fund may earn income on securities it has deposited in a segregatedaccount. When purchasing a security on a delayed delivery basis, the Fundassumes the rights and risks of ownership of the security, including the risk ofprice and yield fluctuations, and takes such fluctuations into account whendetermining its net asset value. Because the Fund is not required to pay for thesecurity until the delivery date, these risks are in addition to the risksassociated with the Fund's other investments. If the Fund remains substantiallyfully invested at a time when delayed delivery purchases are outstanding, thedelayed delivery purchases may result in a form of leverage. When the Fund hassold a security on a delayed delivery basis, the Fund does not participate infuture gains or losses with respect to the security. If the other party to adelayed delivery transaction fails to deliver or pay for the security, the Fundcould miss a favorable price or yield opportunity or could suffer a loss. TheFund may dispose of or renegotiate a delayed delivery transaction after it isentered into, and may sell when-issued securities before they are delivered,which may result in a capital gain or loss. There is no percentage limitation onthe extent to which the Fund may purchase or sell securities on a delayeddelivery basis.

Foreign Securities. The Fund may invest directly in U.S. dollar- orforeign currency-denominated fixed income securities. The Fund will limit itsforeign investments to securities of issuers based in developed countries(including newly industrialized countries ("NICs"), such as Taiwan, South Koreaand Mexico). The Fund will limit its investment in securities of issuers basedin NICs to 10% of its assets. For purposes of this restriction, the term "NIC"is not meant to include a defined set of countries selected according tospecific criteria, but rather is a broadly defined term which includes countrieswhich are considered by the Sub-advisor to have sound economies and thepotential for positive growth. Investing in the securities of issuers in anyforeign country involves special risks and considerations not typicallyassociated with investing in U.S. companies. For a discussion of the risksinvolved in investing in foreign securities, including the risk of currencyfluctuations, see this Prospectus and the Company's SAI under "Certain RiskFactors and Investment Methods."

Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds aresecurities created through the exchange of existing commercial bank loans tosovereign entities for new obligations in connection with debt restructuringsunder a debt restructuring plan introduced by former U.S. Secretary of theTreasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and forthat reason do not have a long payment history. Brady Bonds may becollateralized or uncollateralized, are issued in various currencies (butprimarily the U.S. dollar), and are actively traded in the over-the-countersecondary market. Brady Bonds are not considered to be U.S. GovernmentSecurities. In light of the residual risk of Brady Bonds and, among otherfactors, the history of defaults with respect to commercial bank loans by publicand private entities in countries issuing Brady Bonds, investments in BradyBonds may be viewed as speculative. There can be no assurance that Brady Bondsacquired by the Fund will not be subject to restructuring arrangements or torequests for new credit, which may cause the Fund to suffer a loss of interestor principal on any of its holdings.



Foreign Currency Transactions. The Fund may buy and sell foreigncurrency futures contracts and options on foreign currencies and foreigncurrency futures contracts, enter into forward foreign currency exchangecontracts to reduce the risks of adverse changes in foreign exchange rates. TheFund may enter into these contracts for the purpose of hedging against foreignexchange risk arising from the Fund's investment or anticipated investment insecurities denominated in foreign currencies. For a discussion of foreigncurrency transactions and the risks involved therein, see this Prospectus andthe Company's SAI under "Certain Risk Factors and Investment Methods."

Options on Securities, Securities Indexes and Currencies. The Fund maypurchase and write call and put options on securities, securities indexes and onforeign currencies, and enter into futures contracts and use options on futurescontracts as further described below. The Fund may also enter into swapagreements with respect to foreign currencies, interest rates and securitiesindexes. The Fund may use these techniques to hedge against changes in interestrates, foreign currency, exchange rates or securities prices or as part of itsoverall investment strategy.

The Fund may purchase options on securities to protect holdings in anunderlying or related security against a substantial decline in market value. Afund may purchase call options on securities to protect against substantialincreases in prices of securities the Fund intends to purchase pending itsability to invest in such securities in an orderly manner. The Fund may sell putor call options it has previously purchased, which could result in a net gain orloss depending on whether the amount realized on the sale is more or less thanthe premium and other transaction costs paid on the put or call option which issold. A fund may write a call or put option only if it is "covered" by the Fundholding a position in the underlying securities or by other means which wouldpermit immediate satisfaction of the Fund's obligation as writer of the option.Prior to exercise or expiration, an option may be closed out by an offsettingpurchase or sale of an option of the same series.

The Fund may also invest in foreign-denominated securities and may buyor sell put and call options on foreign currencies. Currency options traded onU.S. or other exchanges may be subject to position limits which may limit theability of the Fund to reduce foreign currency risk using such options. For adiscussion of options and the risks involved therein, as well as the risksinvolved in investing in foreign currency, see this Prospectus and the Company'sSAI under "Certain Risk Factors and Investment Methods."

Swap Agreements. The Fund may enter into interest rate, index andcurrency exchange rate swap agreements for the purposes of attempting to obtaina particular desired return at a lower cost to the Fund than if the Fund hadinvested directly in an instrument that yielded the desired return. Swapagreements are two-party contracts entered into primarily by institutionalinvestors for periods ranging from a few weeks to more than one year. In astandard "swap" transaction, two parties agree to exchange the returns (ordifferentials in rates of return) earned or realized on particular predeterminedinvestments or instruments. The gross returns to be exchanged or "swapped"between the parties are calculated with respect to a "notional amount," i.e.,the return on or increase in value of a particular dollar amount invested at aparticular interest rate, in a particular foreign currency, or in a "basket" ofsecurities representing a particular index. Commonly used swap agreementsinclude interest rate caps, under which, in return for a premium, one partyagrees to make payments to the other to the extent that interest rates exceed aspecified rate or "cap"; interest floors, under which, in return for a premium,one party agrees to make payments to the other to the extent that interest ratesfall below a specified level or "floor"; and interest rate collars, under whicha party sells a cap and purchases a floor or vice versa in an attempt to protectitself against interest rate movements exceeding given minimum or maximumlevels.

The "notional amount" of a swap agreement is only a fictive basis onwhich to calculate the obligations which the parties to a swap agreement haveagreed to exchange. Most swap agreements entered into by the Fund wouldcalculate the obligations of the parties to the agreement on a "net basis."Consequently, the Fund's obligations (or rights) under a swap agreement willgenerally be equal only to the net amount to be paid or received under theagreement based on the relative values of the positions held by each party tothe agreement ("net amount"). The Fund's obligations under a swap agreement willbe accrued daily (offset against amounts owed to the Fund) and any accruedunpaid net amounts owed to a swap counterparty will be covered by themaintenance of a segregated account consisting of cash or other liquid assets toavoid any potential leveraging of the Fund. The Fund will not enter into a swapagreement with any single party if the net amount owed or to be received underexisting contracts with that party would exceed 5% of the Fund's total assets.

Risks of Swaps. Whether the Fund's use of swap agreements will besuccessful in furthering its investment objective will depend on the Fund'sability to predict correctly whether certain types of investment are likely toproduce greater returns than other investments. Because they are two-partycontracts and because they have terms of greater than seven days, swap



agreements may be considered illiquid. Moreover, the Fund bears the risk of lossof the amount expected to be received under a swap agreement in the event of adefault or bankruptcy of a swap agreement counterparty. The Sub-advisor willcause the Fund to enter into swap agreements only with counterparties that wouldbe eligible for consideration as repurchase agreement counterparties under theFund's repurchase agreement guidelines. Certain restrictions imposed on the Fundby the Internal Revenue Code may limit the Fund's ability to use swapagreements. The swaps market is relatively new and is largely unregulated. It ispossible that developments in the swaps market, including potential governmentalregulation, could adversely affect the Fund's ability to terminate existing swapagreements or to realize amounts to be received under such agreements.

Futures Contracts and Options on Futures Contracts. The Fund may investin interest rate futures contracts, stock index futures contracts and foreigncurrency futures contracts and options thereon that are traded on a U.S. orforeign exchange or board of trade. The Fund will only enter into futurescontracts or futures options which are standardized and traded on a U.S. orforeign exchange or board of trade, or similar entity, or quoted on an automatedquotation system. The Fund will use financial futures contracts and relatedoptions only for "bona fide" hedging purposes, as such term is defined in theapplicable regulations of the Commodity Futures Trading Commission, or, withrespect to positions in financial futures and related options that do notqualify as "bona fide hedging" positions, will enter such non-hedging positionsonly to the extent that aggregate initial margin deposit plus premiums paid byit for the open futures options position, less the amount by which any suchpositions are "in-the-money," would not exceed 5% of the Fund's total assets.For an additional discussion of futures contracts and related options, and therisks involved therein, see this Prospectus and the Company's SAI under "CertainRisk Factors and Investment Methods."

Portfolio Turnover. The Fund may have higher portfolio turnover than othermutual funds with similar investment objectives. For a discussion of portfolioturnover and its effects, see this Prospectus and the Company's SAI under"Portfolio Transactions."

ASAF JPM MONEY MARKET FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income and maintain high levels of liquidity.


The Fund attempts to accomplish its objectives by maintaining adollar-weighted average portfolio maturity of not more than 90 days and byinvesting in the types of high quality U.S. dollar-denominated securitiesdescribed below which have effective maturities of not more than 397 days. TheFund will invest in one or more of the types of investments described below.

United States Government Obligations. The Fund may invest inobligations of the U.S. Government and its agencies ("U.S. GovernmentObligations") and instrumentalities ("U.S. Government Instrumentalities")maturing 397 days or less from the date of acquisition or purchased pursuant torepurchase agreements that provide for repurchase by the seller within 397 daysfrom the date of acquisition. U.S. Government Obligations, for purposes of thisFund, include: (i) direct obligations issued by the United States Treasury suchas Treasury bills, notes and bonds; and (ii) instruments issued or guaranteed bygovernment-sponsored agencies acting under authority of Congress, such as, butnot limited to, obligations of the Bank for Cooperatives, Federal FinancingBank, Federal Intermediate Credit Banks, Federal Land Banks, and TennesseeValley Authority, Federal Home Loan Bank and Federal Farm Credit Bureau. U.S.Government Instrumentalities are government agencies organized by Congress undera Federal Charter and supervised and regulated by the U.S. Government, such asthe Federal National Mortgage Association and the Student Loan MortgageAssociation. Some of these U.S. Government Obligations are supported by the fullfaith and credit of the U.S. Treasury; others are supported by the right of theissuer to borrow from the Treasury; others, such as those of the FederalNational Mortgage Association, are supported by the discretionary authority ofthe U.S. Government to purchase the agency's obligations; still others, such asthose of the Student Loan Mortgage Association, are supported only by the creditof the instrumentality. No assurance can be given that the U.S. Government wouldprovide financial support to the U.S. Government-sponsored instrumentalities ifit is not obligated to do so by law.

Bank Obligations. The Fund may invest in high quality United Statesdollar-denominated negotiable certificates of deposit, time deposits andbankers' acceptances of (i) banks, savings and loan associations and savingsbanks which have more than $2 billion in total assets and are organized underUnited States federal or state law, (ii) foreign branches of these banks orforeign banks of equivalent size (Euros), and (iii) United States branches offoreign banks of equivalent size (Yankees). The Fund may also invest inobligations of international banking institutions designated or supported bynational governments to promote economic reconstruction, development or tradebetween nations (e.g., the European Investment Bank, the Inter-American



Development Bank, or the World Bank). These obligations may be supported byappropriated but unpaid commitments of their member countries, and there is noassurance these commitments will be undertaken or met in the future.

Commercial Paper; Bonds. The Fund may invest in high quality commercialpaper and corporate bonds issued by United States corporations. The Fund mayalso invest in bonds and commercial paper of foreign issuers if the obligationis United States dollar-denominated and is not subject to foreign withholdingtax. For a discussion of the risks involved in foreign investments, see thisProspectus and the Company's SAI under "Certain Risk Factors and InvestmentMethods."

Asset-Backed Securities. As may be permitted by current laws andregulations and if expressly permitted by the Directors of the Company, the Fundmay invest in securities generally referred to as asset-backed securities, whichdirectly or indirectly represent a participation interest in, or are secured byand payable from, a stream of payments generated by particular assets such asmotor vehicle or credit card receivables. Asset-backed securities provideperiodic payments that generally consist of both interest and principalpayments. Consequently, the life of an asset-backed security varies with theprepayment experience of the underlying debt instruments. For more informationabout these instruments and the risks involved therein, see this Prospectus andthe Company's SAI under "Certain Risk Factors and Investment Methods."

Synthetic Instruments. As may be permitted by current laws andregulations and if expressly permitted by the Directors of the Company, the Fundmay invest in certain synthetic instruments. Such instruments generally involvethe deposit of asset-backed securities in a trust arrangement and the issuanceof certificates evidencing interests in the trust. The certificates aregenerally sold in private placements in reliance on Rule 144A of the SecuritiesAct of 1933. The Sub-advisor will review the structure of synthetic instrumentsto identify credit and liquidity risks and will monitor such risks.

Quality Information. The Fund will limit its investments to thosesecurities which, in accordance with guidelines adopted by the Directors of theCompany, present minimal credit risks. In addition, the Fund will not purchaseany security (other than a United States Government security) unless: (i) ifrated by only one nationally recognized rating organization (such as Moody's andStandard & Poor's), then such organization has rated it with the highest ratingassigned to short-term debt securities; (ii) if rated by more than onenationally recognized rating organization, then at least two such ratingorganizations have rated it with the highest rating assigned to short-term debtsecurities; or (iii) it is not rated and is determined to be of comparablequality. Determinations of comparable quality shall be made in accordance withprocedures established by the Directors of the Company. These standards must besatisfied at the time an investment is made. If the quality of the investmentlater declines, the Fund may continue to hold the investment, subject in certaincircumstances to a finding by the Directors that disposing of the investmentwould not be in the Fund's best interest. For a description of securitiesratings, see the Appendix to the Company's SAI.

When-Issued and Delayed Delivery Securities. The Fund may purchasesecurities on a when-issued or delayed delivery basis. Delivery of and paymentfor these securities may take as long as a month or more after the date of thepurchase commitment. The value of these securities is subject to marketfluctuation during this period and no interest or income accrues to the Funduntil settlement. The Fund maintains with the custodian a separate account witha segregated portfolio of securities in an amount at least equal to thesecommitments. When entering into a when-issued or delayed delivery transaction,the Fund will rely on the other party to consummate the transaction; if theother party fails to do so, the Fund may be disadvantaged. It is the currentpolicy of the Fund not to enter into when-issued commitments exceeding in theaggregate 15% of the market value of the Fund's total assets less liabilitiesother than the obligations created by these commitments. For an additionaldiscussion of when-issued securities and certain risks involved therein, see theCompany's SAI under "Certain Risk Factors and Investment Methods."

Repurchase Agreements. Subject to guidelines promulgated by the Directorsof the Company, the Fund is permitted to enter into repurchase agreements. For adiscussion of repurchase agreements and the risks involved therein, see thisProspectus under "Certain Risk Factors and Investment Methods."

Reverse Repurchase Agreements. The Fund is permitted to enter intoreverse repurchase agreements. In a reverse repurchase agreement, the Fund sellsa security and agrees to repurchase it at a mutually agreed upon date and price,reflecting the interest rate effective for the term of the agreement. It mayalso be viewed as the borrowing of money by the Fund. If interest rates riseduring the term of a reverse repurchase agreement, entering into the reverserepurchase agreement may have a negative impact on the Fund's ability tomaintain a net asset value of $1.00 per share. For a discussion of reverserepurchase agreements and the risks involved therein, see this Prospectus under"Certain Risk Factors and Investment Methods."



Foreign Securities. The Fund may invest in U.S. dollar-denominatedforeign securities. Any foreign commercial paper must not be subject to foreignwithholding tax at the time of purchase. Foreign investments may be madedirectly in securities of foreign issuers or in the form of American DepositaryReceipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs andEDRs are receipts issued by a bank or trust company that evidence ownership ofunderlying securities issued by a foreign corporation and that are designed foruse in the domestic, in the case of ADRs, or European, in the case of EDRs,securities markets. For a discussion of depositary receipts and the risksinvolved in investing in foreign securities, in general, see this Prospectus andthe Company's SAI under "Certain Risk Factors and Investment Methods."

Lending Portfolio Securities. Subject to the Fund's restriction onlending, the Fund is permitted to lend its securities. These loans must besecured continuously by cash or equivalent collateral or by a letter of creditat least equal to the market value of the securities loaned plus accruedinterest or income. For an additional discussion of the Fund's limitations onlending and certain risks involved in lending, see this Prospectus under"Certain Risk Factors and Investment Methods" and the Company's SAI under"Fundamental Investment Restrictions."

Borrowing. The Fund may borrow money from banks for non-leveraging,temporary or emergency purposes in amounts up to 33 1/3% of its total assets.The Fund will not purchase securities while borrowings exceed 5% of the Fund'stotal assets. For an additional discussion of the Fund's limitations onborrowing and certain risks involved in borrowing, see this Prospectus under"Certain Risk Factors and Investment Methods" and the Company's SAI under"Fundamental Investment Restrictions."


The following is a description of certain securities and investmentmethods that the Funds and Portfolios may invest in or use, and certain of therisks associated with such securities and investment methods. Whether aparticular Fund or Portfolio may invest in a specific security or use a type ofinvestment method, as well as other risk factors associated with the Fund orPortfolio's investment program, are described in this Prospectus and theCompany's SAI under "Investment Programs of the Funds" and in the Company's SAIunder "Fundamental Investment Restrictions." The risk factors and investmentmethods described below only apply to those Funds or Portfolios that may investin such securities or use such investment methods. Because the investmentobjective, policies and limitations of each Feeder Fund are identical to thoseof its corresponding Portfolio, the references below to the Feeder Funds,including references to the Directors of the Company, apply equally to theFunds' corresponding Portfolios and the Trustees of the Trust.

Derivative Instruments. To the extent permitted by the investmentobjectives and policies of a Fund, a Fund may invest in securities and otherinstruments that are commonly referred to as "derivatives." For instance, a Fundmay purchase and write call and put options on securities, securities indexesand foreign currencies, enter into futures contracts and use options on futurescontracts, and enter into swap agreements with respect to foreign currencies,interest rates, and securities indexes. A Fund may use these techniques to hedgeagainst changes in interest rates, foreign currency exchange rates or securitiesprices or as part of their overall investment strategies.

In general, derivative instruments are those securities or otherinstruments whose value is derived from or related to the value of some otherinstrument or asset, but not those securities whose payment of principal and/orinterest depend upon cash flows from underlying assets, such as mortgage orasset-backed securities. The value of some derivative instruments in which aFund invests may be particularly sensitive to changes in prevailing interestrates, and, like the other investments of a Fund, the ability of the Fund tosuccessfully utilize these instruments may depend in part upon the ability ofthe Sub-advisor to forecast interest rates and other economic factors correctly.If the Sub-advisor incorrectly forecasts such factors and has taken positions inderivative instruments contrary to prevailing market trends, the Fund could beexposed to the risk of a loss.

A Fund might not employ any of the derivative strategies describedbelow, and no assurance can be given that any strategy used will succeed. If aSub-advisor incorrectly forecasts interest rates, market values or othereconomic factors in utilizing a derivatives strategy for a Fund, the Fund mighthave been in a better position if it had not entered into the transaction atall. The use of these strategies involves certain special risks, including apossible imperfect correlation, or even no correlation, between price movementsof derivative instruments and price movements of related investments. Inaddition, while some strategies involving derivative instruments can reduce therisk of loss, they can also reduce the opportunity for gain, or even result inlosses, by offsetting favorable price movements in related investments.Furthermore, a Fund may be unable to purchase or sell a portfolio security at a



time that otherwise would be favorable for it to do so, or may need to sell aportfolio security at a disadvantageous time, due to the need to maintain assetcoverage or offsetting positions in connection with transactions in derivativeinstruments. A Fund may also be unable to close out or to liquidate itsderivatives positions.

Options:

Call Options. A call option on a security gives the purchaserof the option, in return for a premium paid to the writer (seller), the right tobuy the underlying security at the exercise price at any time during the optionperiod. Upon exercise by the purchaser, the writer (seller) of a call option hasthe obligation to sell the underlying security at the exercise price. When aFund purchases a call option, it will pay a premium to the party writing theoption and a commission to the broker selling the option. If the option isexercised by such Fund, the amount of the premium and the commission paid may begreater than the amount of the brokerage commission that would be charged if thesecurity were to be purchased directly. By writing a call option, a Fund assumesthe risk that it may be required to deliver the security having a market valuehigher than its market value at the time the option was written. The Fund willwrite call options in order to obtain a return on its investments from thepremiums received and will retain the premiums whether or not the options areexercised. Any decline in the market value of portfolio securities will beoffset to the extent of the premiums received (net of transaction costs). If anoption is exercised, the premium received on the option will effectivelyincrease the exercise price.

If a Fund writes a call option on a security it already owns,it gives up the opportunity for capital appreciation above the exercise priceshould market price of the underlying security increase, but retains the risk ofloss should the price of the underlying security decline. Writing call optionsalso involves the risk relating to a Fund's ability to close out options it haswritten.

A call option on a securities index is similar to a calloption on an individual security, except that the value of the option depends onthe weighted value of the group of securities comprising the index, and allsettlements are made in cash. A call option may be terminated by the writer(seller) by entering into a closing purchase transaction in which it purchasesan option of the same series as the option previously written.

Put Options. A put option on a security gives the purchaser ofthe option, in return for premium paid to the writer (seller), the right to sellthe underlying security at the exercise price at any time during the optionperiod. Upon exercise by the purchaser, the writer of a put option has theobligation to purchase the underlying security at the exercise price. By writinga put option, a Fund assumes the risk that it may be required to purchase theunderlying security at a price in excess of its current market value.

A put option on a securities index is similar to a put optionon an individual security, except that the value of the option depends on theweighted value of the group of securities comprising the index, and allsettlements are made in cash.

A Fund may sell a call option or a put option which it haspreviously purchased prior to the purchase (in the case of a call) or the sale(in the case of a put) of the underlying security. Any such sale would result ina net gain or loss depending on whether the amount received on the sale is moreor less than the premium and other transaction costs paid on the call or putwhich is sold.

Futures Contracts and Related Options. A financial futures contractcalls for delivery of a particular security at a specified price at a certaintime in the future. The seller of the contract agrees to make delivery of thetype of security called for in the contract and the buyer agrees to takedelivery at a specified future time. A Fund may also write call options andpurchase put options on financial futures contracts as a hedge to attempt toprotect the Fund's securities from a decrease in value. When a Fund writes acall option on a futures contract, it is undertaking the obligation of selling afutures contract at a fixed price at any time during a specified period if theoption is exercised. Conversely, the purchaser of a put option on a futurescontract is entitled (but not obligated) to sell a futures contract at a fixedprice during the life of the option.

Financial futures contracts consist of interest rate futures contractsand securities index futures contracts. An interest rate futures contractobligates the seller of the contract to deliver, and the purchaser to takedelivery of, interest rate securities called for in a contract at a specifiedfuture time at a specified price. A stock index assigns relative values tocommon stocks included in the index and the index fluctuates with changes in themarket values of the common stocks included. A stock index futures contract is abilateral contract pursuant to which two parties agree to take or make deliveryof an amount of cash equal to a specified dollar amount times the difference



between the stock index value at the close of the last trading day of thecontract and the price at which the futures contract is originally struck. Anoption on a financial futures contract gives the purchaser the right to assume aposition in the contract (a long position if the option is a call and a shortposition if the option is a put) at a specified exercise price at any timeduring the period of the option.

Futures contracts and options can be highly volatile and could resultin reduction of a Fund's total return, and a Fund's attempt to use suchinvestments for hedging purposes may not be successful. Successful futuresstrategies require the ability to predict future movements in securities prices,interest rates and other economic factors. A Fund's potential losses from theuse of futures extends beyond its initial investment in such contracts. Also,losses from options and futures could be significant if a Fund is unable toclose out its position due to distortions in the market or lack of liquidity.

The use of futures and options involves investment risks andtransaction costs to which a Fund would not be subject absent the use of thesestrategies. If a Sub-advisor seeks to protect a Fund against potential adversemovements in the securities, foreign currency or interest rate markets usingthese instruments, and such markets do not move in a direction adverse to theFund, the Fund could be left in a less favorable position than if suchstrategies had not been used. The successful use of these strategies thereforemay depend on the ability of the Sub-advisor to correctly forecast interest ratemovements and general stock market price movements. Risks inherent in the use offutures and options include: (a) the risk that interest rates, securities pricesand currency markets will not move in the directions anticipated; (b) imperfectcorrelation between the price of futures, options and forward contracts andmovements in the prices of the securities or currencies being hedged; (c) thefact that skills needed to use these strategies are different from those neededto select portfolio securities; (d) the possible absence of a liquid secondarymarket for any particular instrument at any time; and (e) the possible need todefer closing out certain hedged positions to avoid adverse tax consequences. AFund's ability to terminate option positions established in the over-the-countermarket may be more limited than in the case of exchange-traded options and mayalso involve the risk that securities dealers participating in such transactionswould fail to meet their obligations to such Fund.

In addition, the use of futures and options involves the risk ofimperfect correlation between movements in futures and options prices andmovements in the price of securities that are the subject of a hedge.Particularly with respect to options on stock indices and stock index futures,the risk of such imperfect correlation increases as the composition of the Funddiverges from the composition of the relevant index.

Pursuant to regulations of the Commodity Futures Trading Commission("CFTC"), the Company has represented that:

(i) it will not purchase or sell futures or options on futurescontracts or stock indices for purposes other than bona fide hedgingtransactions (as defined by the CFTC) if as a result the sum of the initialmargin deposits and premiums required to establish positions in futurescontracts and related options that do not fall within the definition of bonafide hedging transactions would exceed 5% of the fair market value of eachFund's net assets; and

(ii) a Fund will not enter into any futures contracts if the aggregateamount of that Fund's commitments under outstanding futures contracts positionswould exceed the market value of its total assets.

Asset-Backed Securities. Asset-backed securities represent aparticipation in, or are secured by and payable from, a stream of paymentsgenerated by particular assets, for example, credit card, automobile or tradereceivables. Asset-backed commercial paper, one type of asset-backed security,is issued by a special purpose entity, organized solely to issue the commercialpaper and to purchase interests in the assets. The credit quality of thesesecurities depends primarily upon the quality of the underlying assets and thelevel of credit support and/or enhancement provided.

The underlying assets (e.g., loans) are subject to prepayments whichshorten the securities' weighted average life and may lower their return. If thecredit support or enhancement is exhausted, losses or delays in payment mayresult if the required payments of principal and interest are not made. Thevalue of these securities also may change because of changes in the market'sperception of the creditworthiness of the servicing agent for the pool, theoriginator of the pool, or the financial institution providing the creditsupport or enhancement.

Mortgage Pass-Through Securities. Mortgage pass-through securities aresecurities representing interests in "pools" of mortgage loans secured byresidential or commercial real property in which payments of both interest andprincipal on the securities are generally made monthly, in effect "passingthrough" monthly payments made by the individual borrowers on the mortgage loans



which underlie the securities (net of fees paid to the issuer or guarantor ofthe securities). Early repayment of principal on some mortgage-relatedsecurities (arising from prepayments of principal due to sale of the underlyingproperty, refinancing, or foreclosure, net of fees and costs which may beincurred) expose a Fund to a lower rate of return upon reinvestment ofprincipal. Also, if a security subject to prepayment has been purchased at apremium, in the event of prepayment the value of the premium would be lost. Likeother fixed-income securities, when interest rates rise, the value of amortgage-related security will generally decline; however, when interest ratesare declining, the value of mortgage-related securities with prepayment featuresmay not increase as much as other fixed-income securities. The value of thesesecurities also may change because of changes in the market's perception of thecreditworthiness of the federal agency or private institution that issued them.In addition, the mortgage securities market in general may be adversely affectedby changes in governmental regulation or tax policies.

Collateralized Mortgage Obligations (CMOs). CMOs areobligations fully collateralized by a portfolio of mortgages or mortgage-relatedsecurities. Payments of principal and interest on the mortgages are passedthrough to the holders of the CMOs on the same schedule as they are received,although certain classes of CMOs have priority over others with respect to thereceipt of prepayments on the mortgages. Therefore, depending on the type ofCMOs in which a Fund invests, the investment may be subject to a greater orlesser risk of prepayment than other types of mortgage-related securities. CMOsmay also be less marketable than other securities.

Stripped Agency Mortgage-Backed Securities. Stripped agencymortgage-backed securities represent interests in a pool of mortgages, the cashflow of which has been separated into its interest and principal components."IOs" (interest only securities) receive the interest portion of the cash flowwhile "POs" (principal only securities) receive the principal portion. StrippedAgency Mortgage-Backed Securities may be issued by U.S. Government Agencies orby private issuers. Unlike other debt instruments and other mortgage-backedsecurities, the value of IOs tends to move in the same direction as interestrates.

The cash flows and yields on IO and PO classes are extremely sensitiveto the rate of principal payments (including prepayments) on the relatedunderlying mortgage assets. For example, a rapid or slow rate of principalpayments may have a material adverse effect on the prices of IOs or POs,respectively. If the underlying mortgage assets experience greater thananticipated prepayments of principal, an investor may fail to recoup fully itsinitial investment in an IO class of a stripped mortgage-backed security, evenif the IO class is rated AAA or Aaa or is derived from a full faith and creditobligation. Conversely, if the underlying mortgage assets experience slower thananticipated prepayments of principal, the price on a PO class will be affectedmore severely than would be the case with a traditional mortgage-backedsecurity.

Foreign Securities. Investments in securities of foreign issuers mayinvolve risks that are not present with domestic investments. While investmentsin foreign securities are intended to reduce risk by providing furtherdiversification, such investments involve sovereign risk in addition to creditand market risks. Sovereign risk includes local political or economicdevelopments, potential nationalization, withholding taxes on dividend orinterest payments, and currency blockage (which would prevent cash from beingbrought back to the United States). Compared to United States issuers, there isgenerally less publicly available information about foreign issuers and theremay be less governmental regulation and supervision of foreign stock exchanges,brokers and listed companies. Brokerage commissions on foreign securitiesexchanges, which may be fixed, are generally higher than in the United States.Foreign issuers are not generally subject to uniform accounting and auditing andfinancial reporting standards, practices and requirements comparable to thoseapplicable to domestic issuers. Securities of some foreign issuers are lessliquid and their prices are more volatile than securities of comparable domesticissuers. In some countries, there may also be the possibility of expropriationor confiscatory taxation, limitations on the removal of funds or other assets,difficulty in enforcing contractual and other obligations, political or socialinstability or revolution, or diplomatic developments which could affectinvestments in those countries. Settlement of transactions in some foreignmarkets may be delayed or less frequent than in the United States, which couldaffect the liquidity of investments. For example, securities which are listed onforeign exchanges or traded in foreign markets may trade on days (such asSaturday or Holidays) when a Fund does not compute its price or accept ordersfor the purchase, redemption or exchange of its shares. As a result, the netasset value of a Fund may be significantly affected by trading on days whenshareholders cannot make transactions. Further, it may be more difficult for theCompany's agents to keep currently informed about corporate actions which mayaffect the price of portfolio securities. Communications between the U.S. andforeign countries may be less reliable than within the U.S., increasing the riskof delayed settlements or loss of certificates for portfolio securities.

Currency Fluctuations. Investments in foreign securities may



be denominated in foreign currencies. The value of Fund investments denominatedin foreign currencies may be affected, favorably or unfavorably, by the relativestrength of the U.S. dollar, changes in foreign currency and U.S. dollarexchange rates and exchange control regulations. A Fund's net asset value pershare may, therefore, be affected by changes in currency exchange rates. Changesin foreign currency exchange rates may also affect the value of dividends andinterest earned, gains and losses realized on the sale of securities and netinvestment income and gains, if any, to be distributed to shareholders by aFund. Foreign currency exchange rates generally are determined by the forces ofsupply and demand in foreign exchange markets and the relative merits ofinvestment in different countries, actual or perceived changes in interest ratesor other complex factors, as seen from an international perspective. Currencyexchange rates also can be affected unpredictably by intervention by U.S. orforeign governments or central banks or the failure to intervene, or by currencycontrols or political developments in the U.S. or abroad. In addition, a Fundmay incur costs in connection with conversions between various currencies.Investors should understand and consider carefully the special risks involved inforeign investing. These risks are often heightened for investments in emergingor developing countries.

Developing Countries. Investing in developing countriesinvolves certain risks not typically associated with investing in U.S.securities, and imposes risks greater than, or in addition to, risks ofinvesting in foreign, developed countries. These risks include: the risk ofnationalization or expropriation of assets or confiscatory taxation; currencydevaluations and other currency exchange rate fluctuations; social, economic andpolitical uncertainty and instability (including the risk of war); moresubstantial government involvement in the economy; higher rates of inflation;less government supervision and regulation of the securities markets andparticipants in those markets; controls on foreign investment and limitations onrepatriation of invested capital and on a Fund's ability to exchange localcurrencies for U.S. dollars; unavailability of currency hedging techniques incertain developing countries; the fact that companies in developing countriesmay be smaller, less seasoned and newly organized companies; the difference in,or lack of, auditing and financial reporting standards, which may result inunavailability of material information about issuers; the risk that it may bemore difficult to obtain and/or enforce a judgment in a court outside the UnitedStates; and greater price volatility, substantially less liquidity andsignificantly smaller market capitalization of securities markets.

American Depositary Receipts ("ADRs"), European Depositary Receipts("EDRs") and Global Depositary Receipts ("GDRs"). ADRs are dollar-denominatedreceipts generally issued by a domestic bank that represents the deposit of asecurity of a foreign issuer. ADRs may be publicly traded on exchanges orover-the-counter in the United States. EDRs are receipts similar to ADRs and areissued and traded in Europe. GDRs may be offered privately in the United Statesand also trade in public or private markets in other countries. Depositaryreceipts may be issued as sponsored or unsponsored programs. In sponsoredprograms, the issuer makes arrangements to have its securities traded in theform of a depositary receipt. In unsponsored programs, the issuer may not bedirectly involved in the creation of the program. Although regulatoryrequirements with respect to sponsored and unsponsored programs are generallysimilar, the issuers of unsponsored depositary receipts are not obligated todisclose material information in the United States and, therefore, the import ofsuch information may not be reflected in the market value of such securities.

Forward Foreign Currency Exchange Contracts. A forward foreign currencyexchange contract involves an obligation to purchase or sell a specifiedcurrency at a future date, which may be any fixed number of days from the datethe contract is agreed upon by the parties, at a price set at the time of thecontract. By entering into a forward foreign currency contract, a Fund "locksin" the exchange rate between the currency it will deliver and the currency itwill receive for the duration of the contract. As a result, a Fund reduces itsexposure to changes in the value of the currency it will deliver and increasesits exposure to changes in the value of the currency into which it willexchange. The effect on the value of a Fund is similar to selling securitiesdenominated in one currency and purchasing securities denominated in another.The Funds may enter into these contracts for the purposes of hedging againstforeign exchange risk arising from such Fund's investment or anticipatedinvestment in securities denominated in or exposed to foreign currencies.Although a Sub-advisor may, from time to time, seek to protect a Fund by usingforward contracts, anticipated currency movements may not be accuratelypredicted and the Fund may incur a gain or a loss on a forward contract. Aforward contract may reduce a Fund's losses on securities denominated in foreigncurrency, but it may also reduce the potential gain on the securities dependingon changes in the currency's value relative to the U.S. dollar or othercurrencies.

Lower-Rated High-Yield Bonds. Lower-rated high-yield bonds (commonlyknown as "junk bonds") are generally considered to be high risk investments asthey are subject to a higher risk of default than higher-rated bonds. Inaddition, the market for lower-rated high-yield bonds generally is more limitedthan the market for higher-rated bonds, and because their markets may be thinner



and less active, the market prices of lower-rated high-yield bonds may fluctuatemore than the prices of higher-rated bonds, particularly in times of marketstress. In addition, while the market for high-yield corporate debt securitieshas been in existence for many years, the market in recent years has experienceda dramatic increase in the large-scale use of such securities to fund highlyleveraged corporate acquisitions and restructurings. Accordingly, pastexperience may not provide an accurate indication of future performance of thehigh-yield bond market, especially during periods of economic recession. Otherrisks which may be associated with lower-rated high-yield bonds include: theexercise of any redemption or call provisions in a declining market may resultin their replacement by lower yielding bonds; and legislation, from time totime, may adversely affect their market. Since the risk of default is higheramong lower-rated high-yield bonds, a Sub-advisor's research and analysis are animportant ingredient in the selection of lower-rated high-yield bonds. Throughportfolio diversification, good credit analysis and attention to currentdevelopments and trends in interest rates and economic conditions, investmentrisk may be reduced, although there is no assurance that losses will not occur.

Illiquid and Restricted Securities. The Directors of the Company havepromulgated guidelines with respect to illiquid securities. Illiquid securitiesare deemed as such because they are subject to restrictions on their resale("restricted securities") or because, based upon their nature or the market forsuch securities, they are not readily marketable. Restricted securities areacquired through private placement transactions, directly from the issuer orfrom security holders, generally at higher yields or on terms more favorable toinvestors than comparable publicly traded securities. However, the restrictionson resale may make it difficult for a Fund to dispose of such securities at thetime considered most advantageous by its Sub-advisor, and/or may involveexpenses that would not be incurred in the sale of securities that were freelymarketable. A Fund that may purchase restricted securities may qualify for andtrade restricted securities in the "institutional trading market" pursuant toRule 144A of the Securities Act of 1933. Trading in the institutional tradingmarket may enable a Sub-advisor to dispose of restricted securities at a timethe Sub-advisor considers advantageous and/or at a more favorable price thanwould be available if such securities were not traded in such market. However,the institutional trading market is relatively new and liquidity of a Fund'sinvestments in such market could be impaired if trading does not develop ordeclines. Risks associated with restricted securities include the potentialobligation to pay all or part of the registration expenses in order to sellcertain restricted securities. A considerable period of time may elapse betweenthe time of the decision to sell a security and the time a Fund may be permittedto sell it under an effective registration statement. If, during such a period,adverse conditions were to develop, a Fund might obtain a less favorable pricethan prevailing when it decided to sell.

Repurchase Agreements. The Directors of the Company have promulgatedguidelines with respect to repurchase agreements. Repurchase agreements areagreements by which a Fund purchases a security and obtains a simultaneouscommitment from the seller to repurchase the security at an agreed upon priceand date. The resale price is in excess of the purchase price and reflects anagreed upon market rate unrelated to the coupon rate on the purchased security.A repurchase transaction is usually accomplished either by crediting the amountof securities purchased to the account of a Fund's custodian maintained in acentral depository or book-entry system or by physical delivery of thesecurities to a Fund's custodian in return for delivery of the purchase price tothe seller. Repurchase transactions are intended to be short-term transactionswith the seller repurchasing the securities, usually within seven days.

A Fund which enters into a repurchase agreement bears a risk of loss inthe event that the other party to such an agreement defaults on its obligationand such Fund is delayed or prevented from exercising its rights to dispose ofthe collateral securities, including the risk of a possible decline in value ofthe underlying securities during the period such Fund seeks to assert theserights, as well as the risk of incurring expenses in asserting these rights andthe risk of losing all or part of the income from such an agreement. If theseller institution defaults, a Fund might incur a loss or delay in therealization of proceeds if the value of the collateral securing the repurchaseagreement declines and it might incur disposition costs in liquidating thecollateral. In the event that such a defaulting seller filed for bankruptcy orbecame insolvent, disposition of such securities by a Fund might be delayedpending court action.

Reverse Repurchase Agreements. In a reverse repurchase agreement, aFund transfers possession of a portfolio instrument to another person, such as abroker-dealer or financial institution in return for a percentage of theinstrument's market value in cash and agrees that on a stipulated date in thefuture such Fund will repurchase the portfolio instrument by remitting theoriginal consideration plus interest at an agreed upon rate. When effectingreverse repurchase agreements, assets of a Fund, in a dollar amount sufficientto make payment for the obligations to be repurchased, are segregated on suchFund's records at the trade date and are maintained until the transaction issettled. Reverse repurchase agreements involve the risk that the market value ofthe securities retained by the Fund may decline below the repurchase price of



the securities which it is obligated to repurchase.

Borrowing. Each Fund's borrowings are limited so that immediately aftersuch borrowing the value of the Fund's assets (including borrowings) less itsliabilities (not including borrowings) is at least three times the amount of theborrowings. Should a Fund, for any reason, have borrowings that do not meet theabove test then, within three business days, such Fund must reduce suchborrowings so as to meet the necessary test. Under such a circumstance, suchFund may have to liquidate securities at a time when it is disadvantageous to doso. Gains made with additional funds borrowed will generally cause the net assetvalue of such Fund's shares to rise faster than could be the case withoutborrowings. Conversely, if investment results fail to cover the cost ofborrowings, the net asset value of such Fund could decrease faster than if therehad been no borrowings.

Convertible Securities and Warrants. Convertible securities generallyparticipate in the appreciation or depreciation of the underlying stock intowhich they are convertible, but to a lesser degree. Warrants are options to buya stated number of shares of common stock at a specified price any time duringthe life of the warrants. The value of warrants may fluctuate more than thevalue of the securities underlying such warrants. The value of a warrantdetached from its underlying security will expire without value if the rightsunder such warrant are not exercised prior to its expiration date.

Lending. With respect to the lending of securities, there is the riskof delays in receiving additional collateral or in the recovery of securitiesand possible loss of rights in collateral in the event that a borrower failsfinancially.

PERFORMANCE OF THE FUNDS

From time to time, a Fund's yield and total return may be included inadvertisements, sales literature, or shareholder reports. In addition, theCompany may advertise the effective yield of the ASAF JPM Money Market Fund. Allfigures are based upon historical earnings and are not intended to indicatefuture performance.

The "yield" of a Fund refers to the annualized net income generated byan investment in that Fund over a specified 30-day period (7-day period for theASAF JPM Money Market Fund). The effective yield is calculated similarly, but,when annualized, the income earned by an investment in that Fund is assumed tobe reinvested. The effective yield will be slightly higher than the yieldbecause of the compounding effect of this assumed reinvestment.

The "total return" of a Fund refers to the average annual rate ofreturn of an investment in the Fund. This figure is computed by calculating thepercentage change in the value of an investment of $1,000, assuming reinvestmentof all income dividends and capital gains distributions, to the end of aspecified period. "Total return" quotations reflect the performance of the Fundand include the effect of capital changes.

Additional information about the performance of the Funds is containedin the Company's SAI under "Additional Performance Information," and is alsocontained in the Funds' annual reports to shareholders, both of which you mayobtain without charge by writing to "American Skandia Advisor Funds, Inc." atP.O. Box 8012, Boston, Massachusetts 02266-8012 or by calling 1-800-SKANDIA.

HOW TO BUY SHARES

MINIMUM INVESTMENTS:

You can open a Fund account with a minimum initial investment of $1,000in a particular Fund and make additional investments to such account at any timewith as little as $50. The initial investment minimum is reduced to $50 per Fundthrough "Automatic Investment Plans" as discussed more fully in this Prospectusunder "Special Investment Programs and Privileges." Lower minimum initial andadditional investments may also be applicable for certain tax deferredretirement programs. There is no minimum investment requirement when you arebuying shares by reinvesting dividends and distributions from a Fund.

METHODS OF BUYING SHARES:

Each Fund offers investors four different classes of shares -- Class Ashares, Class B shares, Class C shares and Class X shares. The different classesof shares represent investments in the same portfolio of securities but aresubject to different sales charges, expenses and, likely, different shareprices. When you purchase shares of the Funds, be sure to specify the class ofshares of the Fund(s) you wish to purchase. If you do not choose, yourinvestment will be made in Class A shares. See below for a detailed descriptionof the purchase of Class A, B, C and X shares of the Funds.

If you are a new investor to the Company, you can purchase shares ofthe Funds through any dealer or financial institution that has a sales agreement



with American Skandia Marketing, Incorporated (the "Distributor"), or directlythrough the Company. If you are currently an investor with the Company, you mayalso purchase shares of the Funds automatically through an electronic transfer.

Buying Shares Through Your Dealer. Your dealer will place your order withthe Company on your behalf.

Buying Shares Through the Company. Make your check payable to "AmericanSkandia Advisor Funds, Inc." and mail your investment, along with your completedaccount application, to the address indicated on the application. Please includean investment dealer on the application. If a dealer is not listed, theDistributor will act as your agent in buying the Shares.

Buying Shares Through Electronic Transfer. You should instruct your bank totransfer funds by wire to:

ABA # 011000028State Street Bank & Trust Company

Boston, MassachusettsDDA # 99052995

FBO: American Skandia Advisor Funds, Inc.Fund Name and Class of Shares

Shareholder Name and Account Number

PURCHASE ORDERS:

Purchase orders for all Funds are accepted only on a day on which theNew York Stock Exchange ("NYSE") is open for business (a "business day"). Ordersfor shares received by Boston Financial Data Services, Inc. (the "TransferAgent") on any business day prior to the close of trading on the NYSE (normally4:00 p.m. Eastern Time) will receive the offering price calculated at the closeof trading that day. Orders received by the Transfer Agent after such time butprior to the close of business on the next business day will receive theoffering price calculated at the close of trading on that next business day. Theoffering price is the net asset value ("NAV") plus any initial sales charge thatapplies. For a discussion of how NAV is determined, see this Prospectus under"Determination of Net Asset Value." If you purchase shares through a dealer,your dealer is responsible for forwarding payment promptly to the TransferAgent. It is anticipated that the NYSE will be closed Saturdays and Sundays andon days on which the NYSE observes New Year's Day, President's Day, Good Friday,Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Each Fund and the Distributor or the Transfer Agent reserves the rightto reject any order for the purchase of a Fund's shares. The Company reservesthe right to cancel any purchase order for which payment has not been receivedby the fifth business day following the placement of the order. Additionally, ifthe purchase payment does not clear, your purchase will be canceled and youcould be liable for any losses or fees the Fund or the Transfer Agent haveincurred. If the Transfer Agent deems it appropriate, additional documentationor verification of authority may be required and an order will not be deemedreceived unless and until such additional documentation or verification isreceived by the Transfer Agent.

PURCHASE OF CLASS A SHARES:

Class A shares are sold at their offering price, which is normally NAVplus an initial sales charge that varies depending on the amount of yourinvestment. In certain instances described below, however, purchases are eithernot subject to an initial sales charge (and the offering price will be at NAV)or will be eligible for reduced initial sales charges. The Fund receives anamount equal to the NAV to invest for your account. A portion of the salescharge may be retained by the Distributor or allocated to your dealer. Thecurrent sales charge rates and commissions paid to dealers and brokers are asfollows:<TABLE><CAPTION>

High Yield Bond & Total Return Bond Funds: All Other Funds:

<S> <C> <C> <C> <C> <C> <C>Front-end Front-end Front-end Front-endSales Charge Sales Charge Commission Sales Charge Sales Charge Commission(as % of (as % of (as % of (as % of (as % of (as % of

Amount of Purchase: offering amt. offering offering amt. offering------------------ --------- --------- --------- --------

price) invested) price) price) invested) price)------ --------- ------ ------ --------- ------

Less than $50,000 4.25% 4.44% 3.50% 5.00% 5.26% 4.25%$50,000 up to $100,000 3.75% 3.90% 3.00% 4.25% 4.44% 3.50%$100,000 up to $250,000 3.25% 3.36% 2.50% 3.25% 3.36% 2.50%$250,000 up to $500,000 2.25% 2.30% 1.75% 2.25% 2.30% 1.75%



$500,000 up to $1 million 1.50% 1.52% 1.25% 1.50% 1.52% 1.25%</TABLE>

The Distributor reserves the right to allocate up to the entire amountof the initial sales charge to dealers for all sales with respect to orderswhich are placed during a particular period. Dealers to whom substantially theentire sales charge is allocated may be deemed to be "underwriters" as that termis defined under the Securities Act of 1933 (the "1933 Act"). In addition toamounts paid to dealers as a commission out of the front-end sales charge, theDistributor may, at its own expense, provide promotional incentives, includingcash compensation in excess of the applicable sales charge to certain dealerswhose representatives have sold or are expected to sell significant amounts ofshares of one or more of the Funds.

Purchases Subject to a Contingent Deferred Sales Charge ("CDSC"). Thereis no initial sales charge on purchases of Class A shares of any one or more ofthe Funds in the following cases:

o Purchases aggregating $1 million or more;o Purchases by an employer sponsored 403(b)(7) plan; oro Purchases of shares by a defined contribution plan under Section

401(a) of the Code, including a 401(k) plan with at least 25eligible employees.

However, if such Class A shares are redeemed within 12 months of thefirst business day of the calendar month of their purchase, a CDSC ("Class ACDSC") will be deducted from the redemption proceeds. The Class A CDSC will notapply to redemptions of shares purchased by the reinvestment of dividends orcapital gains distributions and may be waived under certain circumstancesdescribed below under "Waiver of Class A CDSC." The Class A CDSC will be equalto 1.0% of the lesser of the shares' NAV at the time of redemption or theoriginal amount invested. The Class A CDSC is not imposed on the amount of anyincrease in your account value over the initial amount invested. The Class ACDSC is paid to the Distributor to reimburse expenses incurred in providingdistribution-related services to the Fund in connection with the sale of Class Ashares. To determine whether the Class A CDSC applies to a redemption, the Fundwill first redeem shares acquired by reinvestment of dividends and capital gainsdistributions, and then will redeem shares in the order in which they werepurchased (such that shares held the longest are redeemed first).

The Distributor will pay the dealer of record a sales commission on thesepurchases in an amount equal to 0.50% of the amount invested.

Reduction of Initial Sales Charges for Class A Shares. You may beeligible to buy Class A shares at reduced initial sales charge rates in one ormore of the following ways:

Combined Purchases. Initial sales charge reductions areavailable by combining into a single transaction the purchase of Class A shareswith the purchase of any other class of shares. Qualifying purchases include:(1) those by you, your spouse and your children under the age of 21, if allparties are purchasing shares for their own account(s), which may include taxqualified plans such as an IRA, SIMPLE IRA, individual type 403(b)(7) plan, asingle participant Keogh type plan, or by a company controlled by suchindividuals as defined in the Investment Company Act of 1940 (the "1940 Act");(2) individual purchases by a trustee (or other fiduciary) if the investment isfor a single trust estate or single fiduciary account, including a employeebenefit plan other than those described above; and (3) purchases by qualifiedemployee benefit plans, other than those described above, of a single employer,or of affiliated employers as defined in the 1940 Act. Purchases made fornominee or street name accounts (securities held in the name of an investmentdealer or another nominee such as a bank trust department instead of thecustomer) may not be aggregated with purchases made for other accounts and maynot be aggregated with other nominee or street name accounts unless otherwisequalified as described above.

Rights of Accumulation. The initial sales charge for yourinvestment in Fund shares may also be reduced by aggregating the amount of suchinvestment with the current value of all Fund shares currently owned by you atthe time of your current purchase. The rules described above under "CombinedPurchases" may apply.

Letter of Intent ("LOI"). You may reduce the initial salescharge rate that applies to your purchases of Class A shares by meeting theterms of an LOI -- a non-binding commitment to invest a certain amount within athirteen-month period from your initial purchase. The total amount of yourintended purchases of Class A, B, C and X shares will determine the reducedsales charge rate for Class A shares purchased during that period. This caninclude purchases made up to 90 days before the date of the LOI. Up to 5% of theLOI amount will be held in escrow to cover additional sales charges which may bedue if your total investments over the LOI period are not sufficient to qualifyfor a sales charge reduction. For additional information regarding LOIs, see theaccount application and the Company's SAI under "Additional Information on the



Purchase and Redemption of Shares."

Waiver of All Class A Sales Charges. No sales charge is imposed on sales ofClass A shares for the following investors: (1) the Investment Manager, itsparent company, or any affiliate or subsidiary of the parent company; (2)present or former officers, directors, trustees and employees (and theirparents, spouses and dependent children) of the Company, the Investment Manager(including, its parent company or any affiliate or subsidiary of the parentcompany) or the Sub-advisors, and any retirement plans established by suchentities for their employees; (3) present partners and employees (and theirparents, spouses and dependent children) of the Company's or the Trust's legalcounsel; (4) present employees of the Transfer Agent and the administrator forthe Company and the Trust; (5) dealers that have a sales agreement with theDistributor, if they purchase shares for their own accounts or for retirementplans for their employees; (6) employees and registered representatives (andtheir parents, spouses and dependent children) of dealers or financialinstitutions that have entered into sales arrangements with such dealers (andare identified to the Distributor) or with the Distributor; the purchaser mustcertify to the Distributor at the time of purchase that the purchase is for thepurchaser's own account (or for the benefit of such employee's parents, spouse,parents of spouse, or minor children); or (7) dealers, brokers, registeredinvestment advisers or third-party administrators or consultants that haveentered into an agreement with the Distributor providing specifically for theuse of Fund shares in investment products or services made available to theirclients (those clients may be charged a transaction fee by their dealer, brokeror adviser for the purchase or sale of Fund shares).

Additionally, no sales charge is imposed on the following transactions:(1) shares issued in plans of reorganization, such as mergers, assetacquisitions and exchange offers, to which a Fund is a party; (2) sharespurchased by the reinvestment of loan repayments by a participant in aretirement plan; (3) shares purchased by the reinvestment of distributionsreceived from a Fund; (4) shares purchased and paid for with the proceeds ofshares redeemed in the prior 180 days from a mutual fund on which an initialsales charge or CDSC was paid (other than a mutual fund managed by theInvestment Manager or any of its affiliates); (5) purchases by formerparticipants in a qualified retirement plan, where a portion of the plan wasinvested in the Company; or (6) sponsored arrangements with organizations whichmake recommendations to or permit group solicitations of its employees, membersor participants.

In order for the above sales charge reductions or waivers to beeffective, the Transfer Agent must be notified of the reduction or waiverrequest when the purchase order is placed. The Transfer Agent may requireevidence of your qualification for such reductions or waivers. Additionalinformation about the above sales charge reductions or waivers can be obtainedfrom the Transfer Agent by calling 1-800-SKANDIA.

Waiver of Class A CDSC. The Class A CDSC is waived in the followingcases if shares are redeemed and the Transfer Agent is notified: (1) redemptionsunder a Systematic Withdrawal Plan as described in this Prospectus under"Special Investment Programs and Privileges"; (2) redemptions to pay premiumsfor optional insurance coverage described in this Prospectus under "SpecialInvestment Programs and Privileges"; (3) redemptions following death orpost-purchase disability (as defined by Section 72(m)(7) of the Code); (4)distributions or loans to participants of qualified retirement plans and otheremployee benefit plans; (5) mandated minimum distributions from an IRA, SIMPLEIRA or 403(b)(7) plan; (6) substantially equal periodic payments (as describedin Section 72(t) of the Code); (7) the return of excess contributions made toyour IRA, SIMPLE IRA, 403(b)(7) plan or 401(k) plan; and (8) involuntaryredemption due to the small size of the account.

Class A Distribution and Service Plan. The Company has adopted aDistribution and Service plan (commonly known as a "12b-1 Plan") for Class Ashares to compensate the Distributor for its services and costs in distributingClass A shares and servicing Class A shareholder accounts (the "Class A Plan").Under the Class A Plan, the Fund pays the Distributor 0.50% of the Fund'saverage daily net assets attributable to Class A shares, half of which isintended as a fee for services provided to existing shareholders. TheDistributor uses distribution and service fees received under the Class A Planto compensate qualified dealers, brokers, banks and other financial institutionsfor services provided in connection with the sale of Class A shares and themaintenance of shareholders accounts. Such compensation is paid by theDistributor quarterly at an annual rate not to exceed 0.50% of the Fund'saverage daily net assets attributable to Class A shares held in accounts of thedealer or its customers. The calculation of such payment excludes, until oneyear after purchase, shares purchased at NAV with a CDSC. NAV shares are notsubject to the one-year exclusion in cases where certain shareholders whoinvested $1 million or more have made arrangements with the Company and thedealer of record waives the sales commission.



PURCHASE OF CLASS B SHARES:

Class B shares are not available for "Qualified" purchases (including,but not limited to, purchases by IRAs, SIMPLE IRAs, 401(k) plans and 403(b)(7)plans). Any request for "Qualified" purchases of Class B shares will normally beconsidered as a purchase request for Class X shares or declined.

Class B shares are sold at NAV per share without an initial salescharge. However, if Class B shares are redeemed within 7 years of theirpurchase, a CDSC ("Class B CDSC") will be deducted from the redemption proceeds.The Class B CDSC will not apply to redemptions of shares purchased by thereinvestment of dividends or capital gains distributions and may be waived undercertain circumstances described below. The charge will be assessed on the lesserof the shares' NAV at the time of redemption or the original amount invested.The Class B CDSC is not imposed on the amount of any increase in your accountvalue over the initial amount invested. The Class B CDSC is paid to theDistributor to reimburse expenses incurred in providing distribution-relatedservices to the Fund in connection with the sale of Class B shares. Because inmost cases it is more advantageous for an investor to purchase Class A sharesfor amounts in excess of $250,000, orders for amounts of $250,000 or more willnormally be considered as a purchase request for Class A shares or declined.

To determine whether the Class B CDSC applies to a redemption, the Fundwill first redeem shares acquired by reinvestment of dividends and capital gainsdistributions, and then will redeem shares in the order in which they werepurchased (such that shares held the longest are redeemed first). The amount ofthe Class B CDSC will depend on the number of years since the time you investedand the dollar amount being redeemed, according to the following schedule

Redemption During: Class B CDSC (as % of amountsubject to charge):

1st year after purchase 6.0%2nd year after purchase 5.0%3rd year after purchase 4.0%4th year after purchase 3.0%5th year after purchase 2.0%6th year after purchase 2.0%7th year after purchase 1.0%8th year after purchase None

In the table, a "year" is a 12-month period. All purchases areconsidered to have been made on the first business day of the month in which thepurchase was made.

Waiver of Class B CDSC. The Class B CDSC will be waived in thefollowing cases if shares are redeemed and the Transfer Agent is notified: (1)redemptions under a Systematic Withdrawal Plan as described in this Prospectusunder "Special Investment Programs and Privileges"; (2) redemptions to paypremiums for optional insurance coverage described in this Prospectus under"Special Investment Programs and Privileges"; (3) redemptions following death orpost-purchase disability (as defined by Section 72(m)(7) of the Code); and (4)involuntary redemptions due to the small size of the account.

Automatic Conversion of Class B Shares. Eight years after you purchaseClass B shares of a Fund, those shares will automatically convert to Class Ashares of that Fund. This conversion feature relieves Class B shareholders ofthe higher asset-based distribution charge that applies to Class B shares underthe Class B Distribution and Service Plan described below. The conversion isbased on the relative NAV of the two classes, and no sales load or other chargeis imposed. At the time of conversion, a portion of the Class B shares purchasedthrough the reinvestment of dividends or capital gains ("Dividend Shares") willalso convert to Class A shares. The portion of Dividend Shares that will convertis determined by the ratio of your converting Class B non-Dividend Shares toyour total Class B non-Dividend Shares. Under Section 1036 of the Code, theautomatic conversion of Class B shares will not result in a gain or loss to theFund or to affected shareholders.

Class B Distribution and Service Plan. The Company has adopted aDistribution and Service plan (commonly known as a "12b-1 Plan") for Class Bshares to compensate the Distributor for its services and costs in distributingClass B shares and servicing Class B shareholder accounts (the "Class B Plan").Under the Class B Plan, the Fund pays the Distributor 1.00% of the Fund'saverage daily net assets attributable to Class B shares that are outstanding for8 years or less, 0.25% of which is intended as a fee for services provided toexisting shareholders. The Distributor uses distribution and service feesreceived under the Class B Plan to compensate qualified dealers, brokers, banksand other financial institutions for services provided in connection with thesale of Class B shares and the maintenance of shareholder accounts. Suchcompensation is paid by the Distributor quarterly at an annual rate not toexceed 0.50% of the Fund's average daily net assets attributable to Class Bshares (and any shares purchased by the reinvestment of dividends or capital



gains) held for over seven years. Although Class B shares are sold without aninitial sales charge, the Distributor currently pays a sales commission of 6.0%of the purchase price of Class B shares to the dealer from its own resources atthe time of the sale.

PURCHASE OF CLASS X SHARES:

Class X shares are currently only available for certain "Qualified"purchases (including, but not limited to, purchases by IRAs and SIMPLE IRAs).Any request for "Non-Qualified" purchases of Class X shares up to $250,000 willnormally be considered as a purchase request for Class B shares or declined. Anyrequest for "Non-Qualified" purchases of Class X shares above $250,000 will beconsidered as a purchase request for Class A shares or declined.

Class X shares are sold at NAV per share without an initial salescharge. In addition, investors purchasing Class X shares will receive, as abonus, additional shares having a value equal to 2.5% of the amount invested("Bonus Shares"). Bonus Shares shall be paid for by the Distributor. Sharespurchased by the reinvestment of dividends or capital gains distributions arenot eligible for Bonus Shares.

Although Class X shares are sold without an initial sales charge, ifClass X shares are redeemed within 7 years of their purchase, a CDSC ("Class XCDSC") will be deducted from the redemption proceeds. The Class X CDSC will notapply to redemptions of Bonus Shares or shares purchased by the reinvestment ofdividends or capital gains distributions and may be waived under certaincircumstances described below. The Class X CDSC will be assessed on the lesserof the NAV of the shares at the time of redemption or the original amountinvested. The Class X CDSC is not imposed on the amount of any increase in youraccount value over the initial amount invested. The Class X CDSC is paid to theDistributor to reimburse expenses incurred in providing distribution-relatedservices to the Fund in connection with the sale of Class X shares. Because itis more advantageous for an investor to purchase Class A shares for amounts inexcess of $1,000,000, orders for amounts of $1,000,000 or more will normally beconsidered as a purchase request for Class A shares or declined.

To determine whether the Class X CDSC applies to a redemption, the Fundredeems shares in the following order: (1) shares acquired by reinvestment ofdividends and capital gains distributions; (2) shares (including Bonus Shares)held for over 7 years; (3) shares (not including Bonus Shares) in the order theywere purchased (such that shares held the longest are redeemed first); and (4)Bonus Shares in the order they were acquired (such that Bonus Shares held thelongest are redeemed first). The amount of the Class X CDSC will depend on thenumber of years since the time you invested and the dollar amount beingredeemed, according to the following schedule:

Redemption During: Class X CDSC (as % of amount subjectto charge):


In the table, a "year" is a 12-month period. All purchases areconsidered to have been made on the first business day of the month in which thepurchase was made.

Waiver of Class X CDSC. The Class X CDSC will be waived in thefollowing cases if shares are redeemed, and the Transfer Agent is notified: (1)redemptions under a Systematic Withdrawal Plan as described in this Prospectusunder "Special Investment Programs and Privileges"; (2) redemptions to paypremiums for optional insurance coverage described in this Prospectus under"Special Investment Programs and Privileges"; (3) redemptions following death orpost-purchase disability (as defined by Section 72(m)(7) of the Code); (4)mandated minimum distributions from an IRA, SIMPLE IRA or an individual type403(b)(7) plan; (5) substantially equal periodic payments (as described inSection 72(t) of the Code); (6) the return of excess contributions from an IRAor SIMPLE IRA; and (7) involuntary redemptions due to the small size of theaccount.

Automatic Conversion of Class X Shares. Eight years after you purchaseClass X shares of a Fund, those shares will automatically convert to Class Ashares of that Fund. This conversion feature relieves Class X shareholders ofthe higher asset-based distribution charge that applies to Class X shares underthe Class X Distribution and Service Plan described below. The conversion isbased on the relative NAV of the two classes, and no sales load or other chargeis imposed. At the time of conversion, a portion of the Class X shares purchased



through the reinvestment of dividends or capital gains ("Dividend Shares") willalso convert to Class A shares. The portion of Dividend Shares that will convertis determined by the ratio of your converting Class X non-Dividend Shares toyour total Class X non-Dividend Shares. Under Section 1036 of the Code, theautomatic conversion of Class X shares will not result in a gain or loss to theFund or to affected shareholders.

Class X Distribution and Service Plan. The Company has adopted aDistribution and Service plan (commonly known as a "12b-1 Plan") for Class Xshares to compensate the Distributor for its services and costs in distributingClass X shares and servicing Class X shareholder accounts (the "Class X Plan").Under the Class X Plan, the Fund pays the Distributor 1.00% of the Fund'saverage daily net assets attributable to Class X shares that are outstanding for8 years or less, 0.25% of which is intended as a fee for services provided toexisting shareholders. The Distributor uses distribution and service feesreceived under the Class X Plan as reimbursement for its purchases of BonusShares, as well as to compensate qualified dealers, brokers, banks and otherfinancial institutions for services provided in connection with the sale ofClass X shares and the maintenance of shareholder accounts. Such lattercompensation is paid by the Distributor quarterly at an annual rate not toexceed 0.50% of the Fund's average daily net assets attributable to Class Xshares (and any shares purchased by the reinvestment of dividends or capitalgains as such shares) held for over seven years. Although Class X shares aresold without an initial sales charge, the Distributor currently pays a salescommission of 3.50% of the purchase price of Class X shares to the dealer fromits own resources at the time of the sale.

PURCHASE OF CLASS C SHARES:

Class C shares are sold at NAV per share without an initial salescharge. However, if Class C shares are redeemed within 12 months of the firstbusiness day of the calendar month of their purchase, a CDSC ("Class C CDSC") of1.0% will be deducted from the redemption proceeds. The Class C CDSC will notapply to redemptions of shares purchased by the reinvestment of dividends orcapital gains distributions and may be waived under certain circumstancesdescribed below. The charge will be assessed on the lesser of the NAV of theshares at the time of redemption or the original amount invested. The Class CCDSC is not imposed on the amount of any increase in your account value over theinitial amount invested. The Class C CDSC is paid to the Distributor toreimburse its expenses of providing distribution-related services to the Fund inconnection with the sale of Class C shares. Because it is more advantageous foran investor to purchase Class A shares for amounts in excess of $1,000,000,orders for amounts of $1,000,000 or more will be considered as a purchaserequest for Class A shares or declined.

To determine whether the Class C CDSC applies to a redemption, the Fundwill first redeem shares acquired by reinvestment of dividends and capital gainsdistributions, and then will redeem shares in the order in which they werepurchased (such that shares held the longest are redeemed first).

Waiver of Class C CDSC. The Class C CDSC will be waived in thefollowing cases if shares are redeemed and the Transfer Agent is notified: (1)redemptions under a Systematic Withdrawal Plan as described in this Prospectusunder "Special Investment Programs and Privileges"; (2) redemptions to paypremiums for optional insurance coverage described in this Prospectus under"Special Investment Programs and Privileges"; (3) redemptions following death orpost-purchase disability (as defined by Section 72(m)(7) of the Code); (4)distributions or loans to participants of qualified retirement plans and otheremployee benefit plans; (5) mandated minimum distributions from an IRA, SIMPLEIRA or an individual type 403(b)(7) plan; (6) substantially equal periodicpayments (as described in Section 72(f) of the Code); (7) the return of excesscontributions from an IRA, SIMPLE IRA or 401(k) plan; and (8) involuntaryredemptions due to the small size of the account.

Class C Distribution and Service Plan. The Company has adopted aDistribution and Service plan (commonly known as a "12b-1 Plan") for Class Cshares to compensate the Distributor for its services and costs in distributingClass C shares and servicing Class C shareholder accounts (the "Class C Plan").Under the Class C Plan, the Fund pays the Distributor 1.00% of the Fund'saverage daily net assets attributable to Class C shares, 0.25% of which isintended as a fee for services provided to existing shareholders. TheDistributor uses distribution and service fees received under the Class C Planto compensate qualified dealers, brokers, banks and other financial institutionsfor services provided in connection with the sale of Class C shares and themaintenance of shareholder accounts. The Distributor currently pays a 1.00% feeto dealers in advance upon sale of Class C shares and retains the fee paid bythe Fund in the first year. After the shares have been held for a year, theDistributor pays the fee to dealers on a quarterly basis.

SPECIAL INVESTMENT PROGRAMS AND PRIVILEGES



Electronic Transfers. You can initiate a purchase or redemption of Fundshares for as little as $50, or a redemption of Fund shares for as much as$50,000, between your bank account and Fund account using the Automated ClearingHouse ("ACH") network. Initial purchase minimums and sales charges will apply.

Automatic Investment Plans ("AIP"). You may make regular monthlyinvestments through an automatic withdrawal from your bank account ($50 minimumper Fund). Sales charges will apply.

Automatic Dividend Reinvestment. Unless you indicate otherwise on youraccount application, your dividend and capital gains distributions willautomatically be reinvested in additional shares at no sales charge.

Automatic Dividend Diversification ("ADD"). You may automaticallyreinvest dividends and capital gains distributions paid by one Fund into sharesof the same class of another Fund, provided that you have already met thatFund's minimum initial purchase requirement. No initial sales charge or CDSCwill apply to the purchased shares. The number of shares purchased through anADD investment program will be determined by using the NAV of the Fund in whichdividends will be reinvested next computed after the dividend payment is made.All shareholder accounts involved in an ADD investment program must haveidentical registrations.

Dollar Cost Averaging ("DCA"). You can set up monthly or quarterlyexchanges in amounts of $50 or more from one Fund to the same class of shares ofanother Fund providing the latter is currently available for sale. You may setup more than one of these programs simultaneously. A shareholder should considerthe investment objectives and policies of a Fund before electing to exchangemoney into such Fund through the DCA investment program. All shareholderaccounts involved in a DCA investment program must have identical registrations.

Systematic Withdrawal Plans ("SWPs"). You may set up monthly,quarterly, semi-annual or annual redemptions from any account with a value of$5,000 or more. You may direct a Fund to make regular payments in fixed dollaramounts of $50 or more, or in an amount equal to the value of a fixed number ofshares (5 shares or more) at the time of withdrawal. SWP redemptions for Class Aand Class C shares are limited to no more than 10% annually of the originalamount invested. SWP redemption for Class B and Class X shares are limited to nomore than 10% annually of the account value measured from the date the TransferAgent receives the redemption request.

Payments under a SWP can be directed to you or to someone other thanthe registered owner(s) of the account subject to the Fund's approval. If thisprivilege is requested when the account is established, no signature guaranteeis needed. If this privilege is added to an existing account and payments aredirected to someone other than the registered owners(s) of the account, asignature guarantee is required on the SWP application. The Company reserves theright to institute a charge for this service.

Exchange Privilege. You may exchange your shares of a Fund for sharesof the same class of any other Fund. You should consider the differences ininvestment objectives and expenses of a Fund as described in this Prospectusbefore making an exchange. For complete policies and restrictions governingexchanges, including circumstances under which a shareholder's exchangeprivilege may be suspended or revoked, see this Prospectus under "How toExchange Shares."

Reinvestment Privilege. If you redeem some or all of your Class A, B orX Fund shares, you have up to 180 days to reinvest all or part of the redemptionproceeds in Class A shares of the Fund without paying a sales charge. Thisprivilege applies to redemptions of Class A shares on which an initial ordeferred sales charge was paid and to redemptions of Class B and Class X shareson which you paid a CDSC when you redeemed them. You must ask the Transfer Agentfor this privilege when you send your payment.

Retirement Plans. Certain classes of Fund shares are available as aninvestment option for your retirement plans. If you participate in a plansponsored by your employer, the plan trustee or administrator must make thepurchase of shares for your retirement plan account. A number of differentretirement plans can be used by individuals and employers including IRAs, SIMPLEIRAs, 403(b)(7) plans and 401(k) plans. Please call 1-800-SKANDIA for theapplicable plan documents, which contain important information and applications.

The above programs and privileges may be selected at the time of yourinitial investment or at a later date.

Optional Benefits. American Skandia Life Assurance Corporation("ASLAC") -- an "affiliated person" of the Company, the Trust, the InvestmentManager and the Distributor within the meaning of the 1940 Act -- intends tomake certain life insurance coverage available to certain persons on whosebehalf shares of the Funds are purchased. The benefits of this coverage payableat death will be related to the amounts paid to purchase shares and to the valueof the shares held for the benefit of the insured persons. Therefore, coverage



will terminate if all shares are redeemed.

Purchasers of the life insurance coverage are required to authorizeperiodic redemptions of Fund shares to pay the premiums for such coverage. Suchredemptions will not be subject to contingent deferred sales charges, but willhave the same tax consequences as any other Fund redemptions.

The above life insurance coverage will be available to eligible personswho enroll for the coverage within a limited time period after shares in anyFund are initially purchased or transferred. In addition, coverage cannot bemade available unless ASLAC knows for whose benefit shares are purchased. Forinstance, coverage cannot be made available for shares registered in the name ofyour broker unless the broker provides ASLAC with information regarding thebeneficial owners of such shares. Other restrictions on the coverage will apply,such as the age of the persons upon whose life the coverage is issued. Thisinsurance coverage may not be available in all states and may be subject toadditional restrictions or limitations on coverage. Purchasers of shares shouldalso make themselves familiar with the impact on the life coverage of purchasingadditional shares, reinvestment of dividends and capital gains distributions andredemptions.

Please call 1-800-SKANDIA for more information and application formsfor any of the above programs and privileges.

HOW TO REDEEM SHARES

You can arrange to take money out of your Fund account on any businessday by redeeming some or all of your shares. Your shares will be sold at thenext NAV calculated after your order is received in good order and accepted bythe Transfer Agent. The Company offers you a number of ways to sell your shares:in writing, by telephone, by ACH bank transfer, by wire transfer or other meansacceptable to the Company. You can also set up a Systematic Withdrawal Plan toredeem shares on a regular basis (as described in this Prospectus under "SpecialInvestment Programs and Privileges").

If you hold Fund shares through a retirement account, call the TransferAgent in advance for additional information and any necessary forms. There arespecial income tax withholding requirements for distributions from retirementplans and you must submit a withholding form with your request to avoid delay.If your retirement plan account is held for you by your employer, you mustarrange for the distribution request to be sent by the plan administrator ortrustee.

REDEEMING SHARES BY MAIL:

If you want to redeem your shares by mail, write a "letter ofinstruction" that includes the following information:

o Your nameo Fund's nameo Your Fund account number (from your account statement)o Dollar amount or number of shares to be redeemedo Any special payment instructionso Signatures of all registered owners exactly as the

account is registeredo Any special requirements or documents requested by the Transfer

Agent to assure proper authorization of theperson requesting the redemption

Send Requests by Regular Mail to: Send Requests by Courier orExpress Mail to:

American Skandia Advisor Funds, Inc. American Skandia Advisor Funds, Inc.P.O. Box 8012 Two Heritage DriveBoston, Massachusetts 02266-8012 North Quincy, Massachusetts 02171-2138

REDEEMING SHARES BY TELEPHONE:

You may also redeem shares by telephone by calling 1-800-SKANDIA. Toreceive the redemption price calculated on the business day that you call, yourcall must be received by the Transfer Agent before the close of the NYSE thatday, which is normally 4:00 P.M., Eastern Time. Shares held in tax-qualifiedretirement plans may not be redeemed by telephone. You may have a check sent tothe address on the account statement, or, if you have linked your Fund accountto your bank account, you may have the proceeds transferred to that bankaccount.

Telephone Redemptions Paid By Check. You may make one redemptionrequest by telephone in any 7-day period for any amount up to $50,000. The checkmust be payable to all owners of record of the shares and must be sent to theaddress on the account. This service is not available within 30 days afterchanging the address on an account.



Telephone Redemptions Through Bank-Linked Accounts. If you haveselected this option on your account application, you may link your Fund accountto your designated bank account. There are no dollar limits on telephoneredemption proceeds sent to a bank-linked account. Normally the AutomatedClearing House ("ACH") transfer to your bank is initiated on the business dayafter the redemption.

REDEEMING SHARES THROUGH YOUR BROKER:

The Distributor has made arrangements to redeem Fund shares for brokerson behalf of their customers. Brokers may charge for this service. TheDistributor, acting as agent for the Funds, stands ready to redeem each Fund'sshares upon orders from brokers at the offering price next determined afterreceipt of the order.

ADDITIONAL INFORMATION:

To protect you and the Fund from fraud, redemption requests under thefollowing situations must be in writing and must include a signature guarantee(there may be other situations also requiring a signature guarantee at thediscretion of the Company or the Transfer Agent):

o You wish to redeem more than $50,000 worth of shares and receive acheck o A redemption check is not payable to all shareholders listed onthe account statement o A redemption check is not sent to the addressof record on your statement o Shares are being transferred to a Fundaccount with a different owner or name o Shares are redeemed by someoneother than the owners (such as an Executor)

The Transfer Agent may delay forwarding a check or processing a paymentvia bank-linked account for the sale of recently purchased shares, but onlyuntil the purchase payment has cleared. Such delay may be as long as 15 calendardays from the date the shares were purchased, and may be avoided if you purchaseshares by certified check. You may be charged a fee of up to $10 for wiretransfers of redemption proceeds, which will be deducted from such proceeds.There is no fee for ACH wire transfers.

If you have any questions about any of the above procedures, andespecially if you are redeeming shares in a special situation, such as due tothe death of the owner, or from a retirement plan, please call 1-800-SKANDIA forassistance.

HOW TO EXCHANGE SHARES

In most cases, shares of a Fund may be exchanged for shares of the sameclass of other Funds at NAV per share at the time of exchange. Exchanges ofshares involve a redemption of the shares of the Fund you own and a purchase ofshares of another Fund. Shares are normally redeemed from one Fund and purchasedfrom the other Fund in the exchange transaction on the same business day onwhich the Transfer Agent receives an exchange request that is in proper form bythe close of the NYSE that day. Exchanges may be taxable transactions and may besubject to special tax rules about which you should consult your own taxadviser.

You may exchange your Fund shares for shares of the same class of anyother Fund without the imposition of a sales charge. If you exchange such sharesfor shares of another Fund, any applicable CDSC will be calculated based on thedate on which you acquired the original shares. Investors will not receive BonusShares where Class X shares are obtained through an exchange.

Exchanges may be requested in writing, by telephone or by other meansacceptable to the Company. For written exchange requests you should submit aletter of instruction, signed by all owners of the account, to the TransferAgent at P.O. Box 8012, Boston, Massachusetts 02266-8012. To initiate atelephone exchange, you should call 1-800-SKANDIA.

All exchanges are subject to the following restrictions:

o The Fund you are exchanging into must be registered for sale inyour state.

You may exchange only between Funds that are registered in thesame name, address and taxpayer identification number.

o You may only exchange for shares of the same class of anotherFund.

o You must meet the minimum purchase requirements for the Fund youpurchase by exchange.

o You must hold the shares you purchase when you establish your Fundaccount for at least 7 days before you can exchange them. There isno holding period if you acquired the shares to be exchanged



through reinvestment of dividends or distributions.

Each Fund reserves the right to refuse or delay exchanges by any personor group if, in the Investment Manager's judgment, a Fund would be unable toinvest the money effectively in accordance with its investment objective andpolicies, or would otherwise potentially be adversely affected. Your exchangesmay also be restricted or refused if a Fund receives or anticipates simultaneousorders affecting significant portions of the Fund's assets. In particular, apattern of exchanges that coincides with a "market timing" strategy may bedisruptive to the Fund.

Although a Fund will attempt to give you prior notice whenever it isreasonably able to do so, it may impose the above restrictions at any time. EachFund reserves the right to terminate or modify the exchange privilege in thefuture.


The net asset value ("NAV") per share is determined for each class ofshares for each Fund as of the close of the NYSE (normally 4:00 p.m. EasternTime) on each business day (as previously defined under "How to Buy Shares:Purchase Orders") by dividing the value of the Fund or Portfolio's total assetsattributable to a class, less any liabilities, by the number of total shares ofthat class outstanding. The total assets of each Non-Feeder Fund and Portfoliois determined by the market value of securities the Fund or Portfolio holds plusany cash and other assets maintained. The total assets of each Feeder Fund, incomparison, is determined by the Fund's percentage interest in its correspondingPortfolio, multiplied by the Portfolio's NAV, plus any other asset held by theFund.

The assets of each Non-Feeder Fund and Portfolio (except the ASMT JPMMoney Market Portfolio) are valued primarily on the basis of market quotations.If quotations are not readily available, assets are valued by a method that theDirectors of the Company or Trustees of the Trust, where applicable, believeaccurately reflects fair value. Foreign securities are valued on the basis ofquotations from the primary market in which they are traded, and are translatedfrom the local currency into U.S. dollars using current exchange rates. Theassets of the ASMT JPM Money Market Portfolio are valued by the amortized costmethod pursuant to procedures established by the Directors of the Company andthe Trustees of the Trust. With respect to all Funds and Portfolios, short-terminvestments that will mature in 60 days or less are valued at amortized cost,which is intended to approximate market value.

SHAREHOLDER ACCOUNT RULES AND POLICIES

o The offering of Fund shares may be suspended during any period inwhich the determination of NAV is suspended, and the offering may be suspendedby the Directors of the Company at any time they believe it is in the Fund'sbest interest to do so.

o Telephone transaction privileges or privileges using electronic meansfor purchases, redemptions or exchanges may be modified, suspended or terminatedby a Fund at any time. If an account has more than one owner, the Fund and theTransfer Agent may rely on the instructions of any one owner. Telephoneprivileges apply to each owner of the account and the dealer representative ofrecord for the account unless and until the Transfer Agent receives instructionsfrom an owner of the account indicating otherwise. The Transfer Agent willrecord any telephone calls to verify data concerning transactions and hasadopted other procedures to confirm that telephone instructions or instructionsreceived by electronic means are genuine. If the Company does not use reasonableprocedures the Company or its agents may be liable for losses due tounauthorized transactions, but otherwise the Company or its agents will not beliable for losses or expenses arising out of telephone instructions or otherelectronic means that are reasonably believed to be genuine. If you are unableto reach the Transfer Agent during periods of unusual market activity, you maynot be able to complete a telephone transaction and should consider placing yourorder by mail.

o Purchase, redemption or exchange requests will not be honored until theTransfer Agent receives all required documents in proper form.

o Share certificates will not be issued for the Company's shares.

o Brokers that can perform account transactions for their clients throughthe National Securities Clearing Corporation are responsible for obtaining theirclients' permission to perform those transactions and are responsible to theirclients who are shareholders of a Fund if the dealer performs any transactionerroneously or improperly.

o All purchases must be made in U.S. dollars and checks must be drawn onU.S. banks. You may not purchase shares with a third-party check.



o Payment for redeemed shares is forwarded ordinarily by check or throughthe bank-linked service (as elected by the shareholder) within 7 calendar daysafter the business day on which the Transfer Agent receives redemptioninstructions in proper form. Payment will be forwarded within 3 business daysfor accounts registered in the name of a dealer. Redemptions may be suspended orpayment dates postponed when the NYSE is closed (other than weekends orholidays), when trading is restricted or as permitted by the Commission.

o Involuntary redemptions of small accounts may be made by a Fund if theaccount value has fallen below $500 (for reasons other than a drop in marketvalue of shares) and at least 30 days notice has been given to the shareholder.

o Under unusual circumstances shares of a Fund may be redeemed "in kind,"which means that the redemption proceeds will be paid with securities from theFund's portfolio of securities. For additional information regarding suchredemptions, see the Company's SAI under "Additional Information on the Purchaseand Redemption of Shares."

o "Backup withholding" of Federal income tax may be applied at the rate of31% from dividends, distributions and redemption proceeds (including exchanges)if you fail to furnish the Fund a certified Social Security or EmployerIdentification Number when you sign your application, or if you violate InternalRevenue Service regulations on the reporting of income.

o The Company does not charge a transaction fee, but if your broker handlesyour redemption, your broker may charge a fee. Such fee can be avoided byredeeming your Fund shares directly through the Transfer Agent. You may besubject to a CDSC under the circumstances described in this Prospectus under"How To Buy Shares."

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

The Funds are separate series of shares of the Company, a MarylandCorporation established on March 5, 1997 and registered under the 1940 Act as anopen-end management investment company. Each Fund has its own investmentobjective, policies and limitations, and operates as a diversified portfolio asdefined in the 1940 Act. The Funds each intend to be treated as a regulatedinvestment company for federal income tax purposes. Five of the Funds, theFeeder Funds, currently invest all of their investable assets in a correspondingPortfolio of the Trust, in each case receiving a beneficial interest in thatPortfolio. The Portfolios are separate series of shares of the Trust, a Delawarebusiness trust established on March 6, 1997, and intend to be treated as apartnership for federal tax purposes. Those Funds which do not currently investall of their investable assets in a corresponding Portfolio of the Trust, theNon-Feeder Funds, retain the right to do so in the future. Each Portfolio, aswell as the Trust, intends to comply with all applicable federal and statesecurities laws. For additional information regarding the Feeder Funds'investment in the Portfolios of the Trust, see this Prospectus under "SpecialInformation on the 'Master/Feeder' Fund Structure."

Capital Stock. The authorized capital stock of the Company consists ofthe following shares (par value $.001 per share): ASAF Founders InternationalSmall Capitalization Fund (1.575 million); ASAF T. Rowe Price InternationalEquity Fund (2.1 million); ASAF Founders Small Capitalization Fund (2.1million); ASAF T. Rowe Price Small Company Value Fund (2.1 million); ASAF JanusCapital Growth Fund (4.25 million); ASAF INVESCO Equity Income Fund (2.1million); ASAF American Century Strategic Balanced Fund (1.575 million); ASAFFederated High Yield Bond Fund (2.1 million); ASAF Total Return Bond Fund (2.1million); and ASAF JPM Money Market Fund (20 million).

Description of Shares. The Company currently has ten separate series ofshares, each of which is divided into Class A, B, C and X shares. The Directorsof the Company are authorized to establish, from time to time and withoutshareholder approval, additional series or classes of shares. The assets of eachseries of shares belong only to that series, and the liabilities of each seriesare borne solely by that series and no other. Shares of each Fund representequal proportionate interests in the assets of that Fund only and have identicalvoting, dividend, redemption, liquidation, and other rights. Each class ofshares, however, bears different sales charges, distribution fees and relatedexpenses, and has exclusive voting rights with respect to its respective 12b-1Distribution and Service Plan. All shares issued are fully paid, non-assessableand freely transferable, and have no preference, preemptive or similar rights.As of the date of this Prospectus, American Skandia Investment Services,Incorporated, which contributed the initial capital of the Funds, owned 100% ofthe Funds' outstanding shares.

Shareholder Voting and Meetings. Each shareholder is entitle to onevote for each share (and to the appropriate fractional vote for each fractionalshare) of the Funds held upon all matters submitted to the shareholdersgenerally. Shareholders of all Funds and classes will vote together as a single



class, except when otherwise required by applicable law or as determined by theDirectors of the Company; and provided that shareholders of a particular Fund orclass shall not be entitled to vote on any matter which does not affect anyinterest of that Fund or class, except as otherwise required by applicable law.The Directors of the Company do not intend to hold annual meetings ofshareholders of the Funds, and will call special meetings of shareholders of aFund only if required under the 1940 Act and other applicable law, in theirdiscretion or upon written request of holders of 10% or more of the outstandingshares of that Fund entitled to vote.

Certain Provisions. Under the Maryland General Corporation Law, aDirector of the Company who is held liable for assenting to a distribution madein violation of the Company's Articles of Incorporation is entitled tocontribution from each shareholder of the Company for the amount the shareholderaccepted knowing the distribution was made in violation of those provisions.Absent such knowledge, a shareholder will not be obligated to the Company or itscreditors in respect of shares held in the Company except to the extent of anyunpaid portion of the subscription price or purchase price for such shares.

SPECIAL INFORMATION ON THE"MASTER/FEEDER" FUND STRUCTURE

An investor in the Feeder Funds should be aware that these Funds,unlike mutual funds which directly acquire and manage their own portfolios ofsecurities, seek to achieve their investment objectives by investing all oftheir investable assets in a corresponding Portfolio of the Trust (although eachFeeder Fund may temporarily hold a de minimis amount of cash). The Portfolios ofthe Trust, which have the same investment objective, policies and limitations astheir corresponding Feeder Fund, in turn invest their investable assets directlyin a portfolio of securities. Each of the Feeder Funds thus acquires an indirectinterest in the securities owned by its corresponding Portfolio.

Each Feeder Fund's investment in its corresponding Portfolio is in theform of a non-transferable beneficial interest. Members of the general publicmay not purchase a direct interest in a Portfolio of the Trust. However, inaddition to selling an interest to its corresponding Feeder Fund, each Portfoliomay sell interests to other affiliated and non-affiliated investment companiesand/or institutional investors. Such investors will invest in a Portfolio on thesame terms and conditions as its corresponding Feeder Fund and will pay aproportionate share of the Portfolio's expenses. Other investors investing in aPortfolio, however, are not required to sell their shares at the same publicoffering price as the corresponding Feeder Fund due to variations in salescommissions and other operating expenses. Therefore, investors in each of theFeeder Funds should be aware that these differences may result in differences inreturns experienced by investors in other investment companies which may investexclusively in the Portfolios. Such differences in returns are also present inother mutual fund structures, including funds that have multiple classes ofshares. Currently, of the investment companies which may invest in thePortfolios, only shares of the Feeder Funds are available for purchase by thegeneral public in the United States. Information regarding the availability ofshares of any other fund that may invest in a Portfolio in the future can beobtained by calling 1-800-SKANDIA.

The Directors of the Company believe that the "master/feeder" fundstructure offers opportunities for substantial growth in the assets of thePortfolios that may enable the Portfolios to realize economies of scale thatcould reduce the Portfolios' operating expenses, thereby producing higherreturns and benefiting the shareholders of the Feeder Funds. A Feeder Fund'sinvestment in its corresponding Portfolio may, however, be adversely affected bythe actions of other investors in the Portfolio, if any. For example, if a largeinvestor withdraws from a Portfolio, the remaining investors may experiencehigher pro rata operating expenses, thereby producing lower returns.Additionally, a Portfolio may become less diverse, resulting in increasedportfolio risk, and experience decreasing economies of scale. However, thispossibility exists as well for traditionally structured funds which have largeor institutional investors. Funds which invest all their assets in interests ina separate investment company are a relatively new development in the mutualfund industry and, therefore, may be subject to additional regulations thantraditionally structured mutual funds.

Each of the Feeder Funds may withdraw (completely redeem) all of itsassets from its corresponding Portfolio at any time if the Directors of theCompany determine that it is in the best interest of the Fund to do so. A FeederFund might withdraw, for example, if other investors in the Fund's correspondingPortfolio voted to, by a vote of all investors in the Portfolio (including theFund), change the investment objective, policies or limitations of the Portfolioin a manner not acceptable to the Directors of the Company. The investmentperformance of a Feeder Fund may be affected by a withdrawal of all its assetsfrom a corresponding Portfolio. A withdrawal could also result in a distribution"in kind" of portfolio securities (as opposed to a cash distribution) by thePortfolio to the Feeder Fund. If securities are distributed, the Feeder Fundcould incur brokerage, tax or other charges in converting the securities to cashor purchasing other securities. In addition, a distribution "in kind" may result



in a less diversified portfolio of investments or adversely affect the liquidityof the Feeder Fund's investment portfolio. In the event a Feeder Fund withdrawsall of its assets from its corresponding Portfolio, or the Directors of theCompany determines that the investment objective of a Portfolio is no longerconsistent with the investment objective of its corresponding Feeder Fund, suchDirectors would consider what action might be taken, including investing all ofthe Fund's investable assets in another pooled investment entity havingsubstantially the same investment objective as the Fund or retaining aninvestment adviser to manage the Fund's assets directly in accordance with theFund's investment objective, policies and limitations.

The Trust's Agreement and Declaration of Trust provides that aPortfolio will continue without limitation of time unless terminated by vote ofinvestors holding at least a majority of the interests of such Portfolioentitled to vote or by the Trustees of the Trust by written notice to investorsof such Portfolio. This provision is consistent with treatment of each Portfolioas a partnership for federal income tax purposes.

Investor Meetings and Voting. Each Portfolio normally will not holdmeetings of investors except as required by the 1940 Act. Each investor in aPortfolio (including a Feeder Fund) will be entitled to vote in proportion toits relative beneficial interest in the Portfolio. Whenever a Feeder Fund as aninvestor in a Portfolio is requested to vote on matters pertaining to aPortfolio (other than the termination of a Portfolio's business, which may bedetermined by the Trustees of the Trust without investor approval), such Fundwill hold a meeting of Fund shareholders and will vote its interest in suchPortfolio for or against such matters proportionately to the instructions tovote for or against such matters received from Fund shareholders. Otherinvestors in the Portfolio may alone or collectively acquire sufficient votinginterests in the Portfolio to control matters relating to the operation of thePortfolio, which could cause or require the Fund to withdraw its investment inthe Portfolio or take other appropriate action.

Certain Provisions. The Trust's Agreement and Declaration of Trustprovides that the Feeder Funds and any other entities permitted to invest in aPortfolio of the Trust (e.g., other U.S. and foreign investment companies, andcommon and commingled trust funds) will each be liable for all obligations ofeach such Portfolio in the event that the Trust fails to satisfy suchliabilities and obligations. However, the risk of an investor in a Portfolio(including a Feeder Fund) incurring financial loss beyond the amount of itsinvestment on account of such liability is limited to circumstances in which thePortfolio had inadequate insurance and was unable to meet its obligations out ofits assets. Accordingly, the Trustees of the Trust believe that neither a FeederFund nor its shareholders will be adversely affected by reason of the Fundinvesting in a corresponding Portfolio of the Trust.

MANAGEMENT OF THE FUNDS

THE DIRECTORS, TRUSTEES AND OFFICERS:

The Directors of the Company and the Trustees of the Trust haveoversight responsibility for the operations of each Fund and Portfolio,respectively. As of the date of this Prospectus, each of the Directors of theCompany also serves as a Trustee of the Trust. The Directors of the Company andthe Trustees of the Trust, including a majority of the Directors and Trusteeswho are not "interested persons" (as defined in the 1940 Act) of the Company orthe Trust, respectively, have adopted written procedures designed to identifyand reasonably address any potential conflicts of interest which might arise asa result of an "overlap" of Directors and Trustees, including, if necessary, thecreation of a separate board of trustees of the Trust. For additionalinformation concerning the Directors and officers of the Company, see theCompany's SAI under "Management of the Company."

THE INVESTMENT MANAGER:

American Skandia Investment Services, Incorporated ("ASISI," aspreviously defined), One Corporate Drive, Shelton, Connecticut 06484, acts asinvestment manager to each of the Non-Feeder Funds and Portfolios pursuant toseparate investment management agreements with the Company and the Trust,respectively (the "Management Agreements"). Unlike the Non-Feeder Funds, each ofthe Feeder Funds invests all of its investable assets in a correspondingPortfolio of the Trust and thus does not require an investment manager. ASISI, aConnecticut corporation organized in 1991, is registered as an investmentadviser with the Commission and is a wholly-owned subsidiary of American SkandiaInvestment Holding Corporation, whose indirect parent is Skandia InsuranceCompany Ltd. ("Skandia"). Skandia is a Swedish company that owns, directly orindirectly, a number of insurance companies in many countries.

In addition to serving as investment manager to the Company and theTrust, ASISI currently serves as the investment manager to American SkandiaTrust, an open-end management investment company whose shares are made availableto life insurance companies writing variable annuity contracts and variable lifeinsurance policies. Shares of American Skandia Trust also may be offered



directly to qualified pension and retirement plans.

The Management Agreements provide that ASISI will furnish eachNon-Feeder Fund and Portfolio with investment advice and investment managementand administrative services subject to the supervision of the Directors of theCompany or the Trustees of the Trusts, where applicable, and in conformity withthe stated investment objectives, policies and limitations of the applicableFund or Portfolio. The Investment Manager is responsible for monitoring theactivities of the Sub-advisors it engages to manage the Non-Feeder Funds andPortfolios and reporting on such activities to the Directors of the Company orthe Trustees of the Trust, where applicable. The Investment Manager must alsoprovide or obtain for the Non-Feeder Funds and the Portfolios, and thereaftersupervise, such executive, administrative, accounting custody, transfer agentand shareholder servicing services as are deemed advisable by the Directors ofthe Company or the Trustees of the Trust, where applicable.

THE SUB-ADVISORS:

ASISI currently engages the following Sub-advisors to conduct theinvestment programs of each Non-Feeder Fund and Portfolio in accordance with theFund or Portfolio's investment objective, policies and limitations and anyinvestment guidelines established by the Investment Manager. Each Sub-advisor isresponsible for, subject to the supervision and control of the InvestmentManager, the purchase, retention and disposition of securities represented inthe Fund or Portfolio's investment portfolio.

Founders Asset Management, Inc. ("Founders") serves as Sub-advisor forthe ASAF Founders International Small Capitalization Fund and the ASAF FoundersSmall Capitalization Fund. Founders, located at Founders Financial Center, 2930East Third Avenue, Denver, Colorado 80206, has acted as an investment advisorsince 1938 and serves as investment advisor to Founders Discovery, Frontier,Passport, Special, International Equity, Worldwide Growth, Growth, Blue Chip,Balanced, Government Securities, and Money Market Funds. Founders, which is alsothe investment advisor for a number of private accounts, managed assetsaggregating approximately $5.1 billion as of March 31, 1997.

The portfolio manager responsible for the day-to-day management of the ASAFFounders International Small Capitalization Fund is Michael W. Gerding, a VicePresident of Investments of Founders. Mr. Gerding is a chartered financialanalyst who has been part of Founders' investment department since 1990. Priorto joining Founders, Mr. Gerding served as a portfolio manager and researchanalyst with NCNB Texas for several years.

The portfolio manager responsible for the day-to-day management of theASAF Founders Small Capitalization Fund is Michael K. Haines, a Senior VicePresident of Investments of Founders. Mr. Haines has been associated withFounders since 1985, serving as a lead portfolio manager and an assistantportfolio manager.

Rowe Price-Fleming International, Inc. ("Price-Fleming") serves asSub-advisor for the ASMT T. Rowe Price International Equity Portfolio.Price-Fleming, located at 100 East Pratt Street, Baltimore, Maryland 21202, wasfounded in 1979 as a joint venture between T. Rowe Price Associates, Inc. andRobert Fleming Holdings Limited. Price-Fleming is one of the world's largestinternational mutual fund asset managers with approximately $25 billion undermanagement as of March 31, 1997 in its offices in Baltimore, London, Tokyo, HongKong and Singapore.

An investment advisory group has responsibility for the day-to-daymanagement of the ASMT T. Rowe Price International Equity Portfolio. Theadvisory group for the Portfolio consists of Martin G. Wade, Christopher D.Alderson, Peter B. Askew, Mark J.T. Edwards, John R. Ford, James B.M. Seddon,Benedict R.F. Thomas, and David J.L. Warren. Martin Wade joined Price-Fleming in1979 and has 27 years of experience with Fleming Group (Fleming Group includesRobert Fleming Holdings Ltd. and/or Jardine Fleming International Holdings Ltd.)in research, client service and investment management. Christopher Aldersonjoined Price-Fleming in 1988, and has 10 years of experience with the FlemingGroup in research and portfolio management. Peter Askew joined Price-Fleming in1988 and has 21 years of experience managing multicurrency fixed incomeportfolios. Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years ofexperience in financial analysis. John R. Ford joined Price-Fleming in 1982 andhas 16 years of experience with Fleming Group in research and portfoliomanagement. James B.M. Seddon joined Price-Fleming in 1987 and has 11 years ofexperience in investment management. Benedict R.F. Thomas joined Price-Flemingin 1988 and has 7 years of portfolio management experience. David J.L. Warrenjoined Price-Fleming in 1984 and has 16 years experience in equity research,fixed income research and portfolio management.



T. Rowe Price Associates, Inc. ("T. Rowe Price") serves as Sub-advisor forthe ASAF T. Rowe Price Small Company Value Fund. T. Rowe Price, located at 100East Pratt Street, Baltimore, Maryland 21202, was founded in 1937 by the lateThomas Rowe Price, Jr. As of March 31, 1997, T. Rowe Price and its affiliatesmanaged over $100 billion for approximately 4.5 million individual andinstitutional accounts.

The ASAF T. Rowe Price Small Company Value Fund is managed by an InvestmentAdvisory Committee composed of the following members: Preston G. Athey,Chairman, Hugh M. Evans III and Gregory A. McCrickard. The Committee Chairmanhas day-to-day responsibility for managing the Portfolio and works with theCommittee in developing and executing the Portfolio's investment program. Mr.Athey joined T. Rowe Price in 1978 and has been managing investments since 1982.

Janus Capital Corporation ("Janus") serves as Sub-advisor for the ASMTJanus Capital Growth Portfolio. Janus, located at 100 Fillmore Street, Denver,Colorado 80206-4923, serves as the investment advisor to the Janus Funds, aswell as advisor or sub-advisor to several other mutual funds and individual,corporate, charitable and retirement accounts. As of March 31, 1997, Janusmanaged assets worth approximately $50 billion. Kansas City Southern Industries,Inc. ("KCSI") owns approximately 83% of the outstanding voting stock of Janus,most of which it acquired in 1984. KCSI is a publicly-traded holding companywhose primary subsidiaries are engaged in transportation and financial services.

The portfolio manager responsible for day-to-day management of the ASMTJanus Capital Growth Portfolio is Thomas F. Marsico. Mr. Marsico has managedJanus Growth and Income Fund since its inception in May 1991 and Janus TwentyFund since April 1985.

INVESCO Trust Company ("INVESCO") serves as Sub-advisor for the ASMTINVESCO Equity Income Portfolio. INVESCO, a trust company founded in 1969 andlocated at 7800 East Union Avenue, P.O. Box 173706, Denver, Colorado 80217-3706,is a wholly-owned subsidiary of INVESCO Funds Group, Inc., which was establishedin 1932. INVESCO serves as sub-advisor to INVESCO Growth Fund, Inc., INVESCODynamics Fund, Inc., INVESCO Money Market Funds, Inc., INVESCO Income Funds,Inc., INVESCO Tax-Free Income Funds, Inc., INVESCO Strategic Portfolios, Inc.,INVESCO Emerging Opportunity Funds, Inc., INVESCO Industrial Income Fund, Inc.,INVESCO Multiple Asset Funds, Inc., INVESCO Specialty Funds, Inc., INVESCOStrategic Portfolios, Inc. and INVESCO Variable Investment Funds, Inc. INVESCOFunds Group, Inc. and INVESCO are part of a global financial services firm thatmanaged approximately $160 billion of assets as of March 31, 1997. AMVESCAP PLC(formerly, "INVESCO PLC"), the parent of INVESCO Funds Group, Inc. and INVESCO,is one of the largest independent investment management businesses in the world.

The portfolio managers responsible for the day-to-day management of theASMT INVESCO Equity Income Portfolio are Charles P. Mayer, Portfolio Co-Manager,and Donovan J. (Jerry) Paul, Portfolio Co-Manager. Mr. Mayer began hisinvestment career in 1969 and is now a senior vice president of INVESCO. From1993 to 1994, he was vice president of INVESCO, and from 1984 to 1993, he was aportfolio manager with Westinghouse Pension. Mr. Paul entered the investmentmanagement industry in 1976 and has been a senior vice president of INVESCOsince 1994. From 1993 to 1994, he was president of Quixote InvestmentManagement, Inc. From 1987 to 1992, Mr. Paul was a portfolio manager, and from1989 to 1992 he was senior vice president and director of fixed-income researchwith Stein, Roe & Farnham, Inc.

American Century Investment Management, Inc. ("American Century,"formally known as, "Investors Research Corporation") serves as Sub-advisor forthe ASAF American Century Strategic Balanced Fund. American Century, located atAmerican Century Towers, 4500 Main Street, Kansas City, Missouri 64111, has beenproviding investment advisory services to investment companies and institutionalclients since 1958. In June 1995, American Century Companies, Inc. ("ACC"), theparent of American Century, acquired Benham Management International, Inc. Inthe acquisition, Benham Management Corporation ("BMC"), the investment adviserto The Benham Group of mutual funds, became a wholly owned subsidiary of ACC.Certain employees of BMC will be providing investment management services toAmerican Century funds, while certain American Century employees will beproviding investment management services to Benham funds. As of March 31, 1997,American Century and its affiliates managed assets totaling approximately $51.2billion.

American Century utilizes a team of portfolio managers, assistantportfolio managers and analysts acting together to manage the assets of thePortfolio. The portfolio manager members of the portfolio team responsible forthe day-to-day management of the ASAF American Century Strategic Balanced Fundare Casey Colton, Norman E. Hoops, Brian Howell, Jeffrey L. Houston, David



Schroeder and Jeffrey R. Tyler. Casey Colton jointed BMC in 1990 as a MunicipalAnalyst. Norman Hoops joined American Century in November 1989 as Vice Presidentand Portfolio Manager and became Senior Vice President and Fixed IncomePortfolio Manager in April 1993. Brian Howell joined BMC in 1987 as a researchanalyst and was promoted to his current position in January 1994. JeffreyHouston has worked for American Century as a Portfolio Manager since November,1990. David Schroeder joined BMC in 1990. Jeffrey Tyler, Senior Vice Presidentand Portfolio Manager, joined BMC in January, 1988 as a Portfolio Manager.

Federated Investment Counseling ("Federated Investment") serves asSub-advisor for the ASAF Federated High Yield Bond Fund. Federated Investment,located at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, wasorganized as a Delaware business trust in 1989 and is a registered investmentadvisor under the Investment Advisers Act of 1940. Federated Investment is awholly owned subsidiary of Federated Investors. Federated Investment and othersubsidiaries of Federated Investors serve as investment advisors to a number ofinvestment companies and private accounts. As of March 31, 1997, total assetsunder management or administration by these and other subsidiaries of FederatedInvestors was over $110 billion.

The portfolio manager responsible for the day-to-day management of the ASAFFederated High Yield Bond Fund is Mark E. Durbiano. Mr. Durbiano joinedFederated Investors in 1982 and has been a Senior Vice President of an affiliateof Federated Investment since January, 1996. From 1988 through 1995, Mr.Durbiano was a Vice President of an affiliate of Federated Investment. Mr.Durbiano is a Chartered Financial Analyst and received his M.B.A. in financefrom the University of Pittsburgh.

Pacific Investment Management Company ("PIMCO") serves as Sub-advisorfor the ASMT PIMCO Total Return Bond Portfolio. PIMCO, located at 840 NewportCenter Drive, Suite 360, Newport Beach, California 92660, is an investmentcounseling firm founded in 1971. PIMCO is a subsidiary general partnership ofPIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors isheld by PIMCO Partners, G.P., a general partnership between Pacific FinancialAsset Management Corporation, an indirect wholly owned subsidiary of PacificMutual Life Insurance Company, and PIMCO Partners, LLC, a California limitedliability company controlled by the managing directors of PIMCO. PIMCO is aregistered investment advisor with the Commission and a commodity tradingadvisor with the CFTC. As of March 31, 1997, PIMCO had over $91.5 billion ofassets under management.

The portfolio manager responsible for the day-to-day management of the ASMTPIMCO Total Return Bond Portfolio is William H. Gross. Mr. Gross is ManagingDirector of PIMCO and has been associated with the firm since 1971.

J.P. Morgan Investment Management, Inc. ("J.P. Morgan") serves asSub-advisor for the ASMT JPM Money Market Portfolio. J.P. Morgan, with principaloffices at 522 Fifth Avenue, New York, New York 10036, is a wholly ownedsubsidiary of J.P. Morgan & Co. Incorporated ("J.P. Morgan & Co."), a bankholding company organized under the laws of Delaware which is located at 60 WallStreet, New York, New York 10260. J.P. Morgan & Co., through J.P. Morgan andother subsidiaries, offers a wide range of services to governmental,institutional, corporate and individual customers, and acts as investmentadviser to individual and institutional clients with combined assets undermanagement of approximately $213 billion as of March 31, 1997. J.P. Morgan hasmanaged investments for clients for almost a century, since 1913. In addition,J.P. Morgan has managed short-term fixed income assets for clients since 1969.As of March 31, 1997, these short-term fixed assets under J.P. Morgan'smanagement totaled over $25 billion.

FEES AND EXPENSES:

Investment Management Fees. ASISI receives a monthly fee from eachNon-Feeder Fund and Portfolio for the performance of its services. ASISI payseach Sub-advisor a portion of such fee for the performance of the sub-advisoryservices at no additional cost to any Fund or Portfolio. The investmentmanagement fee with respect to each Non-Feeder Fund and Portfolio may differ,reflecting the investment objective, policies and limitations of each Fund orPortfolio and the nature of each Management Agreement and Sub-advisoryAgreement. Each Non-Feeder Fund and Portfolio's investment management fee isaccrued daily for the purposes of determining the offering and redemption priceof the Fund's shares. The fees payable to ASISI, based on a stated percentage ofthe Non-Feeder Fund or Portfolio's average daily net assets, are as follows:<TABLE><CAPTION>

Fund/Portfolio: Annual Rate:



<S> <C> <C>ASAF Founders International Small Capitalization Fund: 1.10% of the first $100 million; plus 1.00

% of the amount over $100 million

ASMT T. Rowe Price International Equity Portfolio: 1.00%

ASAF Founders Small Capitalization Fund: 0.90%

ASAF T. Rowe Price Small Company Value Fund: 1.00%

ASMT Janus Capital Growth Portfolio: 1.00%

ASMT INVESCO Equity Income Portfolio: 0.75%

ASAF American Century Strategic Balanced Fund: 0.90%

ASAF Federated High Yield Bond Fund: 0.70%

ASMT PIMCO Total Return Bond Portfolio: 0.65%

ASMT JPM Money Market Portfolio: 0.50%</TABLE>

Sub-Advisory Fees. ASISI pays each Sub-advisor on a monthly basis forthe performance of sub-advisory services. The fee payable to the Sub-advisorswith respect to each Non-Feeder Fund and Portfolio may differ, reflecting, amongother things, the investment objective, policies and limitations of each Fund orPortfolio and the nature of each Sub-advisory Agreement. Each Sub-advisor's feeis accrued daily for purposes of determining the amount payable by theInvestment Manager to the Sub-advisor. The fees payable to the Sub-advisors,based on a stated percentage of the Non-Feeder Fund or Portfolio's average dailynet assets, are as follows:

Founders Asset Management, Inc. for the ASAF Founders International SmallCapitalization Fund: An annual rate of .60% of the portion of the average dailynet assets of the Fund not in excess of $100 million; plus .50% of the portionover $100 million.

Rowe Price-Fleming International, Inc. for the ASMT T. Rowe PriceInternational Equity Portfolio: An annual rate of .75% of the portion of theaverage daily net assets of the Portfolio not in excess of $20 million; plus.60% of the portion over $20 million but not in excess of $50 million; plus .50%

of the portion over $50 million. When the average daily net assets of thePortfolio equal or exceed $200 million, the annual rate will be .50% of theaverage daily net assets of the Portfolio.

Founders Asset Management, Inc. for the ASAF Founders Small CapitalizationFund: An annual rate of .50% of the portion of the average daily net assets ofthe Fund not in excess of $250 million; plus .45% of the portion over $250million.

T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price Small CompanyValue Fund: An annual rate of .60% of the average daily net assets of the Fund.

Janus Capital Corporation for the ASMT Janus Capital Growth Portfolio: Anannual rate of .45% of the average daily net assets of the Portfolio.

INVESCO Trust Company for the ASMT INVESCO Equity Income Portfolio: Anannual rate of .35% of the average daily net assets of the Portfolio.

American Century Investment Management, Inc. for the ASAF American CenturyStrategic Balanced Fund: An annual rate of .50% of the portion of the averagedaily net assets of the Fund not in excess of $50 million; plus .45% of theportion over $50 million.

Federated Investment Counseling for the ASAF Federated High Yield BondFund: An annual rate of .25% of the portion of the average daily net assets ofthe Fund not in excess of $200 million; plus .20% of the portion over $200million.

Pacific Investment Management Company for the ASMT PIMCO Total ReturnBond Portfolio: An annual rate of .25% of the average daily net assets of thePortfolio.

J.P. Morgan Investment Management, Inc. for the ASMT JPM Money MarketPortfolio: An annual rate of .15% of the portion of the average daily net assetsof the Portfolio not in excess of $500 million; plus .09% of the portion over$500 million but not in excess of $1 billion; plus .06% of the portion over $1billion..



Fee Waivers. In order to increase the return to investors, both theInvestment Manager and the Sub-advisors may from time to time agree tovoluntarily waive or reduce their respective fees, while retaining their abilityto be reimbursed for such fees prior to the end of each fiscal year. Suchvoluntary fee waivers or reductions may be rescinded at any time and withoutnotice to investors.

Commencing June 1, 1997, Rowe Price Fleming International, Inc., theSub-advisor for the ASMT T. Rowe Price International Equity Portfolio, hasvoluntarily agreed to waive a portion of its sub-advisory fee equal to .25% ofthe portion of the average daily net assets of the Portfolio not in excess of$20 million; plus .10% of the portion over $20 million but not in excess of $50million. When the average daily net assets of the Portfolio equal or exceed $200million, such voluntary fee waiver is no longer applicable, and the sub-advisoryannual fee rate of .50% of the average daily net assets of the Portfolio will beapplied.

Commencing June 1, 1997, J.P. Morgan Investment Management, Inc., theSub-advisor for the ASMT JPM Money Market Portfolio, has voluntarily agreed towaive a portion of its sub-advisory fee equal to .06% of the portion of theaverage daily net assets of the Portfolio not in excess of $500 million; plus.03% of the portion over $500 million but not in excess of $1 billion.

Expenses. Each Fund and Portfolio pays all of its expenses, including,but not limited to, the costs incurred in connection with the maintenance of itsregistration, as applicable, under the 1933 Act and the 1940 Act, printing andmailing prospectuses and SAIs to shareholders, certain office and financialaccounting services, taxes or governmental fees, brokerage commissions, Fundshare pricing, custodial, transfer and shareholder servicing agent costs,expenses of outside counsel and independent accountants, preparation (including,printing and mailing) of shareholder reports and expenses of director andshareholder meetings. Expenses incurred by the Funds or Portfolios not directlyattributable to any specific Fund(s) or Portfolio(s) are allocated on the basisof the net assets of the respective Fund or Portfolio. For additionalinformation regarding Fund and Portfolio expenses, as well as any voluntaryagreements by the Investment Manager to limit such expenses, see this Prospectusunder "Expense Information" and the Company's SAI under "Fund Expenses."

THE ADMINISTRATOR:

PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,Delaware 19809, a Delaware corporation which is an indirect wholly-ownedsubsidiary of PNC Financial Corp., serves as the administrator for both theCompany and the Trust pursuant to separate administration agreements with theCompany and the Trust, respectively (the "Administration Agreements"). TheAdministrator provides certain fund accounting and administrative services tothe Company and the Trust, including, among other services, accounting relatingto the Company and the Trust and the investment transactions of the foregoingand computing daily NAVs. The Administrator does not have any responsibility orauthority for the management of the assets of the Funds or Portfolios, thedetermination of their investment policies, or for any matter pertaining to thedistribution of securities issued by the Company.

As compensation for the services and facilities provided by theAdministrator to the Company, the Company has agreed to pay the Administratorits "out-of-pocket" expenses, plus a monthly multi-class fee of $3,000 per Fund,plus a monthly feeder fee of $2,000 per Feeder Fund, plus the greater of thefollowing monthly fee based on the average daily net assets of the Non-FeederFunds -- 0.10% (first $200 million), 0.06% (next $200 million), 0.0275% (next$200 million) and 0.02% ($600+ million) -- or a minimum monthly fee of $6,250per Non-Feeder Fund. The Administrator has agreed to waive the above monthlymulti-class fee, the monthly feeder fee and the minimum monthly fee for thefirst two months of each year of its Administration Agreement, and thereafterwill decrease such waiver by 10% increments for each of the remaining ten monthsof the contract year.

In addition, as compensation for the services and facilities providedby the Administrator to the Trust, the Trust has agreed to pay the Administratorits "out-of-pocket" expenses, plus the greater of the following monthly feebased on the average daily net assets of the Portfolios -- 0.12% (first $200million), 0.085% (next $200 million), 0.05% (next $200 million), 0.025% (next$400 million) and 0.02% ($1+ billion) -- or a minimum monthly fee of $8,333 perPortfolio. The Administrator has agreed to waive the above minimum monthly feefor the first two months of each year of its Administration Agreement, andthereafter will decrease such waiver by 10% increments for each of the remainingten months of the contract year. For an additional discussion of the services



provided by the Administrator under the Administration Agreements, and theAdministrator's "out-of-pocket" expenses, see the Company's SAI under"Investment Advisory & Administration Services."


PORTFOLIO TURNOVER:

Each Non-Feeder Fund and Portfolio may sell its portfolio securities,regardless of the length of time that they have been held, if the Sub-advisorand/or the Investment Manager determines that such a disposition is in theFund's or Portfolio's best interest. Portfolio turnover rates may increase as aresult of the need for a Fund or Portfolio to effect significant amounts ofpurchases or redemptions of portfolio securities due to economic, market, orother factors that are not within the Sub-advisor's or Investment Manager'scontrol. Although it is not possible to predict future portfolio turnover ratesaccurately, and such rates may vary from year to year, it is anticipated thatannual portfolio turnover rates for the ASMT T. Rowe Price International EquityPortfolio, ASAF T. Rowe Price Small Company Value Fund, ASMT INVESCO EquityIncome Portfolio and ASAF Federated High Yield Bond Fund will not exceed 100%under normal market conditions. The annual portfolio turnover rates for the ASAFFounders International Small Capitalization Fund, ASAF Founders SmallCapitalization Fund, ASMT Janus Capital Growth Portfolio, ASAF American CenturyStrategic Balanced Fund and ASMT PIMCO Total Return Bond Portfolio are notanticipated to exceed 150%, 150%, 200%, 150% and 350%, respectively, undernormal market conditions.

A 100% portfolio turnover rate would occur if all of the securities ina portfolio of investments were replaced during a given period. A high rate ofportfolio turnover (generally in excess of 100%) involves correspondingly higherbrokerage commission expenses and other transaction costs, which must beultimately borne by a Fund's shareholders. Trading in fixed income securitiesdoes not generally involve the payment of brokerage commissions, but doesinvolve indirect transaction costs. High portfolio turnover rates may alsogenerate larger taxable income and taxable capital gains than would result fromlower portfolio turnover rates and may create higher tax liability for a Fund'sshareholders. For additional information regarding tax liability, see thisProspectus under "Dividends, Capital Gains and Taxes" and the Company's SAIunder "Additional Tax Considerations." For additional information regardingportfolio turnover, in general, see the Company's SAI under "PortfolioTransactions."

BROKERAGE ALLOCATION:

Generally, the primary consideration in placing portfolio securitiestransactions with broker-dealers for execution is to obtain, and maintain theavailability of, execution at the best net price available and in the mosteffective manner possible. The Company's and the Trust's brokerage allocationpolicy may permit a Fund or Portfolio, respectively, to pay a broker-dealerwhich furnishes research services a higher commission than that which might becharged by another broker-dealer which does not furnish research services,provided that such commission is deemed reasonable in relation to the value ofthe services provided by such broker-dealer. In addition, each Fund's orPortfolio's Sub-advisor may consider the use of broker-dealers that are, ormight be deemed to be, their affiliates, and may consider sale of shares of theFunds, or may consider or follow recommendations of the Investment Manager thattake such sales into account, as factors in the selection of broker-dealers toeffect transactions, subject to the requirements of best net price available andmost favorable execution. In this regard, the Investment Manager may directcertain of the Sub-advisors to try to effect a portion of their Fund orPortfolio's investment transactions through broker-dealers that sell shares ofthe Fund (or corresponding Fund, in the case of the Portfolios), to the extentconsistent with best net price available and most favorable execution. For anadditional discussion of portfolio transactions and brokerage allocation, seethe Company's SAI under "Portfolio Transactions."

DIVIDENDS, CAPITAL GAINS AND TAXES

DIVIDENDS:

Each Fund intends to distribute substantially all of its net income andcapital gains to shareholders no less frequently than once a year. Normally,dividends from net investment income of the ASAF Founders International SmallCapitalization Fund, ASAF T. Rowe Price International Equity Fund, ASAF FoundersSmall Capitalization Fund, ASAF T. Rowe Price Small Company Value Fund and ASAFJanus Capital Growth Fund will be declared and paid annually; dividends from thenet investment income of the ASAF INVESCO Equity Income Fund and ASAF AmericanCentury Strategic Balanced Fund will be declared and paid semi-annually;dividends from the net investment income of the ASAF Total Return Bond Fund willbe declared and paid quarterly; and dividends from net investment income of the



ASAF Federated High Yield Bond Fund and ASAF JPM Money Market Fund will bedeclared daily and paid monthly. Dividends from the ASAF JPM Money Market Fundare not paid on shares until the day following the date on which the shares areissued.

DISTRIBUTION OPTIONS:

When you open your account, specify on your application how you want toreceive your distributions. Unless you specify otherwise, all dividends anddistributions will be automatically reinvested in additional full or fractionalshares of each Fund. You have the following five distribution options:

Reinvest All Distributions in the Fund. You can elect to reinvest alldividends and long term capital gains distributions in additional shares of theapplicable Fund.

Reinvest Income Dividends Only. You can elect to reinvest investment incomedividends in a Fund while receiving capital gains distributions.

Reinvest Long-Term Capital Gains Only. You can elect to reinvest long-termcapital gains in the Fund while receiving dividends.

Receive All Distributions in Cash. You can elect to receive a check for alldividends and long-term capital gains distributions.

Reinvest Distributions in Another Fund of the Company. You can reinvest alldistributions in another Fund of the Company. For additional information aboutreinvesting your distributions, see this Prospectus under "Special InvestmentPrograms and Privileges."

TAXES:

If your account is not a tax-deferred retirement account, you should beaware of the following tax implications of investing in the Funds. Each Fundintends to qualify as a regulated investment company by satisfying therequirements under Subchapter M of the Code, including requirements with respectto diversification of assets, distribution of income and sources of income. Itis the Company's policy to have each Fund distribute to shareholders all of itsinvestment income (net of expenses) and any capital gains (net of capitallosses) in accordance with the timing requirements imposed by the Code so thatthe Fund will satisfy the distribution requirement of Subchapter M and not besubject to federal income taxes or the 4% excise tax.

Upward adjustments in the principal value of inflation-indexed bondswill be includable currently in a Fund's gross income notwithstanding theabsence of a corresponding cash payment. The Fund's need to distribute suchincome may compel liquidation of investments under disadvantageouscircumstances.

Distributions by each Fund of its net investment income and the excess,if any, of its net short-term capital gain over its net long-term capital lossare taxable to shareholders as ordinary income. These distributions are treatedas dividends for federal income tax purposes, but will qualify for the 70%dividends-received deduction for corporate shareholders only to the extentdesignated in a notice from the Fund to its shareholders as being attributableto dividends received by the Fund. Distributions by a Fund of the excess, ifany, of its net long-term capital gain over its net short-term capital loss willbe designated as capital gain dividends that are taxable to shareholders aslong-term capital gains, regardless of the length of time shares are held by theshareholder.

Portions of certain Funds' investment income may be subject to foreignincome taxes withheld at source. The Company may, but is not required to, electto "pass-through" to the shareholders of any such Funds these foreign taxes, inwhich event each shareholder will be required to include his pro rata portionthereof in his gross income, but will be able to deduct or (subject to variouslimitations) claim a foreign tax credit for such amount.

Distributions to shareholders will be treated in the same manner forfederal income tax purposes whether received in cash or reinvested in additionalshares of the Funds. In general, distributions by the Funds are taken intoaccount by the shareholders in the year in which they are made. However, certaindistributions made during January will be treated as having been paid by theFund and received by the shareholders on December 31 of the preceding year. Astatement setting forth the federal income tax status of all distributions madeor deemed made during the year, including any amount of foreign taxes "passedthrough," will be sent to shareholders promptly after the end of each year.Notwithstanding the foregoing, distributions by the Funds to certain qualifiedretirement plans may be exempt from federal income tax.

"Buying a Dividend." When a Fund pays a dividend, its share price isreduced by the amount of the distribution. If you buy shares on or just beforethe ex-dividend date (the date used for determining the record owners who will



receive the dividend), or just before a Fund declares a capital gainsdistribution, you will pay the full price for the shares and then receive aportion of the price back as a taxable dividend or capital gain.

Taxes on Transactions. Share redemptions, including redemptions forexchanges, are subject to capital gains tax. A capital gain or loss is thedifference between the price you paid for the shares and the price you receivedwhen you sold them.

Returns of Capital. In certain cases distributions made by the Fund maybe considered a non-taxable return of capital to shareholders. If that occurs,it will be identified in notices to shareholders. A non-taxable return ofcapital may reduce your tax basis in your Fund shares.

The above federal income tax information is based on tax laws andregulations in effect as of the date of this Prospectus, and is subject tochange by legislative or administrative action. As the foregoing discussion isfor general information only, you should also review the more detaileddiscussion of federal income tax considerations relevant to the Funds containedin the Company's SAI under "Additional Tax Considerations." In addition, youshould consult with your own tax adviser as to the effect of an investment inthe Fund on your particular tax situation, including the application of stateand local taxes which may differ from the federal income tax consequencesdescribed above.

OTHER INFORMATION

INVESTOR INFORMATION SERVICES:

The Company provides 24-hour information services via a toll-freenumber on Fund yields and prices, dividends, account balances, and your latesttransaction as well as the ability to request prospectuses, account and taxforms, and duplicate statements. In addition, telephone representatives areavailable during normal business hours to provide the information and servicesyou need. Shareholder inquiries should be made by calling 1-800-SKANDIA or, ifin writing, to "American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston,Massachusetts 02266-8012.

Statements and reports sent to you include the following: confirmationstatements (after every transaction, except reinvestments, automatic investmentsand systematic withdrawals, that affect your account balance or your accountregistration), quarterly consolidated account statements, and financial reports(every six months). Call the above number if you need additional copies offinancial reports or historical account information. There may be a small chargefor historical account information for prior years.

DISTRIBUTOR:

Shares of the Company are distributed through American SkandiaMarketing, Incorporated, the principal underwriter and distributor for theCompany (the "Distributor," as previously defined). The Distributor, located atOne Corporate Drive, Shelton, Connecticut 06484, is registered as abroker-dealer with the Commission and the National Association of SecuritiesDealers, Inc. It is an "affiliated person" (within the meaning of the 1940 Act)of the Investment Manager, the Company, the Trust, American Skandia Trust,American Skandia Life Assurance Corporation and American Skandia InformationServices and Technology Corporation, being a wholly-owned subsidiary of AmericanSkandia Investment Holding Corporation. The Distributor may offer shares of theFunds directly to potential purchasers.

TRANSFER AGENT:

Boston Financial Data Services, Inc. (the "Transfer Agent," aspreviously defined), located at Two Heritage Drive, Quincy, Massachusetts 02171,serves as the transfer agent and dividend paying agent for the Company.

DOMESTIC AND FOREIGN CUSTODIANS:

PNC Bank, located at Airport Business Center, International Court 2,200 Stevens Drive, Philadelphia, Pennsylvania 19113, serves as custodian for alldomestic cash and securities holdings of the Funds and Portfolios investingprimarily in domestic securities. Morgan Stanley Trust Company, located at OnePierrepont Plaza, Brooklyn, New York 11201, serves as custodian for all cash andsecurities holdings of the ASAF Founders International Small Capitalization Fundand the ASAF T. Rowe Price International Equity Fund (and correspondingPortfolio), and co-custodian for all foreign securities holdings of the Fundsand Portfolios which invest primarily in domestic securities.

LEGAL COUNSEL AND INDEPENDENT ACCOUNTANTS:

Werner & Kennedy, located at 1633 Broadway, New York, New York 10019,serves as counsel to the Company. Coopers & Lybrand L.L.P., located at 2400



Eleven Penn Center, Philadelphia, Pennsylvania 19103, has been selected as theindependent accountants of the Company.

REGISTRATION STATEMENT:

This Prospectus omits certain information contained in the RegistrationStatement filed with the Commission. Copies of the Registration Statement,including those items omitted herefrom, may be obtained from the Commission bypaying the charges prescribed under its rules and regulations.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANYREPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATIONOR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIEDUPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE TRUST. THIS PROSPECTUS DOESNOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCHOFFERING MAY NOT LAWFULLY BE MADE.

16173-1

STATEMENT OF ADDITIONAL INFORMATION

[insert], 1997

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Table of Contents Page

General Information and HistoryInvestment Programs of the Funds

ASAF Founders International Small Capitalization FundASAF T. Rowe Price International Equity FundASAF Founders Small Capitalization FundASAF T. Rowe Price Small Company Value FundASAF Janus Capital Growth FundASAF INVESCO Equity Income FundASAF American Century Strategic Balanced FundASAF Federated High Yield Bond FundASAF Total Return Bond FundASAF JPM Money Market Fund

Fundamental Investment RestrictionsCertain Risk Factors and Investment MethodsAdditional Performance InformationManagement of the CompanyInvestment Advisory & Administration ServicesFund ExpensesDistribution ArrangementsDetermination of Net Asset ValueAdditional Information on the Purchase and Redemption of SharesPortfolio TransactionsAdditional Tax ConsiderationsCapital Stock of the Company & Principal Holders of SecuritiesOther InformationFinancial StatementsAppendix

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This Statement of Additional Information ("SAI") is not a prospectus andshould be read in conjunction with the Company's current Prospectus, dated[insert], 1997. A copy of the Company's Prospectus may be obtained by writing to"American Skandia Advisor Funds, Inc." at P.O. Box 8012, Boston, Massachusetts02266-8012 or by calling 1-800-SKANDIA.



GENERAL INFORMATION

American Skandia Advisor Funds, Inc. (the "Company") is an open-endmanagement investment company comprised of ten diversified investment portfolios(each a "Fund" and together the "Funds"). The Company was established as aMaryland corporation on March 5, 1997, and has no business history prior to thedate of this SAI. Five of the Funds -- ASAF T. Rowe Price International EquityFund, ASAF Janus Capital Growth Fund, ASAF INVESCO Equity Income Fund, ASAFTotal Return Bond Fund and ASAF JPM Money Market Fund (each a "Feeder Fund" andtogether the "Feeder Funds") -- invest all of their investable assets in acorresponding portfolio (each a "Portfolio" and together the "Portfolios") ofAmerican Skandia Master Trust (the "Trust"), an open-end management investmentcompany comprised of five diversified investment portfolios. Each Portfolio ofthe Trust invests in securities in accordance with an investment objective,investment policies and limitations identical to those of its correspondingFeeder Fund. This "master/feeder" fund structure differs from that of the otherFunds of the Company and many other investment companies which directly investand manage their own portfolio of securities. Those Funds of the Company whichcurrently are not organized under a "master/feeder" fund structure (the"Non-Feeder Funds") retain the right to invest their assets in a correspondingPortfolio of the Trust in the future. For additional information regarding the"master/feeder" fund structure, see the Company's Prospectus under "SpecialInformation on the 'Master Feeder' Fund Structure."

American Skandia Investment Services, Incorporated ("ASISI" or the"Investment Manager") acts as the investment manager for both the Non-FeederFunds and the Portfolios. Currently, ASISI engages the following sub-advisors("Sub-advisor(s)") for the investment management of each Non-Feeder Fund andPortfolio: (a) ASAF Founders International Small Capitalization Fund: FoundersAsset Management, Inc.; (b) ASMT T. Rowe Price International Equity Portfolio:Rowe Price-Fleming International, Inc.; (c) ASAF Founders Small CapitalizationFund: Founders Asset Management, Inc.; (d) ASAF T. Rowe Price Small CompanyValue Fund: T. Rowe Price Associates, Inc.; (e) ASMT Janus Capital GrowthPortfolio: Janus Capital Corporation; (f) ASMT INVESCO Equity Income Portfolio:INVESCO Trust Company; (g) ASAF American Century Strategic Balanced Fund:American Century Investment Management, Inc.; (h) ASAF Federated High Yield BondFund: Federated Investment Counseling; (i) ASMT PIMCO Total Return BondPortfolio: Pacific Investment Management Company; and (j) ASMT JPM Money MarketPortfolio: J.P. Morgan Investment Management, Inc.


The following information supplements, and should be read inconjunction with, the discussion in the Prospectus of the investment objectiveand policies of each Fund and Portfolio. The investment objective and, unlessotherwise specified, the investment policies and limitations of each Fund andPortfolio are not "fundamental" policies and may be changed by the Directors ofthe Company or the Trustees of the Trust, where applicable, without shareholderapproval. Those investment policies specifically labeled as "fundamental" maynot be changed without shareholder approval. Fundamental investment policies ofa Fund or Portfolio may be changed only with the approval of at least the lesserof (1) 67% or more of the total units of beneficial interest ("shares") of theFund or Portfolio represented at a meeting at which more than 50% of theoutstanding shares of the Fund or Portfolio are represented, or (2) a majorityof the outstanding shares of the Fund or Portfolio.

Notwithstanding any other investment policy of a Fund, each Fund mayinvest all of its investable assets (cash, securities, and receivables relatingto securities) in an open-end management investment company having substantiallythe same investment objective, policies and limitations as the Fund. Those Fundswhich currently invest all of their investable assets in such a manner, theFeeder Funds, seek to meet their respective investment objectives by investingall of their investable assets in a corresponding Portfolio of the Trust, whichin turn invests directly in a portfolio of securities in accordance with theinvestment objective, policies and limitations of its Feeder Fund. Theinvestment objective, policies and limitations of each Feeder Fund are otherwiseidentical to those of its corresponding Portfolio. As such, the followingdiscussion of the Feeder Funds, including references to the Directors of theCompany, apply equally to the Funds' corresponding Portfolios and the Trusteesof the Trust.

ASAF FOUNDERS INTERNATIONAL SMALL CAPITALIZATION FUND:



Options On Stock Indices and Stocks. An option is a right to buy orsell a security at a specified price within a limited period of time. The Fundmay write ("sell") covered call options on any or all of its portfoliosecurities. In addition, the Fund may purchase options on securities. The Fundmay also purchase put and call options on stock indices.



The Fund may write ("sell") options on any or all of its portfoliosecurities and at such time and from time to time as the Sub-advisor shalldetermine to be appropriate. No specified percentage of the Fund's assets isinvested in securities with respect to which options may be written. The extentof the Fund's option writing activities will vary from time to time dependingupon the Sub-advisor's evaluation of market, economic and monetary conditions.

When the Fund purchases a security with respect to which it intends towrite an option, it is likely that the option will be written concurrently withor shortly after purchase. The Fund will write an option on a particularsecurity only if the Sub-advisor believes that a liquid secondary market willexist on an exchange for options of the same series, which will permit the Fundto enter into a closing purchase transaction and close out its position. If theFund desires to sell a particular security on which it has written an option, itwill effect a closing purchase transaction prior to or concurrently with thesale of the security.

The Fund may enter into closing purchase transactions to reduce thepercentage of its assets against which options are written, to realize a profiton a previously written option, or to enable it to write another option on theunderlying security with either a different exercise price or expiration time orboth.

Options written by the Fund will normally have expiration dates betweenthree and nine months from the date written. The exercise prices of options maybe below, equal to or above the current market values of the underlyingsecurities at the times the options are written. From time to time for tax andother reasons, the Fund may purchase an underlying security for delivery inaccordance with an exercise notice assigned to it, rather than delivering suchsecurity from its portfolio.

A stock index measures the movement of a certain group of stocks byassigning relative values to the stocks included in the index. The Fundpurchases put options on stock indices to protect the portfolio against declinein value. The Fund purchases call options on stock indices to establish aposition in equities as a temporary substitute for purchasing individual stocksthat then may be acquired over the option period in a manner designed tominimize adverse price movements. Purchasing put and call options on stockindices also permits greater time for evaluation of investment alternatives.When the Sub-advisor believes that the trend of stock prices may be downward,particularly for a short period of time, the purchase of put options on stockindices may eliminate the need to sell less liquid stocks and possiblyrepurchase them later. The purpose of these transactions is not to generategain, but to "hedge" against possible loss. Therefore, successful hedgingactivity will not produce net gain to the Fund. Any gain in the price of a calloption is likely to be offset by higher prices the Fund must pay in risingmarkets, as cash reserves are invested. In declining markets, any increase inthe price of a put option is likely to be offset by lower prices of stocks ownedby the Fund.

The Fund may purchase only those put and call options that are listedon a domestic exchange or quoted on the automatic quotation system of theNational Association of Securities Dealers, Inc. ("NASDAQ"). Options traded onstock exchanges are either broadly based, such as the Standard & Poor's 500Stock Index and 100 Stock Index, or involve stocks in a designated industry orgroup of industries. The Fund may utilize either broadly based or market segmentindices in seeking a better correlation between the indices and the Fund.

Transactions in options are subject to limitations, established by eachof the exchanges upon which options are traded, governing the maximum number ofoptions which may be written or held by a single investor or group of investorsacting in concert, regardless of whether the options are held in one or moreaccounts. Thus, the number of options the Fund may hold may be affected byoptions held by other advisory clients of the Sub-advisor. As of the date ofthis SAI, the Sub-advisor believes that these limitations will not affect thepurchase of stock index options by the Fund.

One risk of holding a put or a call option is that if the option is notsold or exercised prior to its expiration, it becomes worthless. However, thisrisk is limited to the premium paid by the Fund. Other risks of purchasingoptions include the possibility that a liquid secondary market may not exist ata time when the Fund may wish to close out an option position. It is alsopossible that trading in options on stock indices might be halted at a time whenthe securities markets generally were to remain open. In cases where the marketvalue of an issue supporting a covered call option exceeds the strike price plusthe premium on the call, the Fund will lose the right to appreciation of thestock for the duration of the option. For an additional discussion of options onstock indices and stocks and certain risks involved therein, see this SAI andthe Company's Prospectus under "Certain Risk Factors and Investment Methods."

Futures Contracts. The Fund may enter into futures contracts (oroptions thereon) for hedging purposes. U.S. futures contracts are traded on



exchanges which have been designated "contract markets" by the Commodity FuturesTrading Commission and must be executed through a futures commission merchant(an "FCM") or brokerage firm which is a member of the relevant contract market.Although futures contracts by their terms call for the delivery or acquisitionof the underlying commodities or a cash payment based on the value of theunderlying commodities, in most cases the contractual obligation is offsetbefore the delivery date of the contract by buying, in the case of a contractualobligation to sell, or selling, in the case of a contractual obligation to buy,an identical futures contract on a commodities exchange.Such a transaction cancels the obligation to make or take delivery of thecommodities.

The acquisition or sale of a futures contract could occur, for example,if the Fund held or considered purchasing equity securities and sought toprotect itself from fluctuations in prices without buying or selling thosesecurities. For example, if prices were expected to decrease, the Fund couldsell equity index futures contracts, thereby hoping to offset a potentialdecline in the value of equity securities in the portfolio by a correspondingincrease in the value of the futures contract position held by the Fund andthereby prevent the Fund's net asset value from declining as much as itotherwise would have. The Fund also could protect against potential pricedeclines by selling portfolio securities and investing in money marketinstruments. However, since the futures market is more liquid than the cashmarket, the use of futures contracts as an investment technique would allow theFund to maintain a defensive position without having to sell portfoliosecurities.

Similarly, when prices of equity securities are expected to increase,futures contracts could be bought to attempt to hedge against the possibility ofhaving to buy equity securities at higher prices. This technique is sometimesknown as an anticipatory hedge. Since the fluctuations in the value of futurescontracts should be similar to those of equity securities, the Fund could takeadvantage of the potential rise in the value of equity securities without buyingthem until the market had stabilized. At that time, the futures contracts couldbe liquidated and the Fund could buy equity securities on the cash market.

The Fund may also enter into interest rate and foreign currency futurescontracts. Interest rate futures contracts currently are traded on a variety offixed-income securities, including long-term U.S. Treasury Bonds, TreasuryNotes, Government National Mortgage Association modified pass-throughmortgage-backed securities, U.S. Treasury Bills, bank certificates of depositand commercial paper. Foreign currency futures contracts currently are traded onthe British pound, Canadian dollar, Japanese yen, Swiss franc, West German markand on Eurodollar deposits.

The Fund will not, as to any positions, whether long, short or acombination thereof, enter into futures and options thereon for which theaggregate initial margins and premiums exceed 5% of the fair market value of itstotal assets after taking into account unrealized profits and losses on optionsentered into. In the case of an option that is "in-the-money," the in-the-moneyamount may be excluded in computing such 5%. In general a call option on afuture is "in-the-money" if the value of the future exceeds the exercise("strike") price of the call; a put option on a future is "in-the-money" if thevalue of the future which is the subject of the put is exceeded by the strikeprice of the put. The Fund may use futures and options thereon solely for bonafide hedging or for other non-speculative purposes. As to long positions whichare used as part of the Fund's strategies and are incidental to its activitiesin the underlying cash market, the "underlying commodity value" of the Fund'sfutures and options thereon must not exceed the sum of (i) cash set aside in anidentifiable manner, or short-term U.S. debt obligations or otherdollar-denominated high-quality, short-term money instruments so set aside, plussums deposited on margin; (ii) cash proceeds from existing investments due in 30days; and (iii) accrued profits held at the futures commission merchant. The"underlying commodity value" of a future is computed by multiplying the size ofthe future by the daily settlement price of the future. For an option on afuture, that value is the underlying commodity value of the future underlyingthe option.

Unlike the situation in which the Fund purchases or sells a security,no price is paid or received by the Fund upon the purchase or sale of a futurescontract. Instead, the Fund is required to deposit in a segregated asset accountan amount of cash or qualifying securities (currently U.S. Treasury bills),currently in a minimum amount of $15,000. This is called "initial margin." Suchinitial margin is in the nature of a performance bond or good faith deposit onthe contract. However, since losses on open contracts are required to bereflected in cash in the form of variation margin payments, the Fund may berequired to make additional payments during the term of a contract to itsbroker. Such payments would be required, for example, where, during the term ofan interest rate futures contract purchased by the Fund, there was a generalincrease in interest rates, thereby making the Fund's securities less valuable.In all instances involving the purchase of financial futures contracts by theFund, an amount of cash together with such other securities as permitted byapplicable regulatory authorities to be utilized for such purpose, at least



equal to the market value of the future contracts, will be deposited in asegregated account with the Fund's custodian to collateralize the position. Atany time prior to the expiration of a futures contract, the Fund may elect toclose its position by taking an opposite position which will operate toterminate the Fund's position in the futures contract.

Because futures contracts are generally settled within a day from thedate they are closed out, compared with a settlement period of three businessdays for most types of securities, the futures markets can provide superiorliquidity to the securities markets. Nevertheless, there is no assurance aliquid secondary market will exist for any particular futures contract at anyparticular time. In addition, futures exchanges may establish daily pricefluctuation limits for futures contracts and may halt trading if a contract'sprice moves upward or downward more than the limit in a given day. On volatiletrading days when the price fluctuation limit is reached, it would be impossiblefor the Fund to enter into new positions or close out existing positions. If thesecondary market for a futures contract were not liquid because of pricefluctuation limits or otherwise, the Fund would not promptly be able toliquidate unfavorable futures positions and potentially could be required tocontinue to hold a futures position until the delivery date, regardless ofchanges in its value. As a result, the Fund's access to other assets held tocover its futures positions also could be impaired. For an additional discussionof futures contracts and certain risks involved therein, see this SAI and theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Options on Futures Contracts. The Fund may purchase put and calloptions on futures contracts. An option on a futures contract provides theholder with the right to enter into a "long" position in the underlying futurescontract, in the case of a call option, or a "short" position in the underlyingfutures contract, in the case of a put option, at a fixed exercise price to astated expiration date. Upon exercise of the option by the holder, a contractmarket clearing house establishes a corresponding short position for the writerof the option, in the case of a call option, or a corresponding long position,in the case of a put option. In the event that an option is exercised, theparties will be subject to all the risks associated with the trading of futurescontracts, such as payment of variation margin deposits.

A position in an option on a futures contract may be terminated by thepurchaser or seller prior to expiration by effecting a closing purchase or saletransaction, subject to the availability of a liquid secondary market, which isthe purchase or sale of an option of the same series (i.e., the same exerciseprice and expiration date) as the option previously purchased or sold. Thedifference between the premiums paid and received represents the trader's profitor loss on the transaction.

An option, whether based on a futures contract, a stock index or asecurity, becomes worthless to the holder when it expires. Upon exercise of anoption, the exchange or contract market clearing house assigns exercise noticeson a random basis to those of its members which have written options of the sameseries and with the same expiration date. A brokerage firm receiving suchnotices then assigns them on a random basis to those of its customers which havewritten options of the same series and expiration date. A writer therefore hasno control over whether an option will be exercised against it, nor over thetime of such exercise.

The purchase of a call option on a futures contract is similar in somerespects to the purchase of a call option on an individual security. See"Options on Foreign Currencies" below. Depending on the pricing of the optioncompared to either the price of the futures contract upon which it is based orthe price of the underlying instrument, ownership of the option may or may notbe less risky than ownership of the futures contract or the underlyinginstrument. As with the purchase of futures contracts, when the Fund is notfully invested it could buy a call option on a futures contract to hedge againsta market advance. The purchase of a put option on a futures contract is similarin some respects to the purchase of protective put options on portfoliosecurities. For example, the Fund would be able to buy a put option on a futurescontract to hedge the Fund against the risk of falling prices. For an additionaldiscussion of options on futures contracts and certain risks involved therein,see this SAI and the Company's Prospectus under "Certain Risks Factors andInvestment Methods."

Options on Foreign Currencies. The Fund may buy and sell options onforeign currencies for hedging purposes in a manner similar to that in whichfutures on foreign currencies would be utilized. For example, a decline in theU.S. dollar value of a foreign currency in which portfolio securities aredenominated would reduce the U.S. dollar value of such securities, even if theirvalue in the foreign currency remained constant. In order to protect againstsuch diminutions in the value of portfolio securities, the Fund could buy putoptions on the foreign currency. If the value of the currency declines, the Fundwould have the right to sell such currency for a fixed amount in U.S. dollarsand would thereby offset, in whole or in part, the adverse effect on the Fundwhich otherwise would have resulted. Conversely, when a rise is projected in theU.S. dollar value of a currency in which securities to be acquired are



denominated, thereby increasing the cost of such securities, the Fund could buycall options thereon. The purchase of such options could offset, at leastpartially, the effects of the adverse movements in exchange rates.

Options on foreign currencies traded on national securities exchangesare within the jurisdiction of the Securities and Exchange Commission, as areother securities traded on such exchanges. As a result, many of the protectionsprovided to traders on organized exchanges will be available with respect tosuch transactions. In particular, all foreign currency option positions enteredinto on a national securities exchange are cleared and guaranteed by the OptionsClearing Corporation ("OCC"), thereby reducing the risk of counterparty default.Further, a liquid secondary market in options traded on a national securitiesexchange may be more readily available than in the over-the-counter market,potentially permitting the Fund to liquidate open positions at a profit prior toexercise or expiration, or to limit losses in the event of adverse marketmovements.

The purchase and sale of exchange-traded foreign currency options,however, is subject to the risks of the availability of a liquid secondarymarket 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 otherpolitical and economic events. In addition, exchange-traded options on foreigncurrencies involve certain risks not presented by the over-the-counter market.For example, exercise and settlement of such options must be made exclusivelythrough the OCC, which has established banking relationships in applicableforeign countries for this purpose. As a result, the OCC may, if it determinesthat foreign governmental restrictions or taxes would prevent the orderlysettlement of foreign currency option exercises, or would result in undueburdens on the OCC or its clearing member, impose special procedures on exerciseand settlement, such as technical changes in the mechanics of delivery ofcurrency, the fixing of dollar settlement prices, or prohibitions on exercise.

Risk Factors of Investing in Futures and Options. The successful use ofthe investment practices described above with respect to futures contracts,options on futures contracts, and options on securities indices, securities, andforeign currencies draws upon skills and experience which are different fromthose needed to select the other instruments in which the Fund invests. Shouldinterest or exchange rates or the prices of securities or financial indices movein an unexpected manner, the Fund may not achieve the desired benefits offutures and options or may realize losses and thus be in a worse position thanif such strategies had not been used. Unlike many exchange-traded futurescontracts and options on futures contracts, there are no daily price fluctuationlimits with respect to options on currencies and negotiated or over-the-counterinstruments, and adverse market movements could therefore continue to anunlimited extent over a period of time. In addition, the correlation betweenmovements in the price of the securities and currencies hedged or used for coverwill not be perfect and could produce unanticipated losses.

The Fund's ability to dispose of its positions in the foregoinginstruments will depend on the availability of liquid markets in theinstruments. Markets in a number of the instruments are relatively new and stilldeveloping and it is impossible to predict the amount of trading interest thatmay exist in those instruments in the future. Particular risks exist withrespect to the use of each of the foregoing instruments and could result in suchadverse consequences to the Fund as the possible loss of the entire premium paidfor an option bought by the Fund and the possible need to defer closing outpositions in certain instruments to avoid adverse tax consequences. As a result,no assurance can be given that the Fund will be able to use those instrumentseffectively for the purposes set forth above.

In addition, options on U.S. Government securities, futures contracts,options on futures contracts, forward contracts and options on foreigncurrencies may be traded on foreign exchanges and over-the-counter in foreigncountries. Such transactions are subject to the risk of governmental actionsaffecting trading in or the prices of foreign currencies or securities. Thevalue of such positions also could be affected adversely by (i) other complexforeign political and economic factors, (ii) lesser availability than in theUnited States of data on which to make trading decisions, (iii) delays in theFund's ability to act upon economic events occurring in foreign markets duringnonbusiness hours in the United States, (iv) the imposition of differentexercise and settlement terms and procedures and margin requirements than in theUnited States, and (v) low trading volume. For an additional discussion ofcertain risks involved in investing in futures and options, see this SAI and theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Foreign Securities. Investments in foreign countries involve certain riskswhich are not typically associated with U.S. investments. For a discussion ofcertain risks involved in foreign investing, see this SAI and the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Forward Contracts for Purchase or Sale of Foreign Currencies. The Fundgenerally conducts its foreign currency exchange transactions on a spot (i.e.,



cash) basis at the spot rate prevailing in the foreign exchange currency market.When the Fund purchases or sells a security denominated in a foreign currency,it may enter into a forward foreign currency contract ("forward contract") forthe purchase or sale, for a fixed amount of dollars, of the amount of foreigncurrency involved in the underlying security transaction. A forward contractinvolves an obligation to purchase or sell a specific currency at a future date,which may be any fixed number of days from the date of the contract agreed uponby the parties, at a price set at the time of the contract. In this manner, theFund may obtain protection against a possible loss resulting from an adversechange in the relationship between the U.S. dollar and the foreign currencyduring the period between the date the security is purchased or sold and thedate upon which payment is made or received. Although such contracts tend tominimize the risk of loss due to the decline in the value of the hedgedcurrency, at the same time they tend to limit any potential gain which mightresult should the value of such currency increase. The Fund will not speculatein forward contracts.

Forward contracts are traded in the interbank market conducted directlybetween currency traders (usually large commercial banks) and their customers.Generally a forward contract has no deposit requirement, and no commissions arecharged at any stage for trades. Although foreign exchange dealers do not chargea fee for conversion, they do realize a profit based on the difference betweenthe prices at which they buy and sell various currencies. When the Sub-advisorbelieves that the currency of a particular foreign country may suffer asubstantial decline against the U.S. dollar (or sometimes against anothercurrency), the Fund may enter into a forward contract to sell, for a fixeddollar or other currency amount, foreign currency approximating the value ofsome or all of the Fund's securities denominated in that currency. The Fund willnot enter into such forward contracts or maintain a net exposure to suchcontracts where the fulfillment of the contracts would require the Fund todeliver an amount of foreign currency in excess of the value of its portfoliosecurities or other assets denominated in that currency. Forward contracts may,from time to time, be considered illiquid, in which case they would be subjectto the Fund's limitation on investing in illiquid securities.

At the consummation of a forward contract for delivery by the Fund of aforeign currency, the Fund may either make delivery of the foreign currency orterminate its contractual obligation to deliver the foreign currency bypurchasing an offsetting contract obligating it to purchase, at the samematurity date, the same amount of the foreign currency. If the Fund chooses tomake delivery of the foreign currency, it may be required to obtain suchcurrency through the sale of portfolio securities denominated in such currencyor through conversion of other Fund assets into such currency.

Dealings in forward contracts by the Fund will be limited to thetransactions described above. Of course, the Fund is not required to enter intosuch transactions with regard to its foreign currency-denominated securities andwill not do so unless deemed appropriate by the Sub-advisor. It also should berealized that this method of protecting the value of the Fund's securitiesagainst a decline in the value of a currency does not eliminate fluctuations inthe underlying prices of the securities. It simply establishes a rate ofexchange which can be achieved at some future point in time. Additionally,although such contracts tend to minimize the risk of loss due to the decline inthe value of the hedged currency, at the same time they tend to limit anypotential gain which might result should the value of such currency increase.For an additional discussion of forward foreign currency contracts and certainrisks involved therein, see this SAI and the Company's Prospectus under "CertainRisk Factors and Investment Methods."

Illiquid Securities. As discussed in the Company's Prospectus, the Fundmay invest up to 15% of the value of its net assets, measured at the time ofinvestment, in investments which are not readily marketable. Restrictedsecurities are securities that may not be resold to the public withoutregistration under the Securities Act of 1933 (the "1933 Act"). Restrictedsecurities (other than Rule 144A securities deemed to be liquid, discussedbelow) and securities which, due to their market or the nature of the security,have no readily available markets for their disposition are considered to be notreadily marketable or "illiquid." These limitations on resale and marketabilitymay have the effect of preventing the Fund from disposing of such a security atthe time desired or at a reasonable price. In addition, in order to resell arestricted security, the Fund might have to bear the expense and incur thedelays associated with effecting registration. In purchasing illiquidsecurities, the Fund does not intend to engage in underwriting activities,except to the extent the Fund may be deemed to be a statutory underwriter underthe Securities Act in purchasing or selling such securities. Illiquid securitieswill be purchased for investment purposes only and not for the purpose ofexercising control or management of other companies. For an additionaldiscussion of illiquid or restricted securities and certain risks involvedtherein, see the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

The Directors of the Company have promulgated guidelines with respectto illiquid securities.



Rule 144A Securities. In recent years, a large institutional market hasdeveloped for certain securities that are not registered under the 1933 Act.Institutional investors generally will not seek to sell these instruments to thegeneral public, but instead will often depend on an efficient institutionalmarket in which such unregistered securities can readily be resold or on anissuer's ability to honor a demand for repayment. Therefore, the fact that thereare contractual or legal restrictions on resale to the general public or certaininstitutions is not dispositive of the liquidity of such investments.

Rule 144A under the 1933 Act establishes a "safe harbor" from theregistration requirements of the 1933 Act for resales of certain securities toqualified institutional buyers. The Fund may invest in Rule 144A securitieswhich, as disclosed in the Company's Prospectus, are restricted securities whichmay or may not be readily marketable. Rule 144A securities are readilymarketable if institutional markets for the securities develop pursuant to Rule144A which provide both readily ascertainable values for the securities and theability to liquidate the securities when liquidation is deemed necessary oradvisable. However, an insufficient number of qualified institutional buyersinterested in purchasing a Rule 144A security held by the Fund could affectadversely the marketability of the security. In such an instance, the Fund mightbe unable to dispose of the security promptly or at reasonable prices.

The Sub-advisor will determine that a liquid market exists forsecurities eligible for resale pursuant to Rule 144A under the 1933 Act, or anysuccessor to such rule, and that such securities are not subject to the Fund'slimitations on investing in securities that are not readily marketable. TheSub-advisor will consider the following factors, among others, in making thisdetermination: (1) the unregistered nature of a Rule 144A security; (2) thefrequency of trades and quotes for the security; (3) the number of dealerswilling to purchase or sell the security and the number of additional potentialpurchasers; (4) dealer undertakings to make a market in the security; and (5)the nature of the security and the nature of market place trades (e.g., the timeneeded to dispose of the security, the method of soliciting offers and themechanics of transfers).

Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest upto 5% of its total assets in fixed-income securities which are unrated or arerated below investment grade either at the time of purchase or as a result ofreduction in rating after purchase. (This limitation does not apply toconvertible securities and preferred stocks.) Investments in lower-rated orunrated securities are generally considered to be of high risk. These debtsecurities, commonly referred to as junk bonds, are generally subject to twokinds of risk, credit risk and market risk. Credit risk relates to the abilityof the issuer to meet interest or principal payments, or both, as they come due.The ratings given a security by Moody's Investors Service, Inc. ("Moody's") andStandard & Poor's ("S&P") provide a generally useful guide as to such creditrisk. For a description of securities ratings, see the Appendix to this SAI. Thelower the rating given a security by a rating service, the greater the creditrisk such rating service perceives to exist with respect to the security.Increasing the amount of the Fund's assets invested in unrated or lower gradesecurities, while intended to increase the yield produced by those assets, willalso increase the risk to which those assets are subject.

Market risk relates to the fact that the market values of debtsecurities in which the Fund invests generally will be affected by changes inthe level of interest rates. An increase in interest rates will tend to reducethe market values of such securities, whereas a decline in interest rates willtend to increase their values. Medium and lower-rated securities (Baa or BBB andlower) and non-rated securities of comparable quality tend to be subject towider fluctuations in yields and market values than higher rated securities andmay have speculative characteristics. In order to decrease the risk in investingin debt securities, in no event will the Fund ever invest in a debt securityrated below B by Moody's or by S&P. Of course, relying in part on ratingsassigned by credit agencies in making investments will not protect the Fund fromthe risk that the securities in which they invest will decline in value, sincecredit ratings represent evaluations of the safety of principal, dividend, andinterest payments on debt securities, and not the market values of suchsecurities, and such ratings may not be changed on a timely basis to reflectsubsequent events.

Because investment in medium and lower-rated securities involvesgreater credit risk, achievement of the Fund's investment objective may be moredependent on the Sub-advisor's own credit analysis than is the case for fundsthat do not invest in such securities. In addition, the share price and yield ofthe Fund may fluctuate more than in the case of funds investing in higherquality, shorter term securities. Moreover, a significant economic downturn ormajor increase in interest rates may result in issuers of lower-rated securitiesexperiencing increased financial stress, which would adversely affect theirability to service their principal, dividend, and interest obligations, meetprojected business goals, and obtain additional financing. In this regard, itshould be noted that while the market for high yield debt securities has been inexistence for many years and from time to time has experienced economic



downturns in recent years, this market has involved a significant increase inthe use of high yield debt securities to fund highly leveraged corporateacquisitions and restructurings. Past experience may not, therefore, provide anaccurate indication of future performance of the high yield debt securitiesmarket, particularly during periods of economic recession. Furthermore, expensesincurred in recovering an investment in a defaulted security may adverselyaffect the Fund's net asset value. Finally, while the Sub-advisor attempts tolimit purchases of medium and lower-rated securities to securities having anestablished secondary market, the secondary market for such securities may beless liquid than the market for higher quality securities. The reduced liquidityof the secondary market for such securities may adversely affect the marketprice of, and ability of the Fund to value, particular securities at certaintimes, thereby making it difficult to make specific valuation determinations.The Fund does not invest in any medium and lower-rated securities which presentspecial tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For anadditional discussion of certain risks involved in lower-rated securities, seethis SAI and the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

The Sub-advisor seeks to reduce the overall risks associated with theFund's investments through diversification and consideration of factorsaffecting the value of securities it considers relevant. No assurance can begiven, however, regarding the degree of success that will be achieved in thisregard or that the Fund will achieve its investment objective.

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements withrespect to money market instruments eligible for investment by the Fund withmember banks of the Federal Reserve system, registered broker-dealers, andregistered government securities dealers. A repurchase agreement may beconsidered a loan collateralized by securities. Repurchase agreements maturingin more than seven days are considered illiquid and will be subject to theFund's limitation with respect to illiquid securities.

The Fund has not adopted any limits on the amounts of its total assetsthat may be invested in repurchase agreements which mature in less than sevendays. The Fund may invest up to 15% of the market value of its net assets,measured at the time of purchase, in securities which are not readilymarketable, including repurchase agreements maturing in more than seven days.For an additional discussion of repurchase agreements and certain risks involvedtherein, see the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

Convertible Securities. The Fund may buy securities convertible intocommon stock if, for example, the Sub-advisor believes that a company'sconvertible securities are undervalued in the market. Convertible securitieseligible for purchase include convertible bonds, convertible preferred stocks,and warrants. A warrant is an instrument issued by a corporation which gives theholder the right to subscribe to a specific amount of the corporation's capitalstock at a set price for a specified period of time. Warrants do not representownership of the securities, but only the right to buy the securities. Theprices of warrants do not necessarily move parallel to the prices of underlyingsecurities. Warrants may be considered speculative in that they have no votingrights, pay no dividends, and have no rights with respect to the assets of acorporation issuing them. Warrant positions will not be used to increase theleverage of the Fund; consequently, warrant positions are generally accompaniedby cash positions equivalent to the required exercise amount.

Investment Policies Which May Be Changed Without Shareholder Approval. Thefollowing limitations are not "fundamental" restrictions and may be changed bythe Directors of the Company without shareholder approval. The Fund will not:

1. Invest more than 15% of the market value of its net assets in securitieswhich are not readily marketable, including repurchase agreements maturing inover seven days;

2. Purchase securities of other investment companies except in compliancewith the Investment Company Act of 1940;

3. Purchase any securities on margin except to obtain such short-termcredits as may be necessary for the clearance of transactions (and, providedthat margin payments and other deposits in connection with transactions inoptions, futures and forward contracts shall not be deemed to constitutepurchasing securities on margin); or

4. Sell securities short.

In addition, in periods of uncertain market and economic conditions, asdetermined by the Sub-advisor, the Fund may depart from its basic investmentobjective and assume a defensive position with up to 100% of its assetstemporarily invested in high quality corporate bonds or notes and governmentissues, or held in cash.



If a percentage restriction is adhered to at the time of investment, alater increase or decrease in percentage beyond the specified limit that resultsfrom a change in values or net assets will not be considered a violation.

ASAF T. ROWE PRICE INTERNATIONAL EQUITY FUND:

Investment Objective: The investment objective of the Fund is to seek a totalreturn on its assets from long-term growth of capital and income principallythrough investments in common stocks of established, non-U.S. companies.Investments may be made solely for capital appreciation or solely for income orany combination of both for the purpose of achieving a higher overall return.


The Sub-advisor regularly analyzes a broad range of internationalequity and fixed-income markets in order to assess the degree of risk and levelof return that can be expected from each market. Based upon its currentassessment, the Sub-advisor believes long-term growth of capital may be achievedby investing in marketable securities of non-U.S. companies which have thepotential for growth of capital. Of course, there can be no assurance that theSub-advisor's forecasts of expected return will be reflected in the actualreturns achieved by the Fund.

The Fund's share price will fluctuate with market, economic and foreignexchange conditions, and your investment may be worth more or less when redeemedthan when purchased. The Fund should not be relied upon as a complete investmentprogram, nor used to play short-term swings in the stock or foreign exchangemarkets. The Fund is subject to risks unique to international investing.Further, there is no assurance that the favorable trends discussed below willcontinue, and the Fund cannot guarantee it will achieve its objective.

It is the present intention of the Sub-advisor to invest in companiesbased in (or governments of or within) the Far East (for example, Japan, HongKong, Singapore, and Malaysia), Western Europe (for example, United Kingdom,Germany, Netherlands, France, Spain, and Switzerland), South Africa, Australia,Canada, and such other areas and countries as the Sub-advisor may determine fromtime to time.

In determining the appropriate distribution of investments amongvarious countries and geographic regions, the Sub-advisor ordinarily considersthe following factors: prospects for relative economic growth between foreigncountries; expected levels of inflation; government policies influencingbusiness conditions; the outlook for currency relationships; and the range ofindividual investment opportunities available to international investors.

In analyzing companies for investment, the Sub-advisor ordinarily looksfor one or more of the following characteristics: an above-average earningsgrowth per share; high return on invested capital; healthy balance sheet; soundfinancial and accounting policies and overall financial strength; strongcompetitive advantages; effective research and product development andmarketing; efficient service; pricing flexibility; strength of management; andgeneral operating characteristics which will enable the companies to competesuccessfully in their market place. While current dividend income is not aprerequisite in the selection of portfolio companies, the companies in which theFund invests normally will have a record of paying dividends, and will generallybe expected to increase the amounts of such dividends in future years asearnings increase.

It is expected that the Fund's investments will ordinarily be traded onexchanges located at least in the respective countries in which the variousissuers of such securities are principally based.

The Fund will invest in securities denominated in currencies specifiedelsewhere herein.

It is contemplated that most foreign securities will be purchased inover-the-counter markets or on stock exchanges located in the countries in whichthe respective principal offices of the issuers of the various securities arelocated, if that is the best available market.

The Fund may invest in investment funds which have been authorized bythe governments of certain countries specifically to permit foreign investmentin securities of companies listed and traded on the stock exchanges in theserespective countries. The Fund's investment in these funds is subject to theprovisions of the Investment Company Act of 1940 discussed below. If the Fundinvests in such investment funds, the Fund's shareholders will bear not onlytheir proportionate share of the expenses of the Fund (including operatingexpenses and the fees of the Investment Manager), but also will bear indirectlysimilar expenses of the underlying investment funds. In addition, the securitiesof these investment funds may trade at a premium over their net asset value.

Apart from the matters described herein, the Fund is not aware at thistime of the existence of any investment or exchange control regulations which



might substantially impair the operations of the Fund as described in theCompany's Prospectus and this SAI. It should be noted, however, that thissituation could change at any time.

The Fund may invest in companies located in Eastern Europe. The Fundwill only invest in a company located in, or a government of, Eastern Europe orRussia, if the Sub-advisor believes the potential return justifies the risk. Tothe extent any securities issued by companies in Eastern Europe and Russia areconsidered illiquid, the Fund will be required to include such securities withinits 15% restriction on investing in illiquid securities.

Risk Factors of Foreign Investing. There are special risks in investingin the Fund. Certain of these risks are inherent in any international mutualfund; others relate more to the countries in which the Fund will invest. Many ofthe risks are more pronounced for investments in developing or emergingcountries. Although there is no universally accepted definition, a developingcountry is generally considered to be a country which is in the initial stagesof its industrialization cycle with a per capita gross national product of lessthan $8,000.

Investors should understand that all investments have a risk factor.There can be no guarantee against loss resulting from an investment in the Fund,and there can be no assurance that the Fund's investment policies will besuccessful, or that its investment objective will be attained. The Fund isdesigned for individual and institutional investors seeking to diversify beyondthe United States in an actively researched and managed portfolio, and isintended for long-term investors who can accept the risks entailed in investmentin foreign securities. For a discussion of certain risks involved in foreigninvesting see this SAI and the Company's Prospectus under "Certain Risk Factorsand Investment Methods."

In addition to the investments described in the Company's Prospectus,the Fund may invest in the following:

Writing Covered Call Options. The Fund may write (sell) "covered" calloptions and purchase options to close out options previously written by theFund. In writing covered call options, the Fund expects to generate additionalpremium income which should serve to enhance the Fund's total return and reducethe effect of any price decline of the security or currency involved in theoption. Covered call options will generally be written on securities orcurrencies which, in the Sub-advisor's opinion, are not expected to have anymajor price increases or moves in the near future but which, over the long term,are deemed to be attractive investments for the Fund.

The Fund will write only covered call options. This means that the Fundwill own the security or currency subject to the option or an option to purchasethe same underlying security or currency, having an exercise price equal to orless than the exercise price of the "covered" option, or will establish andmaintain with its custodian for the term of the option, an account consisting ofcash or other liquid assets having a value equal to the fluctuating market valueof the optioned securities or currencies.

Portfolio securities or currencies on which call options may be writtenwill be purchased solely on the basis of investment considerations consistentwith the Fund's investment objective. The writing of covered call options is aconservative investment technique believed to involve relatively little risk (incontrast to the writing of naked or uncovered options, which the Fund will notdo), but capable of enhancing the Fund's total return. When writing a coveredcall option, the Fund, in return for the premium, gives up the opportunity forprofit from a price increase in the underlying security or currency above theexercise price, but conversely, retains the risk of loss should the price of thesecurity or currency decline. Unlike one who owns securities or currencies notsubject to an option, the Fund has no control over when it may be required tosell the underlying securities or currencies, since it may be assigned anexercise notice at any time prior to the expiration of its obligations as awriter. If a call option which the Fund has written expires, the Fund willrealize a gain in the amount of the premium; however, such gain may be offset bya decline in the market value of the underlying security or currency during theoption period. If the call option is exercised, the Fund will realize a gain orloss from the sale of the underlying security or currency. The Fund does notconsider a security or currency covered by a call "pledged" as that term is usedin the Fund's policy which limits the pledging or mortgaging of its assets.

The premium received is the market value of an option. The premium theFund will receive from writing a call option will reflect, among other things,the current market price of the underlying security or currency, therelationship of the exercise price to such market price, the historical pricevolatility of the underlying security or currency, and the length of the optionperiod. Once the decision to write a call option has been made, the Sub-advisor,in determining whether a particular call option should be written on aparticular security or currency, will consider the reasonableness of theanticipated premium and the likelihood that a liquid secondary market will existfor those options. The premium received by the Fund for writing covered call



options will be recorded as a liability of the Fund. This liability will beadjusted daily to the option's current market value, which will be the latestsale price at the time at which the net asset value per share of the Fund iscomputed (close of the New York Stock Exchange), or, in the absence of suchsale, the average of the latest bid and asked price. The option will beterminated upon expiration of the option, the purchase of an identical option ina closing transaction, or delivery of the underlying security or currency uponthe exercise of the option.

Call options written by the Fund will normally have expiration dates ofless than nine months from the date written. The exercise price of the optionsmay be below, equal to, or above the current market values of the underlyingsecurities or currencies at the time the options are written. From time to time,the Fund may purchase an underlying security or currency for delivery inaccordance with an exercise notice of a call option assigned to it, rather thandelivering such security or currency from its portfolio. In such cases,additional costs may be incurred.

The Fund will effect closing transactions in order to realize a profiton an outstanding call option, to prevent an underlying security or currencyfrom being called, or, to permit the sale of the underlying security orcurrency. The Fund will realize a profit or loss from a closing purchasetransaction if the cost of the transaction is less or more than the premiumreceived from the writing of the option. Because increases in the market priceof a call option will generally reflect increases in the market price of theunderlying security or currency, any loss resulting from the repurchase of acall option is likely to be offset in whole or in part by appreciation of theunderlying security or currency owned by the Fund.

The Fund will not write a covered call option if, as a result, theaggregate market value of all portfolio securities or currencies covering callor put options exceeds 25% of the market value of the Fund's net assets. Incalculating the 25% limit, the Fund will offset, against the value of assetscovering written calls and puts, the value of purchased calls and puts onidentical securities or currencies with identical maturity dates.

Writing Covered Put Options. Although the Fund has no current intentionin the foreseeable future of writing American or European style covered putoptions and purchasing put options to close out options previously written bythe Fund, the Fund reserves the right to do so.

The Fund would write put options only on a covered basis, which meansthat the Fund would maintain in a segregated account cash, U.S. governmentsecurities or other liquid high-grade debt obligations in an amount not lessthan the exercise price or the Fund will own an option to sell the underlyingsecurity or currency subject to the option having an exercise price equal to orgreater than the exercise price of the "covered" options at all times while theput option is outstanding. (The rules of a clearing corporation currentlyrequire that such assets be deposited in escrow to secure payment of theexercise price.) The Fund would generally write covered put options incircumstances where the Sub-advisor wishes to purchase the underlying securityor currency for the Fund's portfolio at a price lower than the current marketprice of the security or currency. In such event the Fund would write a putoption at an exercise price which, reduced by the premium received on theoption, reflects the lower price it is willing to pay. Since the Fund would alsoreceive interest on debt securities or currencies maintained to cover theexercise price of the option, this technique could be used to enhance currentreturn during periods of market uncertainty. The risk in such a transactionwould be that the market price of the underlying security or currency woulddecline below the exercise price less the premiums received. Such a declinecould be substantial and result in a significant loss to the Fund. In addition,the Fund, because it does not own the specific securities or currencies which itmay be required to purchase in exercise of the put, cannot benefit fromappreciation, if any, with respect to such specific securities or currencies.

The Fund will not write a covered put option if, as a result, theaggregate market value of all portfolio securities or currencies covering put orcall options exceeds 25% of the market value of the Fund's net assets. Incalculating the 25% limit, the Fund will offset, against the value of assetscovering written puts and calls, the value of purchased puts and calls onidentical securities or currencies with identical maturity dates.

Purchasing Put Options. The Fund may purchase American or Europeanstyle put options. As the holder of a put option, the Fund has the right to sellthe underlying security or currency at the exercise price at any time during theoption period (American style) or at the expiration of the option (Europeanstyle). The Fund may enter into closing sale transactions with respect to suchoptions, exercise them or permit them to expire. The Fund may purchase putoptions for defensive purposes in order to protect against an anticipateddecline in the value of its securities or currencies. An example of such use ofput options is provided in this SAI under "Certain Risk Factors and InvestmentMethods."



The premium paid by the Fund when purchasing a put option will berecorded as an asset of the Fund. This asset will be adjusted daily to theoption's current market value, which will be the latest sale price at the timeat which the net asset value per share of the Fund is computed (close of NewYork Stock Exchange), or, in the absence of such sale, the latest bid price.This asset will be terminated upon expiration of the option, the selling(writing) of an identical option in a closing transaction, or the delivery ofthe underlying security or currency upon the exercise of the option.

Purchasing Call Options. The Fund may purchase American or Europeanstyle call options. As the holder of a call option, the Fund has the right topurchase the underlying security or currency at the exercise price at any timeduring the option period (American style) or at the expiration of the option(European style). The Fund may enter into closing sale transactions with respectto such options, exercise them or permit them to expire. The Fund may purchasecall options for the purpose of increasing its current return or avoiding taxconsequences which could reduce its current return. The Fund may also purchasecall options in order to acquire the underlying securities or currencies.Examples of such uses of call options are provided in this SAI under "CertainRisk Factors and Investment Methods."

The Fund may also purchase call options on underlying securities orcurrencies it owns in order to protect unrealized gains on call optionspreviously written by it. A call option would be purchased for this purposewhere tax considerations make it inadvisable to realize such gains through aclosing purchase transaction. Call options may also be purchased at times toavoid realizing losses.

Dealer Options. The Fund may engage in transactions involving dealeroptions. Certain risks are specific to dealer options. While the Fund would lookto a clearing corporation to exercise exchange-traded options, if the Fund wereto purchase a dealer option, it would rely on the dealer from whom it purchasedthe option to perform if the option were exercised. While the Fund will seek toenter into dealer options only with dealers who will agree to and which areexpected to be capable of entering into closing transactions with the Fund,there can be no assurance that the Fund will be able to liquidate a dealeroption at a favorable price at any time prior to expiration. Failure by thedealer to perform would result in the loss of the premium paid by the Fund aswell as loss of the expected benefit of the transaction.

Futures Contracts:

Transactions in Futures. The Fund may enter into financialfutures contracts, including stock index, interest rate and currency futures("futures or futures contracts"); however, the Fund has no current intention ofentering into interest rate futures. The Fund, however, reserves the right totrade in financial futures of any kind.

Stock index futures contracts may be used to attempt toprovide a hedge for a portion of the Fund, as a cash management tool, or as anefficient way for the Sub-advisor to implement either an increase or decrease inportfolio market exposure in response to changing market conditions. Stock indexfutures contracts are currently traded with respect to the S&P 500 Index andother broad stock market indices, such as the New York Stock Exchange CompositeStock Index and the Value Line Composite Stock Index. The Fund may, however,purchase or sell futures contracts with respect to any stock index whosemovements will, in its judgment, have a significant correlation with movementsin the prices of all or portions of the Fund's portfolio securities.

Interest rate or currency futures contracts may be used toattempt to hedge against changes in prevailing levels of interest rates orcurrency exchange rates in order to establish more definitely the effectivereturn on securities or currencies held or intended to be acquired by the Fund.In this regard, the Fund could sell interest rate or currency futures as anoffset against the effect of expected increases in interest rates or currencyexchange rates and purchase such futures as an offset against the effect ofexpected declines in interest rates or currency exchange rates.

The Fund will enter into futures contracts which are traded onnational or foreign futures exchanges and are standardized as to maturity dateand underlying financial instrument. The principal financial futures exchangesin the United States are the Board of Trade of the City of Chicago, the ChicagoMercantile Exchange, the New York Futures Exchange, and the Kansas City Board ofTrade. Futures exchanges and trading in the United States are regulated underthe Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").Futures are traded in London at the London International Financial FuturesExchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.Although techniques other than the sale and purchase of futures contracts couldbe used for the above-referenced purposes, futures contracts offer an effectiveand relatively low cost means of implementing the Fund's objectives in theseareas. For a discussion of futures transactions and certain risks involvedtherein, see this SAI and the Company's Prospectus under "Certain Risk Factorsand Investment Methods."



Regulatory Limitations. The Fund will engage in transactionsin futures contracts and options thereon only for bona fide hedging, yieldenhancement and risk management purposes, in each case in accordance with therules and regulations of the CFTC.

The Fund may not enter into futures contracts or optionsthereon if, with respect to positions which do not qualify as bona fide hedgingunder applicable CFTC rules, the sum of the amounts of initial margin depositson the Fund's existing futures and premiums paid for options on futures wouldexceed 5% of the net asset value of the Fund after taking into accountunrealized profits and unrealized losses on any such contracts it has enteredinto; provided however, that in the case of an option that is in-the-money atthe time of purchase, the in-the-money amount may be excluded in calculating the5% limitation.

The Fund's use of futures contracts will not result inleverage. Therefore, to the extent necessary, in instances involving thepurchase of futures contracts or call options thereon or the writing of putoptions thereon by the Fund, an amount of cash, or other liquid assets, equal tothe market value of the futures contracts and options thereon (less any relatedmargin deposits), will be identified in an account with the Fund's custodian tocover the position, or alternative cover will be employed.

In addition, CFTC regulations may impose limitations on theFund's ability to engage in certain yield enhancement and risk managementstrategies. If the CFTC or other regulatory authorities adopt different(including less stringent) or additional restrictions, the Fund would complywith such new restrictions.

Options on Futures Contracts. As an alternative to writing orpurchasing call and put options on stock index futures, the Fund may write orpurchase call and put options on stock indices. Such options would be used in amanner similar to the use of options on futures contracts. From time to time, asingle order to purchase or sell futures contracts (or options thereon) may bemade on behalf of the Fund and other mutual funds or portfolios of mutual fundsmanaged by the Sub-advisor or T. Rowe Price Associates, Inc. Such aggregatedorders would be allocated among the Fund and such other portfolios in a fair andnon-discriminatory manner. See this SAI and the Company's Prospectus under"Certain Risk Factors and Investment Methods" for a description of certain risksinvolved in options and futures contracts.

Additional Futures and Options Contracts. Although the Fund has nocurrent intention of engaging in financial futures or option transactions otherthan those described above, it reserves the right to do so. Such futures oroptions trading might involve risks which differ from those involved in thefutures and options described above.

Foreign Futures and Options. The Fund is permitted to invest in foreignfutures and options. For a description of foreign futures and options andcertain risks involved therein as well as certain risks involved in foreigninvesting, see this SAI and the Company's Prospectus under "Certain Risk Factorsand Investment Methods."

Foreign Currency Transactions. The Fund will generally enter intoforward foreign currency exchange contracts under two circumstances. First, whenthe Fund enters into a contract for the purchase or sale of a securitydenominated in a foreign currency, it may desire to "lock in" the U.S. dollarprice of the security. Second, when the Sub-advisor believes that the currencyof a particular foreign country may suffer or enjoy a substantial movementagainst another currency, including the U.S. dollar, it may enter into a forwardcontract to sell or buy the amount of the former foreign currency, approximatingthe value of some or all of the Fund's securities denominated in such foreigncurrency. Alternatively, where appropriate, the Fund may hedge all or part ofits foreign currency exposure through the use of a basket of currencies or aproxy currency where such currency or currencies act as an effective proxy forother currencies. In such a case, the Fund may enter into a forward contractwhere the amount of the foreign currency to be sold exceeds the value of thesecurities denominated in such currency. The use of this basket hedgingtechnique may be more efficient and economical than entering into separateforward contracts for each currency held in the Fund. The precise matching ofthe forward contract amounts and the value of the securities involved will notgenerally be possible since the future value of such securities in foreigncurrencies will change as a consequence of market movements in the value ofthose securities between the date the forward contract is entered into and thedate it matures. The projection of short-term currency market movement isextremely difficult, and the successful execution of a short-term hedgingstrategy is highly uncertain. Other than as set forth above and immediatelybelow, the Fund will also not enter into such forward contracts or maintain anet exposure to such contracts where the consummation of the contracts wouldobligate the Fund to deliver an amount of foreign currency in excess of thevalue of the Fund's securities or other assets denominated in that currency. TheFund, however, in order to avoid excess transactions and transaction costs, may



maintain a net exposure to forward contracts in excess of the value of theFund's securities or other assets to which the forward contracts relate(including accrued interest to the maturity of the forward on such securities)provided the excess amount is "covered" by liquid, high-grade debt securities,denominated in any currency, at least equal at all times to the amount of suchexcess. For these purposes "the securities or other assets to which the forwardcontracts relate" may be securities or assets denominated in a single currency,or where proxy forwards are used, securities denominated in more than onecurrency. Under normal circumstances, consideration of the prospect for currencyparities will be incorporated into the longer term investment decisions madewith regard to overall diversification strategies. However, the Sub-advisorbelieves that it is important to have the flexibility to enter into such forwardcontracts when it determines that the best interests of the Fund will be served.

At the maturity of a forward contract, the Fund may either sell theportfolio security and make delivery of the foreign currency, or it may retainthe security and terminate its contractual obligation to deliver the foreigncurrency by purchasing an "offsetting" contract obligating it to purchase, onthe same maturity date, the same amount of the foreign currency.

As indicated above, it is impossible to forecast with absoluteprecision the market value of portfolio securities at the expiration of theforward contract. Accordingly, it may be necessary for the Fund to purchaseadditional foreign currency on the spot market (and bear the expense of suchpurchase) if the market value of the security is less than the amount of foreigncurrency the Fund is obligated to deliver and if a decision is made to sell thesecurity and make delivery of the foreign currency. Conversely, it may benecessary to sell on the spot market some of the foreign currency received uponthe sale of the portfolio security if its market value exceeds the amount offoreign currency the Fund is obligated to deliver. However, as noted, in orderto avoid excessive transactions and transaction costs, the Fund may use liquid,high-grade debt securities denominated in any currency, to cover the amount bywhich the value of a forward contract exceeds the value of the securities towhich it relates.

If the Fund retains the portfolio security and engages in an offsettingtransaction, the Fund will incur a gain or a loss (as described below) to theextent that there has been movement in forward contract prices. If the Fundengages in an offsetting transaction, it may subsequently enter into a newforward contract to sell the foreign currency. Should forward prices declineduring the period between the Fund's entering into a forward contract for thesale of a foreign currency and the date it enters into an offsetting contractfor the purchase of the foreign currency, the Fund will realize a gain to theextent the price of the currency it has agreed to sell exceeds the price of thecurrency it has agreed to purchase. Should forward prices increase, the Fundwill suffer a loss to the extent of the price of the currency it has agreed topurchase exceeds the price of the currency it has agreed to sell.

The Fund's dealing in forward foreign currency exchange contracts willgenerally be limited to the transactions described above. However, the Fundreserves the right to enter into forward foreign currency contracts fordifferent purposes and under different circumstances. Of course, the Fund is notrequired to enter into forward contracts with regard to its foreigncurrency-denominated securities and will not do so unless deemed appropriate bythe Sub-advisor. It also should be realized that this method of hedging againsta decline in the value of a currency does not eliminate fluctuations in theunderlying prices of the securities. It simply establishes a rate of exchange ata future date. Additionally, although such contracts tend to minimize the riskof loss due to a decline in the value of the hedged currency, at the same time,they tend to limit any potential gain which might result from an increase in thevalue of that currency.

Although the Fund values its assets daily in terms of U.S. dollars, itdoes not intend to convert its holdings of foreign currencies into U.S. dollarson a daily basis. It will do so from time to time, and investors should be awareof the costs of currency conversion. Although foreign exchange dealers do notcharge a fee for conversion, they do realize a profit based on the difference(the "spread") between the prices at which they are buying and selling variouscurrencies. Thus, a dealer may offer to sell a foreign currency to the Fund atone rate, while offering a lesser rate of exchange should the Fund desire toresell that currency to the dealer. For an additional discussion of certainrisks involved in foreign investing, see this SAI and the Company's Prospectusunder "Certain Risk Factors and Investment Methods."

Federal Tax Treatment of Options, Futures Contracts and Forward ForeignExchange Contracts. The Fund may enter into certain option, futures, and forwardforeign exchange contracts, including options and futures on currencies, whichwill be treated as Section 1256 contracts or straddles.

Transactions which are considered Section 1256 contracts will beconsidered to have been closed at the end of the Fund's fiscal year and anygains or losses will be recognized for tax purposes at that time. Such gains orlosses from the normal closing or settlement of such transactions will be



characterized as 60% long-term capital gain or loss and 40% short-term capitalgain or loss regardless of the holding period of the instrument. The Fund willbe required to distribute net gains on such transactions to shareholders eventhough it may not have closed the transaction and received cash to pay suchdistributions.

Options, futures and forward foreign exchange contracts, includingoptions and futures on currencies, which offset a foreign dollar denominatedbond or currency position may be considered straddles for tax purposes in whichcase a loss on any position in a straddle will be subject to deferral to theextent of unrealized gain in an offsetting position. The holding period of thesecurities or currencies comprising the straddle will be deemed not to beginuntil the straddle is terminated. For securities offsetting a purchased put,this adjustment of the holding period may increase the gain from sales ofsecurities held less than three months. The holding period of the securityoffsetting an "in-the-money qualified covered call" option on an equity securitywill not include the period of time the option is outstanding.

Losses on written covered calls and purchased puts on securities,excluding certain "qualified covered call" options on equity securities, may belong-term capital loss, if the security covering the option was held for morethan twelve months prior to the writing of the option.

In order for the Fund to continue to qualify for federal income taxtreatment as a regulated investment company, at least 90% of its gross incomefor a taxable year must be derived from qualifying income, i.e., dividends,interest, income derived from loans of securities, and gains from the sale ofsecurities or currencies. Pending tax regulations could limit the extent thatnet gain realized from option, futures or foreign forward exchange contracts oncurrencies is qualifying income for purposes of the 90% requirement. Inaddition, gains realized on the sale or other disposition of securities,including option, futures or foreign forward exchange contracts on securities orsecurities indexes and, in some cases, currencies, held for less than threemonths, must be limited to less than 30% of the Fund's annual gross income. Inorder to avoid realizing excessive gains on securities or currencies held lessthan three months, the Fund may be required to defer the closing out of option,futures or foreign forward exchange contracts beyond the time when it wouldotherwise be advantageous to do so. It is anticipated that unrealized gains onSection 1256 option, futures and foreign forward exchange contracts, which havebeen open for less than three months as of the end of the Fund's fiscal year andwhich are recognized for tax purposes, will not be considered gains onsecurities or currencies held less than three months for purposes of the 30%test.

Hybrid Commodity and Security Instruments. Instruments have beendeveloped which combine the elements of futures contracts or options with thoseof debt, preferred equity or a depository instrument (hereinafter "HybridInstruments"). Often these hybrid instruments are indexed to the price of acommodity or particular currency or a domestic or foreign debt or equitysecurities index. Hybrid instruments may take a variety of forms, including, butnot limited to, debt instruments with interest or principal payments orredemption terms determined by reference to the value of a currency or commodityat a future point in time, preferred stock with dividend rates determined byreference to the value of a currency, or convertible securities with theconversion terms related to a particular commodity. For a discussion of certainrisks involved in hybrid instruments, see this SAI under "Certain Risk Factorsand Investment Methods."

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements throughwhich an investor (such as the Fund) purchases a security (known as the"underlying security") from a well-established securities dealer or a bank thatis a member of the Federal Reserve System. Any such dealer or bank will be on T.Rowe Price Associates, Inc. ("T. Rowe Price") approved list and have a creditrating with respect to its short-term debt of at least A1 by Standard & Poor'sCorporation, P1 by Moody's Investors Service, Inc., or the equivalent rating byT. Rowe Price. At that time, the bank or securities dealer agrees to repurchasethe underlying security at the same price, plus specified interest. Repurchaseagreements are generally for a short period of time, often less than a week.Repurchase agreements which do not provide for payment within seven days will betreated as illiquid securities. The Fund will only enter into repurchaseagreements where (i) the underlying securities are of the type (excludingmaturity limitations) which the Fund's investment guidelines would allow it topurchase directly, (ii) the market value of the underlying security, includinginterest accrued, will be at all times equal to or exceed the value of therepurchase agreement, and (iii) payment for the underlying security is made onlyupon physical delivery or evidence of book-entry transfer to the account of thecustodian or a bank acting as agent. In the event of a bankruptcy or otherdefault of a seller of a repurchase agreement, the Fund could experience bothdelays in liquidating the underlying securities and losses, including: (a)possible decline in the value of the underlying security during the period whilethe Fund seeks to enforce its rights thereto; (b) possible subnormal levels ofincome and lack of access to income during this period; and (c) expenses of



enforcing its rights.

Illiquid and Restricted Securities. The Fund may not invest in illiquidsecurities including repurchase agreements which do not provide for paymentwithin seven days, if as a result, they would comprise more than 15% of thevalue of the Fund's net assets.

Restricted securities may be sold only in privately negotiatedtransactions or in a public offering with respect to which a registrationstatement is in effect under the Securities Act of 1933 (the "1933 Act"). Whereregistration is required, the Fund may be obligated to pay all or part of theregistration expenses and a considerable period may elapse between the time ofthe decision to sell and the time the Fund may be permitted to sell a securityunder an effective registration statement. If, during such a period, adversemarket conditions were to develop, the Fund might obtain a less favorable pricethan prevailed when it decided to sell. Restricted securities will be priced atfair value as determined in accordance with procedures prescribed by theDirectors of the Company. If through the appreciation of illiquid securities orthe depreciation of liquid securities, the Fund should be in a position wheremore than 15% of the value of its net assets are invested in illiquid assets,including restricted securities, the Fund will take appropriate steps to protectliquidity.

Notwithstanding the above, the Fund may purchase securities which whileprivately placed, are eligible for purchase and sale under Rule 144A under the1933 Act. This rule permits certain qualified institutional buyers, such as theFund, to trade in privately placed securities even though such securities arenot registered under the 1933 Act. The Sub-advisor, under the supervision of theDirectors of the Company, will consider whether securities purchased under Rule144A are illiquid and thus subject to the Fund's restriction of investing nomore than 15% of its assets in illiquid securities. A determination of whether aRule 144A security is liquid or not is a question of fact. In making thisdetermination, the Sub-advisor will consider the trading markets for thespecific security taking into account the unregistered nature of a Rule 144Asecurity. In addition, the Sub-advisor could consider the (1) frequency oftrades and quotes, (2) number of dealers and potential purchasers, (3) dealerundertakings to make a market, (4) and the nature of the security and of marketplace trades (e.g., the time needed to dispose of the security, the method ofsoliciting offers and the mechanics of transfer). The liquidity of Rule 144Asecurities would be monitored and, if as a result of changed conditions, it isdetermined that a Rule 144A security is no longer liquid, the Fund's holdings ofilliquid securities would be reviewed to determine what, if any, steps arerequired to assure that the Fund does not invest more than 15% of its assets inilliquid securities. Investing in Rule 144A securities could have the effect ofincreasing the amount of a Fund's assets invested in illiquid securities ifqualified institutional buyers are unwilling to purchase such securities.


Lending of Portfolio Securities. For the purpose of realizingadditional income, the Fund may make secured loans of portfolio securitiesamounting to not more than 33 1/3% of its total assets. Securities loans aremade to broker-dealers, institutional investors, or other persons pursuant toagreements requiring that the loans be continuously secured by collateral atleast equal at all times to the value of the securities lent marked to market ona daily basis. The collateral received will consist of cash, U.S. governmentsecurities, letters of credit or such other collateral as may be permitted underits investment program. While the securities are being lent, the Fund willcontinue to receive the equivalent of the interest or dividends paid by theissuer on the securities, as well as interest on the investment of thecollateral or a fee from the borrower. The Fund has a right to call each loanand obtain the securities on five business days' notice or, in connection withsecurities trading on foreign markets, within such longer period of time whichcoincides with the normal settlement period for purchases and sales of suchsecurities in such foreign markets. The Fund will not have the right to votesecurities while they are being lent, but it will call a loan in anticipation ofany important vote. The risks in lending portfolio securities, as with otherextensions of secured credit, consist of possible delay in receiving additionalcollateral or in the recovery of the securities or possible loss of rights inthe collateral should the borrower fail financially. Loans will only be made topersons deemed by the Sub-advisor to be of good standing and will not be madeunless, in the judgment of the Sub-advisor, the consideration to be earned fromsuch loans would justify the risk.

Other Lending/Borrowing. Subject to approval by the Securities andExchange Commission, the Fund may make loans to, or borrow funds from, othermutual funds sponsored or advised by the Sub-advisor or T. Rowe PriceAssociates, Inc.The Fund has no current intention of engaging in these practices at this time.

Investment Policies Which May Be Changed Without Shareholder Approval. Thefollowing limitations are not "fundamental" restrictions and may be changed by



the Directors of the Company without shareholder approval. The Fund will not:

1. Purchase additional securities when money borrowed exceeds 5% of theFund's total assets;

2. Invest in companies for the purpose of exercising management or control;

3. Purchase illiquid securities if, as a result, more than 15% of its netassets would be invested in such securities. Securities eligible for resaleunder Rule 144A of the Securities Act of 1933 may be subject to this 15%limitation;

4. Purchase securities of open-end or closed-end investment companiesexcept in compliance with the Investment Company Act of 1940;

5. Invest in puts, calls, straddles, spreads, or any combination thereof,except to the extent permitted by the Company's Prospectus and this SAI;

6. Purchase securities on margin, except (i) for use of short-term creditnecessary for clearance of purchases of portfolio securities and (ii) the Fundmay make margin deposits in connection with futures contracts and otherpermissible investments;

7. Mortgage, pledge, hypothecate or, in any manner, transfer any securityowned by the Fund as a security for indebtedness except as may be necessary inconnection with permissible borrowings or investments and then such mortgaging,pledging, or hypothecating may not exceed 33 1/3% of the Fund's total assets atthe time of borrowing or investment;

8. Effect short sales of securities;

9. Invest in warrants if, as a result thereof, more than 10% of the valueof the total assets of the Fund would be invested in warrants except that thisrestriction does not apply to warrants acquired as a result of the purchase ofanother security. For purposes of these percentage limitations, the warrantswill be valued at the lower of cost or market; or

10. Purchase a futures contract or an option thereon if, with respect topositions in futures or options on futures which do not represent bona fidehedging, the aggregate initial margin and premiums on such positions wouldexceed 5% of the Fund's net assets.

In addition to the restrictions described above, some foreign countrieslimit, or prohibit, all direct foreign investment in the securities of theircompanies. However, the governments of some countries have authorized theorganization of investment portfolios to permit indirect foreign investment insuch securities. For tax purposes these portfolios may be known as PassiveForeign Investment Companies. The Fund is subject to certain percentagelimitations under the Investment Company Act of 1940 relating to the purchase ofsecurities of investment companies, and may be subject to the limitation that nomore than 10% of the value of the Fund's total assets may be invested in suchsecurities.

ASAF FOUNDERS SMALL CAPITALIZATION FUND:



Options On Stock Indices and Stocks. An option is a right to buy orsell a security at a specified price within a limited period of time. The Fundmay write ("sell") covered call options on any or all of its portfoliosecurities. In addition, the Fund may purchase options on securities. The Fundmay also purchase put and call options on stock indices.

The Fund may write ("sell") options on any or all of its portfoliosecurities and at such time and from time to time as the Sub-advisor shalldetermine to be appropriate. No specified percentage of the Fund's assets isinvested in securities with respect to which options may be written. The extentof the Fund's option writing activities will vary from time to time dependingupon the Sub-advisor's evaluation of market, economic and monetary conditions.

When the Fund purchases a security with respect to which it intends towrite an option, it is likely that the option will be written concurrently withor shortly after purchase. The Fund will write an option on a particularsecurity only if the Sub-advisor believes that a liquid secondary market willexist on an exchange for options of the same series, which will permit the Fundto enter into a closing purchase transaction and close out its position. If theFund desires to sell a particular security on which it has written an option, itwill effect a closing purchase transaction prior to or concurrently with thesale of the security.



The Fund may enter into closing purchase transactions to reduce thepercentage of its assets against which options are written, to realize a profiton a previously written option, or to enable it to write another option on theunderlying security with either a different exercise price or expiration time orboth.

Options written by the Fund will normally have expiration dates betweenthree and nine months from the date written. The exercise prices of options maybe below, equal to or above the current market values of the underlyingsecurities at the times the options are written. From time to time for tax andother reasons, the Fund may purchase an underlying security for delivery inaccordance with an exercise notice assigned to it, rather than delivering suchsecurity from its portfolio.

A stock index measures the movement of a certain group of stocks byassigning relative values to the stocks included in the index. The Fundpurchases put options on stock indices to protect the portfolio against declinein value. The Fund purchases call options on stock indices to establish aposition in equities as a temporary substitute for purchasing individual stocksthat then may be acquired over the option period in a manner designed tominimize adverse price movements. Purchasing put and call options on stockindices also permits greater time for evaluation of investment alternatives.When the Sub-advisor believes that the trend of stock prices may be downward,particularly for a short period of time, the purchase of put options on stockindices may eliminate the need to sell less liquid stocks and possiblyrepurchase them later. The purpose of these transactions is not to generategain, but to "hedge" against possible loss. Therefore, successful hedgingactivity will not produce net gain to the Fund. Any gain in the price of a calloption is likely to be offset by higher prices the Fund must pay in risingmarkets, as cash reserves are invested. In declining markets, any increase inthe price of a put option is likely to be offset by lower prices of stocks ownedby the Fund.

The Fund may purchase only those put and call options that are listedon a domestic exchange or quoted on the automatic quotation system of theNational Association of Securities Dealers, Inc. ("NASDAQ"). Options traded onstock exchanges are either broadly based, such as the Standard & Poor's 500Stock Index and 100 Stock Index, or involve stocks in a designated industry orgroup of industries. The Fund may utilize either broadly based or market segmentindices in seeking a better correlation between the indices and the Fund.

Transactions in options are subject to limitations, established by eachof the exchanges upon which options are traded, governing the maximum number ofoptions which may be written or held by a single investor or group of investorsacting in concert, regardless of whether the options are held in one or moreaccounts. Thus, the number of options the Fund may hold may be affected byoptions held by other advisory clients of the Sub-advisor. As of the date ofthis SAI, the Sub-advisor believes that these limitations will not affect thepurchase of stock index options by the Fund.

One risk of holding a put or a call option is that if the option is notsold or exercised prior to its expiration, it becomes worthless. However, thisrisk is limited to the premium paid by the Fund. Other risks of purchasingoptions include the possibility that a liquid secondary market may not exist ata time when the Fund may wish to close out an option position. It is alsopossible that trading in options on stock indices might be halted at a time whenthe securities markets generally were to remain open. In cases where the marketvalue of an issue supporting a covered call option exceeds the strike price plusthe premium on the call, the Fund will lose the right to appreciation of thestock for the duration of the option. For an additional discussion of options onstock indices and stocks and certain risks involved therein, see this SAI andthe Company's Prospectus under "Certain Risk Factors and Investment Methods."

Futures Contracts. The Fund may enter into futures contracts (oroptions thereon) for hedging purposes. U.S. futures contracts are traded onexchanges which have been designated "contract markets" by the Commodity FuturesTrading Commission and must be executed through a futures commission merchant(an "FCM") or brokerage firm which is a member of the relevant contract market.Although futures contracts by their terms call for the delivery or acquisitionof the underlying commodities or a cash payment based on the value of theunderlying commodities, in most cases the contractual obligation is offsetbefore the delivery date of the contract by buying, in the case of a contractualobligation to sell, or selling, in the case of a contractual obligation to buy,an identical futures contract on a commodities exchange. Such a transactioncancels the obligation to make or take delivery of the commodities.

The acquisition or sale of a futures contract could occur, for example,if the Fund held or considered purchasing equity securities and sought toprotect itself from fluctuations in prices without buying or selling thosesecurities. For example, if prices were expected to decrease, the Fund couldsell equity index futures contracts, thereby hoping to offset a potentialdecline in the value of equity securities in the portfolio by a correspondingincrease in the value of the futures contract position held by the Fund and



thereby prevent the Fund's net asset value from declining as much as itotherwise would have. The Fund also could protect against potential pricedeclines by selling portfolio securities and investing in money marketinstruments. However, since the futures market is more liquid than the cashmarket, the use of futures contracts as an investment technique would allow theFund to maintain a defensive position without having to sell portfoliosecurities.

Similarly, when prices of equity securities are expected to increase,futures contracts could be bought to attempt to hedge against the possibility ofhaving to buy equity securities at higher prices. This technique is sometimesknown as an anticipatory hedge. Since the fluctuations in the value of futurescontracts should be similar to those of equity securities, the Fund could takeadvantage of the potential rise in the value of equity securities without buyingthem until the market had stabilized. At that time, the futures contracts couldbe liquidated and the Fund could buy equity securities on the cash market.

The Fund may also enter into interest rate and foreign currency futurescontracts. Interest rate futures contracts currently are traded on a variety offixed-income securities, including long-term U.S. Treasury Bonds, TreasuryNotes, Government National Mortgage Association modified pass-throughmortgage-backed securities, U.S. Treasury Bills, bank certificates of depositand commercial paper. Foreign currency futures contracts currently are traded onthe British pound, Canadian dollar, Japanese yen, Swiss franc, West German markand on Eurodollar deposits.

The Fund will not, as to any positions, whether long, short or acombination thereof, enter into futures and options thereon for which theaggregate initial margins and premiums exceed 5% of the fair market value of itstotal assets after taking into account unrealized profits and losses on optionsentered into. In the case of an option that is "in-the-money," the in-the-moneyamount may be excluded in computing such 5%. In general a call option on afuture is "in-the-money" if the value of the future exceeds the exercise("strike") price of the call; a put option on a future is "in-the-money" if thevalue of the future which is the subject of the put is exceeded by the strikeprice of the put. The Fund may use futures and options thereon solely for bonafide hedging or for other non-speculative purposes. As to long positions whichare used as part of the Fund's strategies and are incidental to its activitiesin the underlying cash market, the "underlying commodity value" of the Fund'sfutures and options thereon must not exceed the sum of (i) cash set aside in anidentifiable manner, or short-term U.S. debt obligations or otherdollar-denominated high-quality, short-term money instruments so set aside, plussums deposited on margin; (ii) cash proceeds from existing investments due in 30days; and (iii) accrued profits held at the futures commission merchant. The"underlying commodity value" of a future is computed by multiplying the size ofthe future by the daily settlement price of the future. For an option on afuture, that value is the underlying commodity value of the future underlyingthe option.

Unlike the situation in which the Fund purchases or sells a security,no price is paid or received by the Fund upon the purchase or sale of a futurescontract. Instead, the Fund is required to deposit in a segregated asset accountan amount of cash or qualifying securities (currently U.S. Treasury bills),currently in a minimum amount of $15,000. This is called "initial margin." Suchinitial margin is in the nature of a performance bond or good faith deposit onthe contract. However, since losses on open contracts are required to bereflected in cash in the form of variation margin payments, the Fund may berequired to make additional payments during the term of a contract to itsbroker. Such payments would be required, for example, where, during the term ofan interest rate futures contract purchased by the Fund, there was a generalincrease in interest rates, thereby making the Fund's securities less valuable.In all instances involving the purchase of financial futures contracts by theFund, an amount of cash together with such other securities as permitted byapplicable regulatory authorities to be utilized for such purpose, at leastequal to the market value of the future contracts, will be deposited in asegregated account with the Fund's custodian to collateralize the position. Atany time prior to the expiration of a futures contract, the Fund may elect toclose its position by taking an opposite position which will operate toterminate the Fund's position in the futures contract.

Because futures contracts are generally settled within a day from thedate they are closed out, compared with a settlement period of three businessdays for most types of securities, the futures markets can provide superiorliquidity to the securities markets. Nevertheless, there is no assurance aliquid secondary market will exist for any particular futures contract at anyparticular time. In addition, futures exchanges may establish daily pricefluctuation limits for futures contracts and may halt trading if a contract'sprice moves upward or downward more than the limit in a given day. On volatiletrading days when the price fluctuation limit is reached, it would be impossiblefor the Fund to enter into new positions or close out existing positions. If thesecondary market for a futures contract were not liquid because of pricefluctuation limits or otherwise, the Fund would not promptly be able toliquidate unfavorable futures positions and potentially could be required to



continue to hold a futures position until the delivery date, regardless ofchanges in its value. As a result, the Fund's access to other assets held tocover its futures positions also could be impaired. For an additional discussionof futures contracts and certain risks involved therein, see this SAI and theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Options on Futures Contracts. The Fund may purchase put and calloptions on futures contracts. An option on a futures contract provides theholder with the right to enter into a "long" position in the underlying futurescontract, in the case of a call option, or a "short" position in the underlyingfutures contract, in the case of a put option, at a fixed exercise price to astated expiration date. Upon exercise of the option by the holder, a contractmarket clearing house establishes a corresponding short position for the writerof the option, in the case of a call option, or a corresponding long position,in the case of a put option. In the event that an option is exercised, theparties will be subject to all the risks associated with the trading of futurescontracts, such as payment of variation margin deposits.

A position in an option on a futures contract may be terminated by thepurchaser or seller prior to expiration by effecting a closing purchase or saletransaction, subject to the availability of a liquid secondary market, which isthe purchase or sale of an option of the same series (i.e., the same exerciseprice and expiration date) as the option previously purchased or sold. Thedifference between the premiums paid and received represents the trader's profitor loss on the transaction.

An option, whether based on a futures contract, a stock index or asecurity, becomes worthless to the holder when it expires. Upon exercise of anoption, the exchange or contract market clearing house assigns exercise noticeson a random basis to those of its members which have written options of the sameseries and with the same expiration date. A brokerage firm receiving suchnotices then assigns them on a random basis to those of its customers which havewritten options of the same series and expiration date. A writer therefore hasno control over whether an option will be exercised against it, nor over thetime of such exercise.

The purchase of a call option on a futures contract is similar in somerespects to the purchase of a call option on an individual security. See"Options on Foreign Currencies" below. Depending on the pricing of the optioncompared to either the price of the futures contract upon which it is based orthe price of the underlying instrument, ownership of the option may or may notbe less risky than ownership of the futures contract or the underlyinginstrument. As with the purchase of futures contracts, when the Fund is notfully invested it could buy a call option on a futures contract to hedge againsta market advance. The purchase of a put option on a futures contract is similarin some respects to the purchase of protective put options on portfoliosecurities. For example, the Fund would be able to buy a put option on a futurescontract to hedge its portfolio against the risk of falling prices. For anadditional discussion of options on futures contracts and certain risks involvedtherein, see this SAI and the Company's Prospectus under "Certain Risks Factorsand Investment Methods."

Options on Foreign Currencies. The Fund may buy and sell options onforeign currencies for hedging purposes in a manner similar to that in whichfutures on foreign currencies would be utilized. For example, a decline in theU.S. dollar value of a foreign currency in which portfolio securities aredenominated would reduce the U.S. dollar value of such securities, even if theirvalue in the foreign currency remained constant. In order to protect againstsuch diminutions in the value of portfolio securities, the Fund could buy putoptions on the foreign currency. If the value of the currency declines, the Fundwould have the right to sell such currency for a fixed amount in U.S. dollarsand would thereby offset, in whole or in part, the adverse effect on the Fundwhich otherwise would have resulted. Conversely, when a rise is projected in theU.S. dollar value of a currency in which securities to be acquired aredenominated, thereby increasing the cost of such securities, the Fund could buycall options thereon. The purchase of such options could offset, at leastpartially, the effects of the adverse movements in exchange rates.

Options on foreign currencies traded on national securities exchangesare within the jurisdiction of the Securities and Exchange Commission, as areother securities traded on such exchanges. As a result, many of the protectionsprovided to traders on organized exchanges will be available with respect tosuch transactions. In particular, all foreign currency option positions enteredinto on a national securities exchange are cleared and guaranteed by the OptionsClearing Corporation ("OCC"), thereby reducing the risk of counterparty default.Further, a liquid secondary market in options traded on a national securitiesexchange may be more readily available than in the over-the-counter market,potentially permitting the Fund to liquidate open positions at a profit prior toexercise or expiration, or to limit losses in the event of adverse marketmovements.

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 otherpolitical and economic events. In addition, exchange-traded options on foreigncurrencies involve certain risks not presented by the over-the-counter market.For example, exercise and settlement of such options must be made exclusivelythrough the OCC, which has established banking relationships in applicableforeign countries for this purpose. As a result, the OCC may, if it determinesthat foreign governmental restrictions or taxes would prevent the orderlysettlement of foreign currency option exercises, or would result in undueburdens on the OCC or its clearing member, impose special procedures on exerciseand settlement, such as technical changes in the mechanics of delivery ofcurrency, the fixing of dollar settlement prices, or prohibitions on exercise.

Risk Factors of Investing in Futures and Options. The successful use ofthe investment practices described above with respect to futures contracts,options on futures contracts, and options on securities indices, securities, andforeign currencies draws upon skills and experience which are different fromthose needed to select the other instruments in which the Fund invests. Shouldinterest or exchange rates or the prices of securities or financial indices movein an unexpected manner, the Fund may not achieve the desired benefits offutures and options or may realize losses and thus be in a worse position thanif such strategies had not been used. Unlike many exchange-traded futurescontracts and options on futures contracts, there are no daily price fluctuationlimits with respect to options on currencies and negotiated or over-the-counterinstruments, and adverse market movements could therefore continue to anunlimited extent over a period of time. In addition, the correlation betweenmovements in the price of the securities and currencies hedged or used for coverwill not be perfect and could produce unanticipated losses.

The Fund's ability to dispose of its positions in the foregoinginstruments will depend on the availability of liquid markets in theinstruments. Markets in a number of the instruments are relatively new and stilldeveloping and it is impossible to predict the amount of trading interest thatmay exist in those instruments in the future. Particular risks exist withrespect to the use of each of the foregoing instruments and could result in suchadverse consequences to the Fund as the possible loss of the entire premium paidfor an option bought by the Fund and the possible need to defer closing outpositions in certain instruments to avoid adverse tax consequences. As a result,no assurance can be given that the Fund will be able to use those instrumentseffectively for the purposes set forth above.

In addition, options on U.S. Government securities, futures contracts,options on futures contracts, forward contracts and options on foreigncurrencies may be traded on foreign exchanges and over-the-counter in foreigncountries. Such transactions are subject to the risk of governmental actionsaffecting trading in or the prices of foreign currencies or securities. Thevalue of such positions also could be affected adversely by (i) other complexforeign political and economic factors, (ii) lesser availability than in theUnited States of data on which to make trading decisions, (iii) delays in theFund's ability to act upon economic events occurring in foreign markets duringnonbusiness hours in the United States, (iv) the imposition of differentexercise and settlement terms and procedures and margin requirements than in theUnited States, and (v) low trading volume. For an additional discussion ofcertain risks involved in investing in futures and options, see this SAI and theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Foreign Securities. Investments in foreign countries involve certain riskswhich are not typically associated with U.S. investments. For a discussion ofcertain risks involved in foreign investing, see this SAI and the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Forward Contracts for Purchase or Sale of Foreign Currencies. The Fundgenerally conducts its foreign currency exchange transactions on a spot (i.e.,cash) basis at the spot rate prevailing in the foreign exchange currency market.When the Fund purchases or sells a security denominated in a foreign currency,it may enter into a forward foreign currency contract ("forward contract") forthe purchase or sale, for a fixed amount of dollars, of the amount of foreigncurrency involved in the underlying security transaction. A forward contractinvolves an obligation to purchase or sell a specific currency at a future date,which may be any fixed number of days from the date of the contract agreed uponby the parties, at a price set at the time of the contract. In this manner, theFund may obtain protection against a possible loss resulting from an adversechange in the relationship between the U.S. dollar and the foreign currencyduring the period between the date the security is purchased or sold and thedate upon which payment is made or received. Although such contracts tend tominimize the risk of loss due to the decline in the value of the hedgedcurrency, at the same time they tend to limit any potential gain which mightresult should the value of such currency increase. The Fund will not speculatein forward contracts.

Forward contracts are traded in the interbank market conducted directlybetween currency traders (usually large commercial banks) and their customers.



Generally a forward contract has no deposit requirement, and no commissions arecharged at any stage for trades. Although foreign exchange dealers do not chargea fee for conversion, they do realize a profit based on the difference betweenthe prices at which they buy and sell various currencies. When the Sub-advisorbelieves that the currency of a particular foreign country may suffer asubstantial decline against the U.S. dollar (or sometimes against anothercurrency), the Fund may enter into a forward contract to sell, for a fixeddollar or other currency amount, foreign currency approximating the value ofsome or all of the Fund's securities denominated in that currency. The Fund willnot enter into such forward contracts or maintain a net exposure to suchcontracts where the fulfillment of the contracts would require the Fund todeliver an amount of foreign currency in excess of the value of its portfoliosecurities or other assets denominated in that currency. Forward contracts may,from time to time, be considered illiquid, in which case they would be subjectto the Fund's limitation on investing in illiquid securities.

At the consummation of a forward contract for delivery by the Fund of aforeign currency, the Fund may either make delivery of the foreign currency orterminate its contractual obligation to deliver the foreign currency bypurchasing an offsetting contract obligating it to purchase, at the samematurity date, the same amount of the foreign currency. If the Fund chooses tomake delivery of the foreign currency, it may be required to obtain suchcurrency through the sale of portfolio securities denominated in such currencyor through conversion of other Fund assets into such currency.

Dealings in forward contracts by the Fund will be limited to thetransactions described above. Of course, the Fund is not required to enter intosuch transactions with regard to its foreign currency-denominated securities andwill not do so unless deemed appropriate by the Sub-advisor. It also should berealized that this method of protecting the value of the Fund's securitiesagainst a decline in the value of a currency does not eliminate fluctuations inthe underlying prices of the securities. It simply establishes a rate ofexchange which can be achieved at some future point in time. Additionally,although such contracts tend to minimize the risk of loss due to the decline inthe value of the hedged currency, at the same time they tend to limit anypotential gain which might result should the value of such currency increase.For an additional discussion of forward foreign currency contracts and certainrisks involved therein, see this SAI and the Company's Prospectus under "CertainRisk Factors and Investment Methods."

Illiquid Securities. As discussed in the Company's Prospectus, the Fundmay invest up to 15% of the value of its net assets, measured at the time ofinvestment, in investments which are not readily marketable. Restrictedsecurities are securities that may not be resold to the public withoutregistration under the Securities Act of 1933 (the "1933 Act"). Restrictedsecurities (other than Rule 144A securities deemed to be liquid, discussedbelow) and securities which, due to their market or the nature of the security,have no readily available markets for their disposition are considered to be notreadily marketable or "illiquid." These limitations on resale and marketabilitymay have the effect of preventing the Fund from disposing of such a security atthe time desired or at a reasonable price. In addition, in order to resell arestricted security, the Fund might have to bear the expense and incur thedelays associated with effecting registration. In purchasing illiquidsecurities, the Fund does not intend to engage in underwriting activities,except to the extent the Fund may be deemed to be a statutory underwriter underthe Securities Act in purchasing or selling such securities. Illiquid securitieswill be purchased for investment purposes only and not for the purpose ofexercising control or management of other companies. For an additionaldiscussion of illiquid or restricted securities and certain risks involvedtherein, see the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."


Rule 144A Securities. In recent years, a large institutional market hasdeveloped for certain securities that are not registered under the 1933 Act.Institutional investors generally will not seek to sell these instruments to thegeneral public, but instead will often depend on an efficient institutionalmarket in which such unregistered securities can readily be resold or on anissuer's ability to honor a demand for repayment. Therefore, the fact that thereare contractual or legal restrictions on resale to the general public or certaininstitutions is not dispositive of the liquidity of such investments.

Rule 144A under the 1933 Act establishes a "safe harbor" from theregistration requirements of the 1933 Act for resales of certain securities toqualified institutional buyers. The Fund may invest in Rule 144A securitieswhich, as disclosed in the Company's Prospectus, are restricted securities whichmay or may not be readily marketable. Rule 144A securities are readilymarketable if institutional markets for the securities develop pursuant to Rule144A which provide both readily ascertainable values for the securities and theability to liquidate the securities when liquidation is deemed necessary oradvisable. However, an insufficient number of qualified institutional buyers



interested in purchasing a Rule 144A security held by the Fund could affectadversely the marketability of the security. In such an instance, the Fund mightbe unable to dispose of the security promptly or at reasonable prices.

The Sub-advisor will determine that a liquid market exists forsecurities eligible for resale pursuant to Rule 144A under the 1933 Act, or anysuccessor to such rule, and that such securities are not subject to the Fund'slimitations on investing in securities that are not readily marketable. TheSub-advisor will consider the following factors, among others, in making thisdetermination: (1) the unregistered nature of a Rule 144A security; (2) thefrequency of trades and quotes for the security; (3) the number of dealerswilling to purchase or sell the security and the number of additional potentialpurchasers; (4) dealer undertakings to make a market in the security; and (5)the nature of the security and the nature of market place trades (e.g., the timeneeded to dispose of the security, the method of soliciting offers and themechanics of transfers).

Lower-Rated or Unrated Fixed-Income Securities. The Fund may invest upto 5% of its total assets in fixed-income securities which are unrated or arerated below investment grade either at the time of purchase or as a result ofreduction in rating after purchase. (This limitation does not apply toconvertible securities and preferred stocks.) Investments in lower-rated orunrated securities are generally considered to be of high risk. These debtsecurities, commonly referred to as junk bonds, are generally subject to twokinds of risk, credit risk and market risk. Credit risk relates to the abilityof the issuer to meet interest or principal payments, or both, as they come due.The ratings given a security by Moody's Investors Service, Inc. ("Moody's") andStandard & Poor's ("S&P") provide a generally useful guide as to such creditrisk. For a description of securities ratings, see the Appendix to this SAI. Thelower the rating given a security by a rating service, the greater the creditrisk such rating service perceives to exist with respect to the security.Increasing the amount of the Fund's assets invested in unrated or lower gradesecurities, while intended to increase the yield produced by those assets, willalso increase the risk to which those assets are subject.

Market risk relates to the fact that the market values of debtsecurities in which the Fund invests generally will be affected by changes inthe level of interest rates. An increase in interest rates will tend to reducethe market values of such securities, whereas a decline in interest rates willtend to increase their values. Medium and lower-rated securities (Baa or BBB andlower) and non-rated securities of comparable quality tend to be subject towider fluctuations in yields and market values than higher rated securities andmay have speculative characteristics. In order to decrease the risk in investingin debt securities, in no event will the Fund ever invest in a debt securityrated below B by Moody's or by S&P. Of course, relying in part on ratingsassigned by credit agencies in making investments will not protect the Fund fromthe risk that the securities in which they invest will decline in value, sincecredit ratings represent evaluations of the safety of principal, dividend, andinterest payments on debt securities, and not the market values of suchsecurities, and such ratings may not be changed on a timely basis to reflectsubsequent events.

Because investment in medium and lower-rated securities involvesgreater credit risk, achievement of the Fund's investment objective may be moredependent on the Sub-advisor's own credit analysis than is the case for fundsthat do not invest in such securities. In addition, the share price and yield ofthe Fund may fluctuate more than in the case of funds investing in higherquality, shorter term securities. Moreover, a significant economic downturn ormajor increase in interest rates may result in issuers of lower-rated securitiesexperiencing increased financial stress, which would adversely affect theirability to service their principal, dividend, and interest obligations, meetprojected business goals, and obtain additional financing. In this regard, itshould be noted that while the market for high yield debt securities has been inexistence for many years and from time to time has experienced economicdownturns in recent years, this market has involved a significant increase inthe use of high yield debt securities to fund highly leveraged corporateacquisitions and restructurings. Past experience may not, therefore, provide anaccurate indication of future performance of the high yield debt securitiesmarket, particularly during periods of economic recession. Furthermore, expensesincurred in recovering an investment in a defaulted security may adverselyaffect the Fund's net asset value. Finally, while the Sub-advisor attempts tolimit purchases of medium and lower-rated securities to securities having anestablished secondary market, the secondary market for such securities may beless liquid than the market for higher quality securities. The reduced liquidityof the secondary market for such securities may adversely affect the marketprice of, and ability of the Fund to value, particular securities at certaintimes, thereby making it difficult to make specific valuation determinations.The Fund does not invest in any medium and lower-rated securities which presentspecial tax consequences, such as zero-coupon bonds or pay-in-kind bonds. For anadditional discussion of certain risks involved in lower-rated securities, seethis SAI and the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."



The Sub-advisor seeks to reduce the overall risks associated with theFund's investments through diversification and consideration of factorsaffecting the value of securities it considers relevant. No assurance can begiven, however, regarding the degree of success that will be achieved in thisregard or that the Fund will achieve its investment objective.

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements withrespect to money market instruments eligible for investment by the Fund withmember banks of the Federal Reserve system, registered broker-dealers, andregistered government securities dealers. A repurchase agreement may beconsidered a loan collateralized by securities. Repurchase agreements maturingin more than seven days are considered illiquid and will be subject to theFund's limitation with respect to illiquid securities.

The Fund has not adopted any limits on the amounts of its total assetsthat may be invested in repurchase agreements which mature in less than sevendays. The Fund may invest up to 15% of the market value of its net assets,measured at the time of purchase, in securities which are not readilymarketable, including repurchase agreements maturing in more than seven days.For an additional discussion of repurchase agreements and certain risks involvedtherein, see the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

Convertible Securities. The Fund may buy securities convertible intocommon stock if, for example, the Sub-advisor believes that a company'sconvertible securities are undervalued in the market. Convertible securitieseligible for purchase include convertible bonds, convertible preferred stocks,and warrants. A warrant is an instrument issued by a corporation which gives theholder the right to subscribe to a specific amount of the corporation's capitalstock at a set price for a specified period of time. Warrants do not representownership of the securities, but only the right to buy the securities. Theprices of warrants do not necessarily move parallel to the prices of underlyingsecurities. Warrants may be considered speculative in that they have no votingrights, pay no dividends, and have no rights with respect to the assets of acorporation issuing them. Warrant positions will not be used to increase theleverage of the Fund; consequently, warrant positions are generally accompaniedby cash positions equivalent to the required exercise amount.


1. Invest more than 15% of the market value of its net assets in securitieswhich are not readily marketable, including repurchase agreements maturing inover seven days;

2. Purchase securities of other investment companies except in compliancewith the Investment Company Act of 1940;

3. Purchase any securities on margin except to obtain such short-termcredits as may be necessary for the clearance of transactions (and, providedthat margin payments and other deposits in connection with transactions inoptions, futures and forward contracts shall not be deemed to constitutepurchasing securities on margin); or

4. Sell securities short.

In addition, in periods of uncertain market and economic conditions, asdetermined by the Sub-advisor, the Fund may depart from its basic investmentobjective and assume a defensive position with up to 100% of its assetstemporarily invested in high quality corporate bonds or notes and governmentissues, or held in cash.

If a percentage restriction is adhered to at the time of investment, alater increase or decrease in percentage beyond the specified limit that resultsfrom a change in values or net assets will not be considered a violation.

ASAF T. ROWE PRICE SMALL COMPANY VALUE FUND:

Investment Objective: The investment objective of the Fund is to providelong-term capital growth by investing primarily in small-capitalization stocksthat appear to be undervalued.


Although primarily all of the Fund's assets are invested in commonstocks, the Fund may invest in convertible securities, corporate debt securitiesand preferred stocks. The fixed-income securities in which the Fund may investinclude, but are not limited to, those described below. See this SAI under"Certain Risk Factors and Investment Methods," for an additional discussion ofdebt obligations.



U.S. Government Obligations. Bills, notes, bonds and other debt securitiesissued by the U.S. Treasury. These are direct obligations of the U.S. Governmentand differ mainly in the length of their maturities.

U.S. Government Agency Securities. Issued or guaranteed by U.S.Government sponsored enterprises and federal agencies. These include securitiesissued by the Federal National Mortgage Association, Government NationalMortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers HomeAdministration, Banks for Cooperatives, Federal Intermediate Credit Banks,Federal Financing Bank, Farm Credit Banks, the Small Business Association, andthe Tennessee Valley Authority. Some of these securities are supported by thefull faith and credit of the U.S. Treasury; and the remainder are supported onlyby the credit of the instrumentality, which may or may not include the right ofthe issuer to borrow from the Treasury.

Bank Obligations. Certificates of deposit, bankers' acceptances, and othershort-term debt obligations. Certificates of deposit are short-term obligationsof commercial banks. A bankers' acceptance is a time draft drawn on a commercialbank by a borrower, usually in connection with international commercialtransactions. Certificates of deposit may have fixed or variable rates. The Fundmay invest in U.S. banks, foreign branches of U.S. banks, U.S. branches offoreign banks, and foreign branches of foreign banks.

Short-Term Corporate Debt Securities. Outstanding nonconvertiblecorporate debt securities (e.g., bonds and debentures) which have one year orless remaining to maturity. Corporate notes may have fixed, variable, orfloating rates.

Commercial Paper. Short-term promissory notes issued by corporationsprimarily to finance short-term credit needs. Certain notes may have floating orvariable rates.

Foreign Government Securities. Issued or guaranteed by a foreigngovernment, province, instrumentality, political subdivision or similar unitthereof.

Savings and Loan Obligations. Negotiable certificates of deposit and othershort-term debt obligations of savings and loan associations.

Supranational Entities. The Fund may also invest in the securities ofcertain supranational entities, such as the International Development Bank.

Lower-Rated Debt Securities. The Fund's investment program permits itto purchase below investment grade securities, commonly referred to as "junkbonds." Since investors generally perceive that there are greater risksassociated with investment in lower quality securities, the yields from suchsecurities normally exceed those obtainable from higher quality securities.However, the principal value of lower-rated securities generally will fluctuatemore widely than higher quality securities. Lower quality investments entail ahigher risk of default -- that is, the nonpayment of interest and principal bythe issuer than higher quality investments. Such securities are also subject tospecial risks, discussed below. Although the Fund seeks to reduce risk byportfolio diversification, credit analysis, and attention to trends in theeconomy, industries and financial markets, such efforts will not eliminate allrisk. There can, of course, be no assurance that the Fund will achieve itsinvestment objective.

After purchase by the Fund, a debt security may cease to be rated orits rating may be reduced below the minimum required for purchase by the Fund.Neither event will require a sale of such security by the Fund. However, theSub-advisor will consider such event in its determination of whether the Fundshould continue to hold the security. To the extent that the ratings given byMoody's or S&P may change as a result of changes in such organizations or theirrating systems, the Fund will attempt to use comparable ratings as standards forinvestments in accordance with the investment policies contained in theCompany's Prospectus.

Junk bonds are regarded as predominantly speculative with respect tothe issuer's continuing ability to meet principal and interest payments. Becauseinvestment in low and lower-medium quality bonds involves greater investmentrisk, to the extent the Fund invests in such bonds, achievement of itsinvestment objective will be more dependent on the Sub-advisor's credit analysisthan would be the case if the Fund was investing in higher quality bonds. For adiscussion of the special risks involved in low-rated bonds, see this SAI andthe Company's Prospectus under "Certain Risk Factors and Investment Methods."

Mortgage-Backed Securities. Mortgage-backed securities are securitiesrepresenting interests in a pool of mortgages. After purchase by the Fund, asecurity may cease to be rated or its rating may be reduced below the minimumrequired for purchase by the Fund. Neither event will require a sale of suchsecurity by the Fund. However, the Sub-advisor will consider such event in itsdetermination of whether the Fund should continue to hold the security. To theextent that the ratings given by Moody's or S&P may change as a result of



changes in such organizations or their rating systems, the Fund will attempt touse comparable ratings as standards for investments in accordance with theinvestment policies contained in the Company's Prospectus. For a discussion ofmortgage-backed securities and certain risks involved therein, see this SAI andthe Company's Prospectus under "Certain Risk Factors and Investment Methods."

Collateralized Mortgage Obligations (CMOs). CMOs are obligations fullycollateralized by a portfolio of mortgages or mortgage-related securities.Payments of principal and interest on the mortgages are passed through to theholders of the CMOs on the same schedule as they are received, although certainclasses of CMOs have priority over others with respect to the receipt ofprepayments on the mortgages. Therefore, depending on the type of CMOs in whicha fund invests, the investment may be subject to a greater or lesser risk ofprepayment than other types of mortgage-related securities. For an additionaldiscussion of CMOs and certain risks involved therein, see the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Stripped Agency Mortgage-Backed Securities. Stripped AgencyMortgage-Backed securities represent interests in a pool of mortgages, the cashflow of which has been separated into its interest and principal components."IOs" (interest only securities) receive the interest portion of the cash flowwhile "POs" (principal only securities) receive the principal portion. StrippedAgency Mortgage-Backed Securities may be issued by U.S. Government Agencies orby private issuers similar to those described above with respect to CMOs andprivately-issued mortgage-backed certificates. As interest rates rise and fall,the value of IOs tends to move in the same direction as interest rates. Thevalue of the other mortgage-backed securities described herein, like other debtinstruments, will tend to move in the opposite direction compared to interestrates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs maygenerate taxable income from the current accrual of original issue discount,without a corresponding distribution of cash to the Fund.

The cash flows and yields on IO and PO classes are extremely sensitiveto the rate of principal payments (including prepayments) on the relatedunderlying mortgage assets. For example, a rapid or slow rate of principalpayments may have a material adverse effect on the prices of IOs or POs,respectively. If the underlying mortgage assets experience greater thananticipated prepayments of principal, an investor may fail to recoup fully itsinitial investment in an IO class of a stripped mortgage-backed security, evenif the IO class is rated AAA or Aaa or is derived from a full faith and creditobligation. Conversely, if the underlying mortgage assets experience slower thananticipated prepayments of principal, the price on a PO class will be affectedmore severely than would be the case with a traditional mortgage-backedsecurity.

The Fund will treat IOs and POs, other than government-issued IOs orPOs backed by fixed rate mortgages, as illiquid securities and, accordingly,limit its investments in such securities, together with all other illiquidsecurities, to 15% of the Fund's net assets. The Sub-advisor will determine theliquidity of these investments based on the following guidelines: the type ofissuer; type of collateral, including age and prepayment characteristics; rateof interest on coupon relative to current market rates and the effect of therate on the potential for prepayments; complexity of the issue's structure,including the number of tranches; size of the issue and the number of dealerswho make a market in the IO or PO. The Fund will treat non-government-issued IOsand POs not backed by fixed or adjustable rate mortgages as illiquid unless anduntil the Securities and Exchange Commission modifies its position.

Asset-Backed Securities. The Fund may invest a portion of its assets indebt obligations known as asset-backed securities. The credit quality of mostasset-backed securities depends primarily on the credit quality of the assetsunderlying such securities, how well the entity issuing the security isinsulated from the credit risk of the originator or any other affiliatedentities and the amount and quality of any credit support provided to thesecurities. The rate of principal payment on asset-backed securities generallydepends on the rate of principal payments received on the underlying assetswhich in turn may be affected by a variety of economic and other factors. As aresult, the yield on any asset-backed security is difficult to predict withprecision and actual yield to maturity may be more or less than the anticipatedyield to maturity.

Automobile Receivable Securities. The Fund may invest inasset-backed securities which are backed by receivables from motor vehicleinstallment sales contracts or installment loans secured by motor vehicles("Automobile Receivable Securities").

Credit Card Receivable Securities. The Fund may invest inasset-backed securities backed by receivables from revolving credit cardagreements ("Credit Card Receivable Securities").

Other Assets. The Sub-advisor anticipates that asset-backedsecurities backed by assets other than those described above will be issued inthe future. The Fund may invest in such securities in the future if such



investment is otherwise consistent with its investment objective and policies.For a discussion of these securities, see this SAI and the Company's Prospectusunder "Certain Risk Factors and Investment Methods."

Writing Covered Call Options. The Fund may write (sell) American orEuropean style "covered" call options and purchase options to close out optionspreviously written by the Fund. In writing covered call options, the Fundexpects to generate additional premium income which should serve to enhance theFund's total return and reduce the effect of any price decline of the securityor currency involved in the option. Covered call options will generally bewritten on securities or currencies which, in the Sub-advisor's opinion, are notexpected to have any major price increases or moves in the near future butwhich, over the long term, are deemed to be attractive investments for the Fund.

The Fund will write only covered call options. This means that the Fundwill own the security or currency subject to the option or an option to purchasethe same underlying security or currency, having an exercise price equal to orless than the exercise price of the "covered" option, or will establish andmaintain with its custodian for the term of the option, an account consisting ofcash or other liquid assets having a value equal to the fluctuating market valueof the optioned securities or currencies.

Portfolio securities or currencies on which call options may be writtenwill be purchased solely on the basis of investment considerations consistentwith the Fund's investment objective. The writing of covered call options is aconservative investment technique believed to involve relatively little risk (incontrast to the writing of naked or uncovered options, which the Fund will notdo), but capable of enhancing the Fund's total return. When writing a coveredcall option, a fund, in return for the premium, gives up the opportunity forprofit from a price increase in the underlying security or currency above theexercise price, but conversely retains the risk of loss should the price of thesecurity or currency decline. Unlike one who owns securities or currencies notsubject to an option, the Fund has no control over when it may be required tosell the underlying securities or currencies, since it may be assigned anexercise notice at any time prior to the expiration of its obligation as awriter. If a call option which the Fund has written expires, the Fund willrealize a gain in the amount of the premium; however, such gain may be offset bya decline in the market value of the underlying security or currency during theoption period. If the call option is exercised, the Fund will realize a gain orloss from the sale of the underlying security or currency. The Fund does notconsider a security or currency covered by a call to be "pledged" as that termis used in the Fund's policy which limits the pledging or mortgaging of itsassets.

Call options written by the Fund will normally have expiration dates ofless than nine months from the date written. The exercise price of the optionsmay be below, equal to, or above the current market values of the underlyingsecurities or currencies at the time the options are written. From time to time,the Fund may purchase an underlying security or currency for delivery inaccordance with an exercise notice of a call option assigned to it, rather thandelivering such security or currency from its portfolio. In such cases,additional costs may be incurred.

The premium received is the market value of an option. The premium theFund will receive from writing a call option will reflect, among other things,the current market price of the underlying security or currency, therelationship of the exercise price to such market price, the historical pricevolatility of the underlying security or currency, and the length of the optionperiod. Once the decision to write a call option has been made, the Sub-advisor,in determining whether a particular call option should be written on aparticular security or currency, will consider the reasonableness of theanticipated premium and the likelihood that a liquid secondary market will existfor those options. The premium received by the Fund for writing covered calloptions will be recorded as a liability of the Fund. This liability will beadjusted daily to the option's current market value, which will be the latestsale price at the time at which the net asset value per share of the Fund iscomputed (close of the New York Stock Exchange), or, in the absence of suchsale, the latest asked price. The option will be terminated upon expiration ofthe option, the purchase of an identical option in a closing transaction, ordelivery of the underlying security or currency upon the exercise of the option.

The Fund will realize a profit or loss from a closing purchasetransaction if the cost of the transaction is less or more than the premiumreceived from the writing of the option. Because increases in the market priceof a call option will generally reflect increases in the market price of theunderlying security or currency, any loss resulting from the repurchase of acall option is likely to be offset in whole or in part by appreciation of theunderlying security or currency owned by the Fund.

The Fund will not write a covered call option if, as a result, theaggregate market value of all portfolio securities or currencies covering callor put options exceeds 25% of the market value of the Fund's net assets. Incalculating the 25% limit, the Fund will offset, against the value of assets



covering written calls and puts, the value of purchased calls and puts onidentical securities or currencies with identical maturity dates.

Writing Covered Put Options. The Fund may write American or Europeanstyle covered put options and purchase options to close out options previouslywritten by the Fund.

The Fund would write put options only on a covered basis, which meansthat the Fund would maintain in a segregated account cash, U.S. governmentsecurities or other liquid high-grade debt obligations in an amount not lessthan the exercise price or the Fund will own an option to sell the underlyingsecurity or currency subject to the option having an exercise price equal to orgreater than the exercise price of the "covered" option at all times while theput option is outstanding. (The rules of a clearing corporation currentlyrequire that such assets be deposited in escrow to secure payment of theexercise price.) The Fund would generally write covered put options incircumstances where the Sub-advisor wishes to purchase the underlying securityor currency for the Fund at a price lower than the current market price of thesecurity or currency. In such event the Fund would write a put option at anexercise price which, reduced by the premium received on the option, reflectsthe lower price it is willing to pay. Since the Fund would also receive intereston debt securities or currencies maintained to cover the exercise price of theoption, this technique could be used to enhance current return during periods ofmarket uncertainty. The risk in such a transaction would be that the marketprice of the underlying security or currency would decline below the exerciseprice less the premiums received. Such a decline could be substantial and resultin a significant loss to the Fund. In addition, the Fund, because it does notown the specific securities or currencies which it may be required to purchasein exercise of the put, cannot benefit from appreciation, if any, with respectto such specific securities or currencies.

The Fund will not write a covered put option if, as a result, theaggregate market value of all portfolio securities or currencies covering put orcall options exceeds 25% of the market value of the Fund's net assets. Incalculating the 25% limit, the Fund will offset, against the value of assetscovering written puts and calls, the value of purchased puts and calls onidentical securities or currencies with identical maturity dates.

Purchasing Put Options. The Fund may purchase American or Europeanstyle put options. As the holder of a put option, the Fund has the right to sellthe underlying security or currency at the exercise price at any time during theoption period (American style) or at the expiration of the option (Europeanstyle). The Fund may enter into closing sale transactions with respect to suchoptions, exercise them or permit them to expire. The Fund may purchase putoptions for defensive purposes in order to protect against an anticipateddecline in the value of its securities or currencies. An example of such use ofput options is provided in this SAI under "Certain Risk Factors and InvestmentMethods."

The premium paid by the Fund when purchasing a put option will berecorded as an asset of the Fund. This asset will be adjusted daily to theoption's current market value, which will be the latest sale price at the timeat which the net asset value per share of the Fund is computed (close of NewYork Stock Exchange), or, in the absence of such sale, the latest bid price.This asset will be terminated upon expiration of the option, the selling(writing) of an identical option in a closing transaction, or the delivery ofthe underlying security or currency upon the exercise of the option.

Purchasing Call Options. The Fund may purchase American or Europeanstyle call options. As the holder of a call option, the Fund has the right topurchase the underlying security or currency at the exercise price at any timeduring the option period (American style) or at the expiration of the option(European style). The Fund may enter into closing sale transactions with respectto such options, exercise them or permit them to expire. The Fund may purchasecall options for the purpose of increasing its current return or avoiding taxconsequences which could reduce its current return. The Fund may also purchasecall options in order to acquire the underlying securities or currencies.Examples of such uses of call options are provided in this SAI under "CertainRisk Factors and Investment Methods."

The Fund may also purchase call options on underlying securities orcurrencies it owns in order to protect unrealized gains on call optionspreviously written by it. A call option would be purchased for this purposewhere tax considerations make it inadvisable to realize such gains through aclosing purchase transaction. Call options may also be purchased at times toavoid realizing losses.

Dealer (Over-the-Counter) Options. The Fund may engage in transactionsinvolving dealer options. Certain risks are specific to dealer options. Whilethe Fund would look to a clearing corporation to exercise exchange-tradedoptions, if the Fund were to purchase a dealer option, it would rely on thedealer from whom it purchased the option to perform if the option wereexercised. Failure by the dealer to do so would result in the loss of the



premium paid by the Fund as well as loss of the expected benefit of thetransaction. For a discussion of dealer options, see this SAI under "CertainRisk Factors and Investment Methods."

Futures Contracts:

Transactions in Futures. The Fund may enter into futurescontracts, including stock index, interest rate and currency futures ("futuresor futures contracts"). The Fund may also enter into futures on commoditiesrelated to the types of companies in which it invests, such as oil and goldfutures. Otherwise the nature of such futures and the regulatory limitations andrisks to which they are subject are the same as those described below.

Stock index futures contracts may be used to attempt to hedgea portion of the Fund, as a cash management tool, or as an efficient way for theSub-advisor to implement either an increase or decrease in portfolio marketexposure in response to changing market conditions. The Fund may purchase orsell futures contracts with respect to any stock index. Nevertheless, to hedgethe Fund successfully, the Fund must sell futures contacts with respect toindices or subindices whose movements will have a significant correlation withmovements in the prices of the Fund's securities.

Interest rate or currency futures contracts may be used toattempt to hedge against changes in prevailing levels of interest rates orcurrency exchange rates in order to establish more definitely the effectivereturn on securities or currencies held or intended to be acquired by the Fund.In this regard, the Fund could sell interest rate or currency futures as anoffset against the effect of expected increases in interest rates or currencyexchange rates and purchase such futures as an offset against the effect ofexpected declines in interest rates or currency exchange rates.

The Fund will enter into futures contracts which are traded onnational or foreign futures exchanges, and are standardized as to maturity dateand underlying financial instrument. Futures exchanges and trading in the UnitedStates are regulated under the Commodity Exchange Act by the CFTC. Futures aretraded in London, at the London International Financial Futures Exchange, inParis, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Althoughtechniques other than the sale and purchase of futures contracts could be usedfor the above-referenced purposes, futures contracts offer an effective andrelatively low cost means of implementing the Fund's objectives in these areas.

Regulatory Limitations. The Fund will engage in futurescontracts and options thereon only for bona fide hedging, yield enhancement, andrisk management purposes, in each case in accordance with rules and regulationsof the CFTC.

The Fund may not purchase or sell futures contracts or relatedoptions if, with respect to positions which do not qualify as bona fide hedgingunder applicable CFTC rules, the sum of the amounts of initial margin depositsand premiums paid on those positions would exceed 5% of the net asset value ofthe Fund after taking into account unrealized profits and unrealized losses onany such contracts it has entered into; provided, however, that in the case ofan option that is in-the-money at the time of purchase, the in-the-money amountmay be excluded in calculating the 5% limitation. For purposes of this policyoptions on futures contracts and foreign currency options traded on acommodities exchange will be considered "related options." This policy may bemodified by the Directors of the Company without a shareholder vote and does notlimit the percentage of the Fund's assets at risk to 5%.

The Fund's use of futures contracts will not result inleverage. Therefore, to the extent necessary, in instances involving thepurchase of futures contracts or the writing of call or put options thereon bythe Fund, an amount of cash or other liquid assets equal to the market value ofthe futures contracts and options thereon (less any related margin deposits),will be identified in an account with the Fund's custodian to cover theposition, or alternative cover (such as owning an offsetting position) will beemployed. Assets used as cover or held in an identified account cannot be soldwhile the position in the corresponding option or future is open, unless theyare replaced with similar assets. As a result, the commitment of a large portionof the Fund's assets to cover or identified accounts could impede portfoliomanagement or the Fund's ability to meet redemption requests or other currentobligations.

If the CFTC or other regulatory authorities adopt different(including less stringent) or additional restrictions, the Fund would complywith such new restrictions.

Options on Futures Contracts. The Fund may purchase and sell options onthe same types of futures in which it may invest. As an alternative to writingor purchasing call and put options on stock index futures, the Fund may write orpurchase call and put options on stock indices. Such options would be used in amanner similar to the use of options on futures contracts. From time to time, asingle order to purchase or sell futures contracts (or options thereon) may be



made on behalf of the Fund and other mutual funds or portfolios of mutual fundsmanaged by the Sub-advisor or Rowe Price-Fleming International, Inc. Suchaggregated orders would be allocated among the Fund and such other portfoliosmanaged by the Sub-advisor in a fair and non-discriminatory manner. See this SAIand Company's Prospectus under "Certain Risk Factors and Investment Methods" fora description of certain risks in options and future contracts.

Additional Futures and Options Contracts. Although the Fund has nocurrent intention of engaging in futures or options transactions other thanthose described above, it reserves the right to do so. Such futures and optionstrading might involve risks which differ from those involved in the futures andoptions described above.

Foreign Futures and Options. The Fund is permitted to invest in foreignfutures and options. For a description of foreign futures and options andcertain risks involved therein as well as certain risks involved in foreigninvesting, see this SAI and the Company's Prospectus under "Certain Risk Factorsand Investment Methods."

Foreign Securities. The Fund may invest in U.S. dollar-denominated andnon-U.S. dollar-denominated securities of foreign issuers. There are specialrisks in foreign investing. Certain of these risks are inherent in anyinternational mutual fund while others relate more to the countries in which theFund will invest. Many of the risks are more pronounced for investments indeveloping or emerging countries, such as many of the countries of SoutheastAsia, Latin America, Eastern Europe and the Middle East. For an additionaldiscussion of certain risks involved in investing in foreign securities, seethis SAI and the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

Foreign Currency Transactions. A forward foreign currency exchangecontract involves an obligation to purchase or sell a specific currency at afuture date, which may be any fixed number of days from the date of the contractagreed upon by the parties, at a price set at the time of the contract. Thesecontracts are principally traded in the interbank market conducted directlybetween currency traders (usually large, commercial banks) and their customers.A forward contract generally has no deposit requirement, and no commissions arecharged at any stage for trades.

The Fund may enter into forward contracts for a variety of purposes inconnection with the management of the foreign securities portion of itsportfolio. The Fund's use of such contracts would include, but not be limitedto, the following: First, when the Fund enters into a contract for the purchaseor sale of a security denominated in a foreign currency, it may desire to "lockin" the U.S. dollar price of the security. Second, when the Sub-advisor believesthat one currency may experience a substantial movement against anothercurrency, including the U.S. dollar, it may enter into a forward contract tosell or buy the amount of the former foreign currency, approximating the valueof some or all of the Fund's securities denominated in such foreign currency.Alternatively, where appropriate, the Fund may hedge all or part of its foreigncurrency exposure through the use of a basket of currencies or a proxy currencywhere such currency or currencies act as an effective proxy for othercurrencies. In such a case, the Fund may enter into a forward contract where theamount of the foreign currency to be sold exceeds the value of the securitiesdenominated in such currency. The use of this basket hedging technique may bemore efficient and economical than entering into separate forward contracts foreach currency held in the Fund. The precise matching of the forward contractamounts and the value of the securities involved will not generally be possiblesince the future value of such securities in foreign currencies will change as aconsequence of market movements in the value of those securities between thedate the forward contract is entered into and the date it matures. Theprojection of short-term currency market movement is extremely difficult, andthe successful execution of a short-term hedging strategy is highly uncertain.Under normal circumstances, consideration of the prospect for currency paritieswill be incorporated into the longer term investment decisions made with regardto overall diversification strategies. However, the Sub-advisor believes that itis important to have the flexibility to enter into such forward contracts whenit determines that the best interests of the Fund will be served.

The Fund may enter into forward contracts for any other purposeconsistent with the Fund's investment objective and policies. However, the Fundwill not enter into a forward contract, or maintain exposure to any suchcontract(s), if the amount of foreign currency required to be deliveredthereunder would exceed the Fund's holdings of liquid assets and currencyavailable for cover of the forward contract(s). In determining the amount to bedelivered under a contract, the Fund may net offsetting positions.

At the maturity of a forward contract, the Fund may sell the portfoliosecurity and make delivery of the foreign currency, or it may retain thesecurity and either extend the maturity of the forward contract (by "rolling"that contract forward) or may initiate a new forward contract.

If the Fund retains the portfolio security and engages in an offsetting



transaction, the Fund will incur a gain or a loss (as described below) to theextent that there has been movement in forward contract prices. If the Fundengages in an offsetting transaction, it may subsequently enter into a newforward contract to sell the foreign currency. Should forward prices declineduring the period between the Fund's entering into a forward contract for thesale of a foreign currency and the date it enters into an offsetting contractfor the purchase of the foreign currency, the Fund will realize a gain to theextent the price of the currency it has agreed to sell exceeds the price of thecurrency it has agreed to purchase. Should forward prices increase, the Fundwill suffer a loss to the extent of the price of the currency it has agreed topurchase exceeds the price of the currency it has agreed to sell.

The Fund's dealing in forward foreign currency exchange contracts willgenerally be limited to the transactions described above. However, the Fundreserves the right to enter into forward foreign currency contracts fordifferent purposes and under different circumstances. Of course, the Fund is notrequired to enter into forward contracts with regard to its foreigncurrency-denominated securities and will not do so unless deemed appropriate bythe Sub-advisor. It also should be realized that this method of hedging againsta decline in the value of a currency does not eliminate fluctuations in theunderlying prices of the securities. It simply establishes a rate of exchange ata future date. Additionally, although such contracts tend to minimize the riskof loss due to a decline in the value of the hedged currency, at the same time,they tend to limit any potential gain which might result from an increase in thevalue of that currency.

Although the Fund values its assets daily in terms of U.S. dollars, itdoes not intend to convert its holdings of foreign currencies into U.S. dollarson a daily basis. It will do so from time to time, and investors should be awareof the costs of currency conversion. Although foreign exchange dealers do notcharge a fee for conversion, they do realize a profit based on the difference(the "spread") between the prices at which they are buying and selling variouscurrencies. Thus, a dealer may offer to sell a foreign currency to the Fund atone rate, while offering a lesser rate of exchange should the Fund desire toresell that currency to the dealer. For a discussion of certain risk factorsinvolved in foreign currency transactions, see this SAI and the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Federal Tax Treatment of Options, Futures Contracts and Forward ForeignExchange Contracts. The Fund may enter into certain option, futures, and forwardforeign exchange contracts, including options and futures on currencies, whichwill be treated as Section 1256 contracts or straddles.

Transactions which are considered Section 1256 contracts will beconsidered to have been closed at the end of the Fund's fiscal year and anygains or losses will be recognized for tax purposes at that time. Such gains orlosses from the normal closing or settlement of such transactions will becharacterized as 60% long-term capital gain or loss and 40% short-term capitalgain or loss regardless of the holding period of the instrument. The Fund willbe required to distribute net gains on such transactions to shareholders eventhough it may not have closed the transaction and received cash to pay suchdistributions.

Options, futures and forward foreign exchange contracts, includingoptions and futures on currencies, which offset a foreign dollar denominatedbond or currency position may be considered straddles for tax purposes, in whichcase a loss on any position in a straddle will be subject to deferral to theextent of unrealized gain in an offsetting position. The holding period of thesecurities or currencies comprising the straddle will be deemed not to beginuntil the straddle is terminated. For securities offsetting a purchased put,this adjustment of the holding period may increase the gain from sales ofsecurities held less than three months. The holding period of the securityoffsetting an "in-the-money qualified covered call" option on an equity securitywill not include the period of time the option is outstanding.

Losses on written covered calls and purchased puts on securities,excluding certain "qualified covered call" options on equity securities, may belong-term capital loss, if the security covering the option was held for morethan twelve months prior to the writing of the option.

In order for the Fund to continue to qualify for federal income taxtreatment as a regulated investment company, at least 90% of its gross incomefor a taxable year must be derived from qualifying income, i.e., dividends,interest, income derived from loans of securities, and gains from the sale ofsecurities or currencies. Pending tax regulations could limit the extent thatnet gain realized from option, futures or foreign forward exchange contracts oncurrencies is qualifying income for purposes of the 90% requirement. Inaddition, gains realized on the sale or other disposition of securities,including option, futures or foreign forward exchange contracts on securities orsecurities indexes and, in some cases, currencies, held for less than threemonths, must be limited to less than 30% of the Fund's annual gross income. Inorder to avoid realizing excessive gains on securities or currencies held lessthan three months, the Fund may be required to defer the closing out of option,



futures or foreign forward exchange contracts) beyond the time when it wouldotherwise be advantageous to do so. It is anticipated that unrealized gains onSection 1256 option, futures and foreign forward exchange contracts, which havebeen open for less than three months as of the end of the Fund's fiscal year andwhich are recognized for tax purposes, will not be considered gains onsecurities or currencies held less than three months for purposes of the 30%test.

Illiquid and Restricted Securities. If through the appreciation ofilliquid securities or the depreciation of liquid securities, the Fund should bein a position where more than 15% of the value of its net assets is invested inilliquid assets, including restricted securities, the Fund will take appropriatesteps to protect liquidity.

Notwithstanding the above, the Fund may purchase securities which,while privately placed, are eligible for purchase and sale under Rule 144A underthe Securities Act of 1933 (the "1933 Act"). This rule permits certain qualifiedinstitutional buyers, such as the Fund, to trade in privately placed securitieseven though such securities are not registered under the 1933 Act. TheSub-advisor, under the supervision of the Directors of the Company, willconsider whether securities purchased under Rule 144A are illiquid and thussubject to the Fund's restriction of investing no more than 15% of its netassets in illiquid securities. A determination of whether a Rule 144A securityis liquid or not is a question of fact. In making this determination, theSub-advisor will consider the trading markets for the specific security takinginto account the unregistered nature of a Rule 144A security. In addition, theSub-advisor could consider the (1) frequency of trades and quotes, (2) number ofdealers and potential purchasers, (3) dealer undertakings to make a market, and(4) the nature of the security and of marketplace trades (e.g., the time neededto dispose of the security, the method of soliciting offers and the mechanics oftransfer). The liquidity of Rule 144A securities would be monitored, and if as aresult of changed conditions it is determined that a Rule 144A security is nolonger liquid, the Fund's holdings of illiquid securities would be reviewed todetermine what, if any, steps are required to assure that the Fund does notinvest more than 15% of its net assets in illiquid securities. Investing in Rule144A securities could have the effect of increasing the amount of the Fund'sassets invested in illiquid securities if qualified institutional buyers areunwilling to purchase such securities.


Hybrid Instruments. Hybrid Instruments have been developed and combinethe elements of futures contracts, options or other financial instruments withthose of debt, preferred equity or a depository instrument (hereinafter "HybridInstruments). Hybrid Instruments may take a variety of forms, including, but notlimited to, debt instruments with interest or principal payments or redemptionterms determined by reference to the value of a currency or commodity orsecurities index at a future point in time, preferred stock with dividend ratesdetermined by reference to the value of a currency, or convertible securitieswith the conversion terms related to a particular commodity. For a discussion ofcertain risks involved in investing in hybrid instruments see this SAI under"Certain Risk Factors and Investment Methods."

Repurchase Agreements. Subject to guidelines adopted by the Directorsof the Company, the Fund may enter into a repurchase agreement through which aninvestor (such as the Fund) purchases a security (known as the "underlyingsecurity") from a well-established securities dealer or a bank that is a memberof the Federal Reserve System. Any such dealer or bank will be on theSub-advisor's approved list and have a credit rating with respect to itsshort-term debt of at least A1 by Standard & Poor's Corporation, P1 by Moody'sInvestors Service, Inc., or the equivalent rating by the Sub-advisor. At thattime, the bank or securities dealer agrees to repurchase the underlying securityat the same price, plus specified interest. Repurchase agreements are generallyfor a short period of time, often less than a week. Repurchase agreements whichdo not provide for payment within seven days will be treated as illiquidsecurities. The Fund will only enter into repurchase agreements where (i) theunderlying securities are of the type (excluding maturity limitations) which theFund's investment guidelines would allow it to purchase directly, (ii) themarket value of the underlying security, including interest accrued, will be atall times equal to or exceed the value of the repurchase agreement, and (iii)payment for the underlying security is made only upon physical delivery orevidence of book- entry transfer to the account of the custodian or a bankacting as agent. In the event of a bankruptcy or other default of a seller of arepurchase agreement, the Fund could experience both delays in liquidating theunderlying security and losses, including: (a) possible decline in the value ofthe underlying security during the period while the Fund seeks to enforce itsrights thereto; (b) possible subnormal levels of income and lack of access toincome during this period; and (c) expenses of enforcing its rights.

Reverse Repurchase Agreements. Although the Fund has no currentintention, in the foreseeable future, of engaging in reverse repurchaseagreements, the Fund reserves the right to do so. Reverse repurchase agreements



are ordinary repurchase agreements in which a fund is the seller of, rather thanthe investor in, securities, and agrees to repurchase them at an agreed upontime and price. Use of a reverse repurchase agreement may be preferable to aregular sale and later repurchase of the securities because it avoids certainmarket risks and transaction costs. A reverse repurchase agreement may be viewedas a type of borrowing by the Fund.

Warrants. The Fund may acquire warrants. For a discussion of certain risksinvolved therein, see this SAI under "Certain Risk Factor and InvestmentMethods."

Lending of Portfolio Securities. Securities loans are made tobroker-dealers or institutional investors or other persons, pursuant toagreements requiring that the loans be continuously secured by collateral atleast equal at all times to the value of the securities lent marked to market ona daily basis. The collateral received will consist of cash, U.S. governmentsecurities, letters of credit or such other collateral as may be permitted underits investment program. While the securities are being lent, the Fund willcontinue to receive the equivalent of the interest or dividends paid by theissuer on the securities, as well as interest on the investment of thecollateral or a fee from the borrower. The Fund has a right to call each loanand obtain the securities on five business days' notice or, in connection withsecurities trading on foreign markets, within such longer period of time whichcoincides with the normal settlement period for purchases and sales of suchsecurities in such foreign markets. The Fund will not have the right to votesecurities while they are being lent, but it will call a loan in anticipation ofany important vote. The risks in lending portfolio securities, as with otherextensions of secured credit, consist of possible delay in receiving additionalcollateral or in the recovery of the securities or possible loss of rights inthe collateral should the borrower fail financially. Loans will only be made tofirms deemed by the Sub-advisor to be of good standing and will not be madeunless, in the judgment of the Sub-advisor, the consideration to be earned fromsuch loans would justify the risk.

Other Lending/Borrowing. Subject to approval by the Securities andExchange Commission, the Fund may make loans to, or borrow funds from, othermutual funds sponsored or advised by the Sub-advisor or Rowe Price-FlemingInternational, Inc. The Fund has no current intention of engaging in thesepractices at this time.

When-Issued Securities and Forward Commitment Contracts. The Fund maypurchase securities on a "when-issued" or delayed delivery basis and maypurchase securities on a forward commitment basis. Any or all of the Fund'sinvestments in debt securities may be in the form of when-issueds and forwards.The price of such securities, which may be expressed in yield terms, is fixed atthe time the commitment to purchase is made, but delivery and payment take placeat a later date. Normally, the settlement date occurs within 90 days of thepurchase for when-issueds, but may be substantially longer for forwards. TheFund will cover these securities by maintaining cash and/or other liquid assets,with its custodian bank equal in value to commitments for them during the timebetween the purchase and the settlement. Such segregated securities either willmature or, if necessary, be sold on or before the settlement date. For adiscussion of these securities and the risks involved therein, see this SAIunder "Certain Risk Factors and Investment Methods."


1. Purchase additional securities when money borrowed exceeds 5% of itstotal assets;


3. Purchase a futures contract or an option thereon if, with respect topositions in futures or options on futures which do not represent bona fidehedging, the aggregate initial margin and premiums on such options would exceed5% of the Fund's net asset value;

4. Purchase illiquid securities if, as a result, more than 15% of its netassets would be invested in such securities. Securities eligible for resaleunder Rule 144A of the 1933 Act may be subject to this 15% limitation;


6. Purchase securities on margin, except (i) for use of short-term creditnecessary for clearance of purchases of portfolio securities and (ii) the Fundmay make margin deposits in connection with futures contracts or otherpermissible investments;

7. Mortgage, pledge, hypothecate or, in any manner, transfer any securityowned by the Fund as security for indebtedness except as may be necessary in



connection with permissible borrowings or investments and then such mortgaging,pledging or hypothecating may not exceed 33 1/3% of the Fund's total assets atthe time of borrowing or investment;

8. Invest in puts, calls, straddles, spreads, or any combination thereof,except to the extent permitted by the Company's Prospectus and this SAI;

9. Effect short sales of securities; or

10. Invest in warrants if, as a result thereof, more than 10% of the valueof the net assets of the Fund would be invested in warrants, except that thisrestriction does not apply to warrants acquired as a result of the purchase ofanother security. For purposes of these percentage limitations, the warrantswill be valued at the lower of cost or market.

ASAF JANUS CAPITAL GROWTH FUND:

Investment Objective: The investment objective of the Fund is to seek growth ofcapital. Realization of income is not a significant investment consideration andany income realized on the Fund's investments, therefore, will be incidental tothe Fund's objective.


Futures, Options and Other Derivative Instruments. The Fund may enterinto futures contracts on securities, financial indices, and foreign currenciesand options on such contracts, and may invest in options on securities,financial indices and foreign currencies, forward contracts and swaps. The Fundwill not enter into any futures contracts or options on futures contracts if theaggregate amount of the Fund's commitments under outstanding futures contractpositions and options on futures contracts written by the Fund would exceed themarket value of the total assets of the Fund (i.e., no leveraging). The Fund mayinvest in forward currency contracts with stated values of up to the value ofthe Fund's assets.

The Fund may buy or write options in privately negotiated transactionson the types of securities and indices based on the types of securities in whichthe Fund is permitted to invest directly. The Fund will effect such transactionsonly with investment dealers and other financial institutions (such ascommercial banks or savings and loan institutions) deemed creditworthy, and onlypursuant to procedures adopted, by the Sub-advisor for monitoring thecreditworthiness of those entities. To the extent that an option bought orwritten by the Fund in a negotiated transaction is illiquid, the value of anoption bought or the amount of the Fund's obligations under an option written bythe Fund, as the case may be, will be subject to the Fund's limitation onilliquid investments. In the case of illiquid options, it may not be possiblefor the Fund to effect an offsetting transaction at a time when the Sub-advisorbelieves it would be advantageous for the Fund to do so. For a description ofthese strategies and instruments and certain risks involved therein, see thisSAI and the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

Interest Rate Swaps and Purchasing and Selling Interest Rate Caps andFloors. In addition to the strategies noted above, the Fund, in order to attemptto protect the value of its investments from interest rate or currency exchangerate fluctuations, may enter into interest rate swaps and may buy or sellinterest rate caps and floors. The Fund expects to enter into these transactionsprimarily to preserve a return or spread on a particular investment or portionof its investments. The Fund also may enter into these transactions to protectagainst any increase in the price of securities the Fund may consider buying ata later date. The Fund does not intend to use these transactions as aspeculative investments. Interest rate swaps involve the exchange by the Fundwith another party of their respective commitments to pay or receive interest,e.g., an exchange of floating rate payments for fixed rate payments. Theexchange commitments can involve payments to be made in the same currency or indifferent currencies. The purchase of an interest rate cap entitles thepurchaser, to the extent that a specified index exceeds a predetermined interestrate, to receive payments of interest on a contractually based principal amountfrom the party selling the interest rate cap. The purchase of an interest ratefloor entitles the purchaser, to the extent that a specified index falls below apredetermined interest rate, to receive payments of interest on a contractuallybased principal amount from the party selling the interest rate floor.

The Fund may enter into interest rate swaps, caps and floors on eitheran asset-based or liability-based basis, depending upon whether it is hedgingits assets or its liabilities, and will usually enter into interest rate swapson a net basis, i.e., the two payment streams are netted out, with the Fundreceiving or paying, as the case may be, only the net amount of the twopayments. The net amount of the excess, if any, of the Fund's obligations overits entitlements with respect to each interest rate swap will be calculated on adaily basis and an amount of cash or other liquid assets having an aggregate netasset value at least equal to the accrued excess will be maintained in asegregated account by the Fund's custodian. If the Fund enters into an interest



rate swap on other than a net basis, the Fund would maintain a segregatedaccount in the full amount accrued on a daily basis of the Fund's obligationswith respect to the swap. The Fund will not enter into any interest rate swap,cap or floor transaction unless the unsecured senior debt or the claims-payingability of the other party thereto is rated in one of the three highest ratingcategories of at least one nationally recognized statistical rating organizationat the time of entering into such transaction. The Sub-advisor will monitor thecreditworthiness of all counterparties on an ongoing basis. If there is adefault by the other party to such a transaction, the Fund will have contractualremedies pursuant to the agreements related to the transaction.

The swap market has grown substantially in recent years with a largenumber of banks and investment banking firms acting both as principals and asagents utilizing standardized swap documentation. The Sub-advisor has determinedthat, as a result, the swap market has become relatively liquid. Caps and floorsare more recent innovations for which standardized documentation has not yetbeen developed and, accordingly, they are less liquid than swaps. To the extentthe Fund sells (i.e., writes) caps and floors, it will maintain in a segregatedaccount cash or other liquid assets having an aggregate net asset value at leastequal to the full amount, accrued on a daily basis, of the Fund's obligationswith respect to any caps or floors.

There is no limit on the amount of interest rate swap transactions thatmay be entered into by the Fund. These transactions may in some instancesinvolve the delivery of securities or other underlying assets by the Fund or itscounterparty to collateralize obligations under the swap. Under thedocumentation currently used in those markets, the risk of loss with respect tointerest rate swaps is limited to the net amount of the payments that the Fundis contractually obligated to make. If the other party to an interest rate swapthat is not collateralized defaults, the Fund would risk the loss of the netamount of the payments that the Fund contractually is entitled to receive. TheFund may buy and sell (i.e., write) caps and floors without limitation, subjectto the segregated account requirement described above. For an additionaldiscussion of these strategies, see this SAI under "Certain Risk Factors andInvestment Methods."

Repurchase Agreements and Reverse Repurchase Agreements. Subject toguidelines promulgated by the Directors of the Company, the Fund may enter intorepurchase agreements. The Fund may also enter into reverse repurchaseagreements. For a description of these investment techniques, see the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Investment Policies Which May Be Changed Without Shareholder Approval.The following limitations are not "fundamental" investment restrictions and maybe changed by the Directors of the Company without shareholder approval.The Fund will not:

1. Purchase a security if as a result, more than 15% of its net assets inthe aggregate, at market value, would be invested in securities which cannot bereadily resold because of legal or contractual restrictions on resale or forwhich there is no readily available market, or repurchase agreements maturing inmore than seven days or securities used as a cover for written over-the-counteroptions, if any. The Directors of the Company, the Investment Manager or theSub-advisor acting pursuant to authority delegated by the Directors, maydetermine that a readily available market exists for securities eligible forresale pursuant to Rule 144A under the Securities Act of 1933, or any successorto such rule, and therefore that such securities are not subject to theforegoing limitation;

2. Enter into any futures contracts or options on futures contracts forpurposes other than bona fide hedging transactions (as defined by the CFTC) ifas a result the sum of the initial margin deposits and premium required toestablish positions in futures contracts and related options that do not fallwithin the definition of bona fide hedging transactions would exceed 5% of thefair market value of the Fund's net assets;

3. Enter into any futures contracts if the aggregate amount of the Fund'scommitments under outstanding futures contracts positions of the Fund wouldexceed the market value of the total assets of the Fund;

4. Sell securities short, unless it owns or has the right to obtainsecurities equivalent in kind and amount to the securities sold short, andprovided that transactions in options, swaps and forward futures contracts arenot deemed to constitute selling securities short;

5. Mortgage or pledge any securities owned or held by the Fund in amountsthat exceed, in the aggregate, 15% of the Fund's net asset value, provided thatthis limitation does not apply to reverse repurchase agreements or in the caseof assets deposited to margin or guarantee positions in futures, options, swapsor forward contracts or placed in a segregated account in connection with suchcontracts;




7. Purchase securities of open-end or closed-end investment companiesexcept in compliance with the Investment Company Act of 1940; or

8. Purchase securities on margin, except (i) for use of short-term creditnecessary for clearance of purchases of portfolio securities and (ii) the Fundmay make margin deposits in connection with futures contracts or otherpermissible investments.

ASAF INVESCO EQUITY INCOME FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income while following sound investment practices.


The Fund will pursue its objective by investing its assets insecurities which will provide a relatively high-yield and stable return andwhich, over a period of years, may also provide capital appreciation. Capitalgrowth potential is an additional consideration in the selection of portfoliosecurities. The Fund invests in common stocks, as well as convertible bonds andpreferred stocks.

In pursuing its investment objective, the Fund normally invests atleast 65% of its total assets in dividend paying common stocks. Up to 10% of theFund's assets may be invested in equity securities that do not pay regulardividends. The remaining assets are invested in other income producingsecurities, such as corporate bonds. Sometimes warrants are acquired whenoffered with income-producing securities, but the warrants are disposed of atthe first favorable opportunity. Acquiring warrants involves a risk that theFund will lose the premium it pays to acquire warrants if the Fund does notexercise a warrant before it expires. The major portion of the investmentportfolio normally consists of common stocks, convertible bonds and debentures,and preferred stocks; however, there may also be substantial holdings of debtsecurities, including non-investment grade and unrated debt securities.

Debt Securities. The debt securities in which the Fund invests aregenerally subject to two kinds of risk, credit risk and market risk. The ratingsgiven a debt security by Moody's and Standard & Poor's ("S&P") provide agenerally useful guide as to such credit risk. The lower the rating given a debtsecurity by such rating service, the greater the credit risk such rating serviceperceives to exist with respect to such security. Increasing the amount of Fundassets invested in unrated or lower grade (Ba or less by Moody's, BB or less byS&P) debt securities, while intended to increase the yield produced by theFund's debt securities, will also increase the credit risk to which those debtsecurities are subject.

Lower-rated debt securities and non-rated securities of comparablequality tend to be subject to wider fluctuations in yields and market valuesthan higher rated debt securities and may have speculative characteristics.Although the Fund may invest in debt securities assigned lower grade ratings byS&P or Moody's, the Fund's investments have generally been limited to debtsecurities rated B or higher by either S&P or Moody's. Debt securities ratedlower than B by either S&P or Moody's may be highly speculative. The Sub-advisorintends to limit such portfolio investments to debt securities which are notbelieved by the Sub-advisor to be highly speculative and which are rated atleast CCC or Caa, respectively, by S&P or Moody's. In addition, a significanteconomic downturn or major increase in interest rates may well result in issuersof lower-rated debt securities experiencing increased financial stress whichwould adversely affect their ability to service their principal and interestobligations, to meet projected business goals, and to obtain additionalfinancing. While the Sub-advisor attempts to limit purchases of lower-rated debtsecurities to securities having an established retail secondary market, themarket for such securities may not be as liquid as the market for higher rateddebt securities. For an additional discussion of certain risks involved inlower-rated or unrated securities, see this SAI and the Company's Prospectusunder "Certain Risk Factors and Investment Methods."

Repurchase Agreements. As discussed in the Company's Prospectus, theFund may enter into repurchase agreements with respect to debt instrumentseligible for investment by the Fund, with member banks of the Federal ReserveSystem, registered broker-dealers, and registered government securities dealers.A repurchase agreement may be considered a loan collateralized by securities.The resale price reflects an agreed upon interest rate effective for the periodthe instrument is held by the Fund and is unrelated to the interest rate on theunderlying instrument. In these transactions, the securities acquired by theFund (including accrued interest earned thereon) must have a total value inexcess of the value of the repurchase agreement, and are held by the Fund'sCustodian Bank until repurchased. For an additional discussion of repurchaseagreements and certain risks involved therein, see this SAI under "Certain RiskFactors and Investment Methods."

The Directors of the Company have promulgated guidelines with respect



to repurchase agreements.

Lending Portfolio Securities. The Fund may lend its securities toqualified brokers, dealers, banks, or other financial institutions. While votingrights may pass with the loaned securities, if a material event (e.g., proposedmerger, sale of assets, or liquidation) is to occur affecting an investment onloan, the loan must be called and the securities voted. Loans of securities madeby the Fund will comply with all other applicable regulatory requirements,including the rules of the New York Stock Exchange and the requirements of theInvestment Company Act of 1940 and the Rules of the Securities and ExchangeCommission thereunder.





4. Effect short sales of securities; or

5. Purchase any security or enter into a repurchase agreement, if as aresult, more than 15% of its net assets would be invested in repurchaseagreements not entitling the holder to payment of principal and interest withinseven days and in securities that are illiquid by virtue of legal or contractualrestrictions on resale or the absence of a readily available market. TheDirectors of the Company, or the Investment Manager or the Sub-advisor actingpursuant to authority delegated by the Directors, may determine that a readilyavailable market exists for securities eligible for resale pursuant to Rule 144Aunder the Securities Act of 1933, or any successor to that rule, and thereforethat such securities are not subject to the foregoing limitation.

ASAF AMERICAN CENTURY STRATEGIC BALANCED FUND:

Investment Objective: The investment objective of the Fund is to seekcapital growth and current income.


In general, within the restrictions outlined herein, the Sub-advisorhas broad powers with respect to investing funds or holding them uninvested.Investments are varied according to what is judged advantageous under changingeconomic conditions. It will be the policy of the Sub-advisor to retain maximumflexibility in management without restrictive provisions as to the proportion ofone or another class of securities that may be held subject to the investmentrestrictions described below. However, the Sub-advisor may invest the assets ofthe Fund in varying amounts in other instruments and in senior securities, suchas bonds, debentures, preferred stocks and convertible issues, when such acourse is deemed appropriate in order to attempt to attain its financialobjectives. Senior securities that, in the opinion of the Sub-advisor, arehigh-grade issues may also be purchased for defensive purposes.

The above statement of investment policy gives the Sub-advisorauthority to invest in securities other than common stocks and traditional debtand convertible issues. The Sub-advisor may invest in master limitedpartnerships (other than real estate partnerships) and royalty trusts which aretraded on domestic stock exchanges when such investments are deemed appropriatefor the attainment of the Fund's investment objectives.

The Sub-advisor will invest approximately 60% of the Fund in commonstocks and the balance in fixed income securities. Common stock investments aredescribed above. The fixed income assets will be invested primarily ininvestment grade securities. The Fund may invest in securities of the UnitedStates government and its agencies and instrumentalities, corporate, sovereigngovernment, municipal, mortgage-backed, and other asset-backed securities. Itcan be expected that the Sub-advisor will invest from time to time in bonds andpreferred stock convertible into common stock.

Forward Currency Exchange Contracts. The Fund conducts its foreigncurrency exchange transactions either on a spot (i.e., cash) basis at the spotrate prevailing in the foreign currency exchange market, or through enteringinto forward foreign currency exchange contracts to purchase or sell foreigncurrencies.

The Fund expects to use forward contracts under two circumstances: (1)when the Sub-advisor wishes to "lock in" the U.S. dollar price of a security



when the Fund is purchasing or selling a security denominated in a foreigncurrency, the Fund would be able to enter into a forward contract to do so; (2)when the Sub-advisor believes that the currency of a particular foreign countrymay suffer a substantial decline against the U.S. dollar, the Fund would be ableto enter into a forward contract to sell foreign currency for a fixed U.S.dollar amount approximating the value of some or all of the Fund's securitieseither denominated in, or whose value is tied to, such foreign currency.

As to the first circumstance, when the Fund enters into a trade for thepurchase or sale of a security denominated in a foreign currency, it may bedesirable to establish (lock in) the U.S. dollar cost or proceeds. By enteringinto forward contracts in U.S. dollars for the purchase or sale of a foreigncurrency involved in an underlying security transaction, the Fund will be ableto protect itself against a possible loss between trade and settlement datesresulting from the adverse change in the relationship between the U.S. dollar atthe subject foreign currency.

Under the second circumstance, when the Sub-advisor believes that thecurrency of a particular country may suffer a substantial decline relative tothe U.S. dollar, the Fund could enter into a foreign contract to sell for afixed dollar amount the amount in foreign currencies approximating the value ofsome or all of its portfolio securities either denominated in, or whose value istied to, such foreign currency. The Fund will place cash or high-grade liquidsecurities in a separate account with its custodian in an amount sufficient tocover its obligation under the contract. If the value of the securities placedin the separate account declines, additional cash or securities will be placedin the account on a daily basis so that the value of the account equals theamount of the Fund's commitments with respect to such contracts.

The precise matching of forward contracts in the amounts and values ofsecurities involved would not generally be possible since the future values ofsuch foreign currencies will change as a consequence of market movements in thevalues of those securities between the date the forward contract is entered intoand the date it matures. Predicting short-term currency market movements isextremely difficult, and the successful execution of short-term hedging strategyis highly uncertain. The Sub-advisor does not intend to enter into suchcontracts on a regular basis. Normally, consideration of the prospect forcurrency parities will be incorporated into the long-term investment decisionsmade with respect to overall diversification strategies. However, theSub-advisor believes that it is important to have flexibility to enter into suchforward contracts when it determines that the Fund 's best interests may beserved.

Generally, the Fund will not enter into a forward contract with a termof greater than one year. At the maturity of the forward contract, the Fund mayeither sell the portfolio security and make delivery of the foreign currency, orit may retain the security and terminate the obligation to deliver the foreigncurrency by purchasing an "offsetting" forward contract with the same currencytrader obligating the Fund to purchase, on the same maturity date, the sameamount of the foreign currency.

It is impossible to forecast with absolute precision the market valueof the Fund's securities at the expiration of the forward contract. Accordingly,it may be necessary for the Fund to purchase additional foreign currency on thespot market (and bear the expense of such purchase) if the market value of thesecurity is less than the amount of foreign currency the Fund is obligated todeliver and if a decision is made to sell the security and make delivery of theforeign currency the Fund is obligated to deliver. For an additional discussionof forward currency exchange contracts and certain risks involved therein, seethis SAI and the Company's Prospectus under "Certain Risk Factors and InvestmentMethods."

Futures Contracts. As described in the Company's Prospectus, the Fundmay enter into futures contracts. Unlike when the Fund purchases securities, nopurchase price for the underlying securities is paid by the Fund at the time itpurchases a futures contract. When a futures contract is entered into, both thebuyer and seller of the contract are required to deposit with a futurescommission merchant ("FCM") cash or high-grade debt securities in an amountequal to a percentage of the contract's value, as set by the exchange on whichthe contract is traded. This amount is known as "initial margin" and is held bythe Fund's custodian for the benefit of the FCM in the event of any default bythe Fund in the payment of any future obligations.

The value of a futures contract is adjusted daily to reflect thefluctuation of the value of the underlying securities. This is a process knownas marking the contract to market. If the value of a party's position declines,that party is required to make additional "variation margin" payments to the FCMto settle the change in value. The party that has a gain is generally entitledto receive all or a portion of this amount.

The Fund maintains from time to time a percentage of its assets in cashor high-grade liquid securities to provide for redemptions or to hold for futureinvestment in securities consistent with the Fund's investment objectives. The



Fund may enter into index futures contracts as an efficient means to expose theFund's cash position to the domestic equity market. The Sub-advisor believesthat the purchase of futures contracts is an efficient means to effectively befully invested in equity securities.

The principal risks generally associated with the use of futuresinclude: (i) the possible absence of a liquid secondary market for anyparticular instrument may make it difficult or impossible to close out aposition when desired (liquidity risk); (ii) the risk that the counter party tothe contract may fail to perform its obligations or the risk of bankruptcy ofthe FCM holding margin deposits (counter-party risk); (iii) the risk that thesecurities to which the futures contract relates may go down in value (marketrisk); and (iv) adverse price movements in the underlying securities can resultin losses substantially greater than the value of the Fund's investment in thatinstrument because only a fraction of a contract's value is required to bedeposited as initial margin (leverage risk); provided, however, that the Fundmay not purchase leveraged futures, so there is no leverage risk involved in theFund's use of futures.

A liquid secondary market is necessary to close out a contract. TheFund may seek to manage liquidity risk by investing in exchange-traded futures.Exchange-traded futures pose less risk that there will not be a liquid secondarymarket than privately negotiated instruments. Through their clearingcorporations, the futures exchanges guarantee the performance of the contracts.

Futures contracts are generally settled within a day from the date theyare closed out, as compared to three days for most types of equity securities.As a result, futures contracts can provide more liquidity than an investment inthe actual underlying securities. Nevertheless, there is no assurance that aliquid secondary market will exist for any particular futures contract at anyparticular time. Liquidity may also be influenced by an exchange-imposed dailyprice fluctuation limit, which halts trading if a contract's price moves up ordown more than the established limit on any given day. On volatile trading dayswhen the price fluctuation limit is reached, it may be impossible for the Fundto enter into new positions or close out existing positions. If the secondarymarket for a futures contract is not liquid because of price fluctuation limitsor otherwise, the Fund may not be able to promptly liquidate unfavorable futurespositions and potentially could be required to continue to hold a futuresposition until liquidity in the market is re-established. As a result, theFund's access to other assets held to cover its futures positions also could beimpaired until liquidity in the market is re-established.

The Fund manages counter-party risk by investing in exchange-tradedindex futures. In the event of the bankruptcy of the FCM that holds margin onbehalf of the Fund, the Fund may be entitled to the return of margin owed to theFund only in proportion to the amount received by the FCM's other customers. TheSub-advisor will attempt to minimize the risk by monitoring the creditworthinessof the FCMs with which the Fund does business.

Short Sales. The Fund may engage in short sales if, at the time of theshort sale, the Fund owns or has the right to acquire an equal amount of thesecurity being sold short at no additional cost.

In a short sale, the seller does not immediately deliver the securitiessold and is said to have a short position in those securities until deliveryoccurs. To make delivery to the purchaser, the executing broker borrows thesecurities being sold short on behalf of the seller. While the short position ismaintained, the seller collateralizes its obligation to deliver the securitiessold short in an amount equal to the proceeds of the short sale plus anadditional margin amount established by the Board of Governors of the FederalReserve. If the Fund engages in a short sale, the collateral account will bemaintained by the Fund's custodian. While the short sale is open, the Fund willmaintain in a segregated custodial account an amount of securities convertibleinto, or exchangeable for, such equivalent securities at no additional cost.These securities would constitute the Fund's long position.

The Fund may make a short sale, as described above, when it wants tosell the security it owns at a current attractive price, but also wishes todefer recognition of gain or loss for federal income tax purposes and forpurposes of satisfying certain tests applicable to regulated investmentcompanies under the Internal Revenue Code. In such a case, any future losses inthe Fund's long position should be reduced by a gain in the short position. Theextent to which such gains or losses are reduced would depend upon the amount ofthe security sold short relative to the amount the Fund owns. There will becertain additional transaction costs associated with short sales, but the Fundwill endeavor to offset these costs with income from the investment of the cashproceeds of short sales.

Portfolio Turnover. The Sub-advisor will purchase and sell securitieswithout regard to the length of time the security has been held and,accordingly, it can be expected that the rate of portfolio turnover may besubstantial.



The Sub-advisor intends to purchase a given security whenever theSub-advisor believes it will contribute to the stated objective of the Fund,even if the same security has only recently been sold. The Fund will sell agiven security, no matter for how long or for how short a period it has beenheld, and no matter whether the sale is at a gain or at a loss, if theSub-advisor believes that it is not fulfilling its purpose, either because,among other things, it did not live up to the Sub-advisor's expectations, orbecause it may be replaced with another security holding greater promise, orbecause it has reached its optimum potential, or because of a change in thecircumstances of a particular company or industry or in general economicconditions, or because of some combination of such reasons.

When a general decline in security prices is anticipated, the equityportion of the Fund may decrease or eliminate entirely its equity position andincrease its cash position, and when a rise in price levels is anticipated, itmay increase its equity position and decrease its cash position. However, itshould be expected that the Fund will, under most circumstances, be essentiallyfully invested in equity securities.

Since investment decisions are based on the anticipated contribution ofthe security in question to the Fund's objectives, the rate of portfolioturnover is irrelevant when the Sub-advisor believes a change is in order toachieve those objectives, and the Fund's annual portfolio turnover rate cannotbe anticipated and may be comparatively high. Since the Sub-advisor does nottake portfolio turnover rate into account in making investment decisions, (1)the Sub-advisor has no intention of accomplishing any particular rate ofportfolio turnover, whether high or low, and (2) the portfolio turnover rates inthe past should not be considered as a representation of the rates which will beattained in the future. For an additional discussion of portfolio turnover, seethis SAI and the Company's Prospectus under "Portfolio Transactions."

Interest Rate Futures Contracts and Related Options. The Fund may buyand sell interest rate futures contracts relating to debt securities ("debtfutures," i.e., futures relating to debt securities, and "bond index futures,"i.e., futures relating to indexes on types or groups of bonds) and write and buyput and call options relating to interest rate futures contracts.

The Fund will not purchase or sell futures contracts and optionsthereon for speculative purposes but rather only for the purpose of hedgingagainst changes in the market value of its portfolio securities or changes inthe market value of securities that the Sub-advisor anticipates it may wish toinclude in the Fund. The Fund may sell a future or write a call or purchase aput on a future if the Sub-advisor anticipates that a general market or marketsector decline may adversely affect the market value of any or all of the Fund'sholdings. The Fund may buy a future or purchase a call or sell a put on a futureif the Sub-advisor anticipates a significant market advance in the type ofsecurities it intends to purchase for the Fund at a time when the Fund is notinvested in debt securities to the extent permitted by its investment policies.The Fund may purchase a future or a call option thereon as a temporarysubstitute for the purchase of individual securities which may then be purchasedin an orderly fashion. As securities are purchased, corresponding futurespositions would be terminated by offsetting sales.

The "sale" of a debt future means the acquisition by the Fund of anobligation to deliver the related debt securities (i.e., those called for by thecontract) at a specified price on a specified date. The "purchase" of a debtfuture means the acquisition by the Fund of an obligation to acquire the relateddebt securities at a specified time on a specified date. The "sale" of a bondindex future means the acquisition by the Fund of an obligation to deliver anamount of cash equal to a specified dollar amount times the difference betweenthe index value at the close of the last trading day of the future and the priceat which the future is originally struck. No physical delivery of the bondsmaking up the index is expected to be made. The "purchase" of a bond indexfuture means the acquisition by the Fund of an obligation to take delivery ofsuch an amount of cash.

Unlike when the Fund purchases or sells a bond, no price is paid orreceived by the Fund upon the purchase or sale of the future. Initially, theFund will be required to deposit an amount of cash or securities equal to avarying specified percentage of the contract amount. This amount is known asinitial margin. Cash held in the margin account is not income producing.Subsequent payments, called variation margin, to and from the broker, will bemade on a daily basis as the price of the underlying debt securities or indexfluctuates, making the future more or less valuable, a process known as mark tothe market. Changes in variation margin are recorded by the Fund as unrealizedgains or losses. At any time prior to expiration of the future, the Fund mayelect to close the position by taking an opposite position that will operate toterminate its position in the future. A final determination of variation marginis then made; additional cash is required to be paid by or released to the Fundand the Fund realizes a loss or a gain.

When the Fund writes an option on a futures contract it becomesobligated, in return for the premium paid, to assume a position in a futures



contract at a specified exercise price at any time during the term of theoption. If the Fund has written a call, it becomes obligated to assume a "long"position in a futures contract, which means that it is required to take deliveryof the underlying securities. If it has written a put, it is obligated to assumea "short" position in a futures contract, which means that it is required todeliver the underlying securities. When the Fund purchases an option on afutures contract it acquires a right in return for the premium it pays to assumea position in a futures contract.

If the Fund writes an option on a futures contract it will be requiredto deposit initial and variation margin pursuant to requirements similar tothose applicable to futures contracts. Premiums received from the writing of anoption on a future are included in the initial margin deposit. For options sold,the Fund will segregate cash or high-quality debt securities equal to the valueof securities underlying the option unless the option is otherwise covered. TheFund will deposit in a segregated account with its custodian bank cash or otherliquid assets, in an amount equal to the fluctuating market value of longfutures contracts it has purchased less any margin deposited on its longposition. It may hold cash or acquire such other assets for the purpose ofmaking these deposits.

Changes in variation margin are recorded by the Fund as unrealizedgains or losses. Initial margin payments will be deposited in the Fund'scustodian bank in an account registered in the broker's name; access to theassets in that account may be made by the broker only under specifiedconditions. At any time prior to expiration of a futures contract or an optionthereon, the Fund may elect to close the position by taking an opposite positionthat will operate to terminate its position in the futures contract or option. Afinal determination of variation margin is made at that time; additional cash isrequired to be paid by or released to it and it realizes a loss or gain.

Although futures contracts by their terms call for the actual deliveryor acquisition of the underlying securities or cash, in most cases thecontractual obligation is so fulfilled without having to make or take delivery.The Sub-advisor does not intend to make or take delivery of the underlyingobligation. All transactions in futures contracts and options thereon are made,offset or fulfilled through a clearinghouse associated with the exchange onwhich the instruments are traded. Although the Sub-advisor intends to buy andsell futures contracts only on exchanges where there appears to be an activesecondary market, there is no assurance that a liquid secondary market willexist for any particular future at any particular time. In such event, it maynot be possible to close a futures contract position.Similar market liquidity risks occur with respect to options.

The use of futures contracts and options thereon to attempt to protectagainst the market risk of a decline in the value of portfolio securities isreferred to as having a "short futures position." The use of futures contractsand options thereon to attempt to protect against the market risk that the Fundmight not be fully invested at a time when the value of the securities in whichit invests is increasing is referred to as having a "long futures position." TheFund must operate within certain restrictions as to long and short positions infutures contracts and options thereon under a rule (CFTC Rule) adopted by theCFTC under the Commodity Exchange Act (CEA) to be eligible for the exclusionprovided by the CFTC Rule from registration by the Fund with the CFTC as a"commodity pool operator" (as defined under the CEA), and must represent to theCFTC that it will operate within such restrictions. Under these restrictions theFund will not, as to any positions that do not qualify as "bona fide hedging"under the CFTC Rule, whether long, short or a combination thereof, enter intofutures contracts and options thereon for which the aggregate initial marginsand premiums exceed 5% of the fair market value of the Fund's assets aftertaking into account unrealized profits and losses on options the Fund hasentered into; in the case of an option that is "in-the-money" (as defined underthe CEA), the in-the-money amount may be excluded in computing such 5%. (Ingeneral, a call option on a futures contract is in-the-money if the value of thefuture exceeds the strike, i.e., exercise, price of the call; a put option on afutures contract is in-the-money if the value of the futures contract that isthe subject of the put is exceeded by the strike price of the put.) As to itslong positions that are used as part of the Fund's strategy and are incidentalto the Fund's activities in the underlying cash market, the "underlyingcommodity value" (see below) of the Fund's futures contract and options thereonmust not exceed the sum of (i) cash set aside in an identifiable manner, orshort-term U.S. debt obligations or other U.S. dollar-denominated, high-quality,short-term money market instruments so set aside, plus any funds deposited asmargin; (ii) cash proceeds from existing investments due in 30 days; and (iii)accrued profits held at the futures commission merchant.

There are described above the segregated accounts that the Fund mustmaintain with its custodian bank as to its options and futures contractsactivities due to Securities and Exchange Commission requirements. The Fundwill, as to its long positions, be required to abide by the more restrictive ofthese SEC and CFTC requirements. The underlying commodity value of a futurescontract is computed by multiplying the size (dollar amount) of the futurescontract by the daily settlement price of the futures contract. For an option on



a futures contract, that value is the underlying commodity value of the futureunderlying the option.

Since futures contracts and options thereon can replicate movements inthe cash markets for the securities in which the Fund invests without the largecash investments required for dealing in such markets, they may subject the Fundto greater and more volatile risks than might otherwise be the case. Theprincipal risks related to the use of such instruments are (i) the offsettingcorrelation between movements in the market price of the portfolio investments(held or intended) being hedged and in the price of the futures contract oroption may be imperfect; (ii) possible lack of a liquid secondary market forclosing out futures or options positions; (iii) the need for additionalportfolio management skills and techniques; (iv) losses due to unanticipatedmarket price movements; and (v) the bankruptcy or failure of a futurescommission merchant holding margin deposits made by the Fund and the Fund'sinability to obtain repayment of all or part of such deposits. For a hedge to becompletely effective, the price change of the hedging instrument should equalthe price change of the security being hedged. Such equal price changes are notalways possible because the investment underlying the hedging instrument may notbe the same investment that is being hedged. The Sub-advisor will attempt tocreate a closely correlated hedge, but hedging activity may not be completelysuccessful in eliminating market value fluctuation. The ordinary spreads betweenprices in the cash and futures markets, due to the differences in the natures ofthose markets, are subject to the following factors which may createdistortions. First, all participants in the futures market are subject to margindeposit and maintenance requirements. Rather than meeting additional margindeposit requirements, investors may close futures contracts through offsettingtransactions which could distort the normal relationship between the cash andfutures markets. Second, the liquidity of the futures market depends onparticipants entering into off-setting transactions rather than making or takingdelivery. To the extent participants decide to make or take delivery, liquidityin the futures market could be reduced, thus producing distortion. Third, fromthe point of view of speculators, the deposit requirements in the futures marketare less onerous than margin requirements in the securities market. Therefore,increased participation by speculators in the futures market may cause temporaryprice distortions. Due to the possibility of distortion, a correct forecast ofgeneral interest trends by the Sub-advisor may still not result in a successfultransaction. The Sub-advisor may be incorrect in its expectations as to theextent of various interest rate movements or the time span within which themovements take place.

The risk of imperfect correlation between movements in the price of abond index future and movements in the price of the securities that are thesubject of the hedge increases as the composition of the Fund diverges from thesecurities included in the applicable index. The price of the bond index futuremay move more than or less than the price of the securities being hedged. If theprice of the bond index future moves less than the price of the securities thatare the subject of the hedge, the hedge will not be fully effective, but if theprice of the securities being hedged has moved in an unfavorable direction, theFund would be in a better position than if it had not hedged at all. If theprice of the securities being hedged has moved in a favorable direction, thisadvantage will be partially offset by the futures contract. If the price of thefutures contract moves more than the price of the security, the Fund willexperience either a loss or a gain on the futures contract that will not becompletely offset by movements in the price of the securities that are thesubject of the hedge. To compensate for the imperfect correlation of movementsin the price of the securities being hedged and movements in the price of thebond index futures, the Fund may buy or sell bond index futures in a greaterdollar amount than the dollar amount of securities being hedged if thehistorical volatility of the prices of such securities being hedged is less thanthe historical volatility of the bond index. It is also possible that, where theFund has sold futures contracts to hedge its securities against a decline in themarket, the market may advance and the value of securities held in the Fund maydecline. If this occurred, the Fund would lose money on the futures contract andalso experience a decline in value in its portfolio securities. However, whilethis could occur for a brief period or to a very small degree, over time thevalue of a portfolio of debt securities will tend to move in the same directionas the market indexes upon which the futures contracts are based.

Where bond index futures are purchased to hedge against a possibleincrease in the price of bonds before the Fund is able to invest in securitiesin an orderly fashion, it is possible that the market may decline instead; ifthe Fund then concludes not to invest in securities at that time because ofconcern as to possible further market decline or for other reasons, it willrealize a loss on the futures contract that is not offset by a reduction in theprice of the securities it had anticipated purchasing.

The risks of investment in options on bond indexes may be greater thanoptions on securities. Because exercises of bond index options are settled incash, when the Fund writes a call on a bond index it cannot provide in advancefor its potential settlement obligations by acquiring and holding the underlyingsecurities. The Fund can offset some of the risk of its writing position byholding a portfolio of bonds similar to those on which the underlying index is



based. However, the Fund cannot, as a practical matter, acquire and hold aportfolio containing exactly the same securities as the underlying index and, asa result, bears a risk that the value of the securities held will vary from thevalue of the index. Even if the Fund could assemble a portfolio that exactlyreproduced the composition of the underlying index, it still would not be fullycovered from a risk standpoint because of the "timing risk" inherent in writingindex options. When an index option is exercised, the amount of cash that theholder is entitled to receive is determined by the difference between theexercise price and the closing index level on the date when the option isexercised. As with other kinds of options, the Fund, as the call writer, willnot learn that it has been assigned until the next business day at the earliest.The time lag between exercise and notice of assignment poses no risk for thewriter of a covered call on a specific underlying security because there, thewriter's obligation is to deliver the underlying security, not to pay its valueas of a fixed time in the past. So long as the writer already owns theunderlying security, it can satisfy its settlement obligations by simplydelivering it, and the risk that its value may have declined since the exercisedate is borne by the exercising holder. In contrast, even if the writer of anindex call holds securities that exactly match the composition of the underlyingindex, it will not be able to satisfy its assignment obligations by deliveringthose securities against payment of the exercise price. Instead, it will berequired to pay cash in an amount based on the closing index value of theexercise date; and by the time it learns that it has been assigned, the indexmay have declined with a corresponding decline in the value of its portfolio.This "timing risk" is an inherent limitation on the ability of index callwriters to cover their risk exposure by holding securities positions.

If the Fund has purchased an index option and exercises it before theclosing index value for that day is available, it runs the risk that the levelof the underlying index may subsequently change. If such a change causes theexercised option to fall out-of-the-money, the Fund must pay the differencebetween the closing index value and the exercise price of the option (times theapplicable multiplier) to the assigned writer.


1. Invest more than 15% of its assets in illiquid investments; or

2. Buy securities on margin or sell short (unless it owns, or by virtue ofits ownership of, other securities has the right to obtain securities equivalentin kind and amount to the securities sold); however, the Fund may make margindeposits in connection with the use of any financial instrument or anytransaction in securities permitted under its investment policies;

3. Invest for control or for management; or

4. Invest in the securities of other investment companies except incompliance with the Investment Company Act of 1940. Duplicate fees may resultfrom such purchases.

ASAF FEDERATED HIGH YIELD BOND FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income.


Corporate Debt Securities. The Fund invests primarily in corporate debtsecurities. The corporate debt obligations in which the Fund intends to investare expected to be lower-rated. For a discussion of the special risks associatedwith lower-rated securities, see the Company's Prospectus and this SAI under"Certain Risk Factors and Investment Methods." Corporate debt obligations inwhich the Fund invests may bear fixed, floating, floating and contingent, orincreasing rates of interest. They may involve equity features such asconversion or exchange rights, warrants for the acquisition of common stock ofthe same or a different issuer, participations based on revenues, sales orprofits, or the purchase of common stock in a unit transaction (where corporatedebt securities and common stock are offered as a unit).

U.S. Government Obligations. The types of U.S. government obligations inwhich the Fund may invest include, but are not limited to, direct obligations ofthe U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) andobligations issued or guaranteed by U.S. government agencies orinstrumentalities. These securities may be backed by: the full faith and creditof the U.S. Treasury; the issuer's right to borrow from the U.S. Treasury; thediscretionary authority of the U.S. government to purchase certain obligationsof agencies or instrumentalities; or the credit of the agency or instrumentalityissuing the obligations. For an additional discussion of the types of U.S.government obligations in which the Fund may invest, see the Company'sProspectus under "Investment Objectives and Policies."



Restricted Securities. The Fund expects that any restricted securitieswould be acquired either from institutional investors who originally acquiredthe securities in private placements or directly from the issuers of thesecurities in private placements. Restricted securities are generally subject tolegal or contractual delays on resale. Restricted securities and securities thatare not readily marketable may sell at a discount from the price they wouldbring if freely marketable. For a discussion of illiquid and restrictedsecurities and certain risks involved therein, see the Company's Prospectusunder "Certain Risk Factors and Investment Methods."


When-Issued and Delayed Delivery Transactions. The Fund may purchasefixed-income securities on a when-issued or delayed delivery basis. The Fund mayengage in when-issued and delayed delivery transactions only for the purpose ofacquiring portfolio securities consistent with the Fund's investment objectiveand policies, not for investment leverage. These transactions are arrangementsin which the Fund purchases securities with payment and delivery scheduled for afuture time. Settlement dates may be a month or more after entering into thesetransactions, and the market values of the securities purchased may vary fromthe purchase prices. These transactions are made to secure what is considered tobe an advantageous price and yield for the Fund.

No fees or other expenses, other than normal transaction costs, areincurred. However, liquid assets of the Fund sufficient to make payment for thesecurities to be purchased are segregated at the trade date. These securitiesare marked to market daily and will maintain until the transaction is settled.For an additional discussion of when-issued securities and certain risksinvolved therein, see this SAI under "Certain Risk Factors and InvestmentMethods."

Repurchase Agreements. The Fund will require its custodian to takepossession of the securities subject to repurchase agreements, and thesesecurities will be marked to market daily. To the extent that the originalseller does not repurchase the securities from the Fund, the Fund could receiveless than the repurchase price on any sale of such securities. In the event thatsuch a defaulting seller filed for bankruptcy or became insolvent, dispositionof such securities by the Fund might be delayed pending court action. The Fundbelieves that under the regular procedures normally in effect for custody of theFund's portfolio securities subject to repurchase agreements, a court ofcompetent jurisdiction would rule in favor of the Fund and allow retention ordisposition of such securities. The Fund will only enter into repurchaseagreements with banks and other recognized financial institutions such asbroker/dealers which are deemed by the Sub-advisor to be creditworthy, pursuantto guidelines established by the Directors of the Company. For an additionaldiscussion of repurchase agreements and certain risks involved therein, see theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Lending Portfolio Securities. In order to generate additional income,the Fund may lend its securities to brokers/dealers, banks, or otherinstitutional borrowers of securities. The Fund will only enter into loanarrangements with broker/dealers, banks, or other institutions which theSub-advisor has determined are creditworthy under guidelines established by theDirectors of the Company. The collateral received when the Fund lends portfoliosecurities must be valued daily and, should the market value of the loanedsecurities increase, the borrower must furnish additional collateral to theFund. During the time portfolio securities are on loan, the borrower pays theFund any dividends or interest paid on such securities. Loans are subject totermination at the option of the Fund or the borrower. The Fund may payreasonable administrative and custodial fees in connection with a loan and maypay a negotiated portion of the interest earned on the cash or cash equivalentcollateral to the borrower or placing broker. The Fund does not have the rightto vote securities on loan, but would terminate the loan and regain the right tovote if that were considered important with respect to the investment.

Reverse Repurchase Agreements. The Fund may also enter into reverserepurchase agreements. When effecting reverse repurchase agreements, liquidassets of the Fund, in a dollar amount sufficient to make payment for theobligations to be purchased, are segregated at the trade date. These securitiesare marked to market daily and are maintained until the transaction is settled.During the period any reverse repurchase agreements are outstanding, but only tothe extent necessary to ensure completion of the reverse repurchase agreements,the Fund will restrict the purchase of portfolio instruments to money marketinstruments maturing on or before the expiration date of the reverse repurchaseagreements. For a discussion of reverse repurchase agreements and certain risksinvolved therein, see the Company's Prospectus under "Certain Risk Factors andInvestment Methods."

Portfolio Turnover. The Fund may experience greater portfolio turnover thanwould be expected with a portfolio of higher-rated securities. For an additionaldiscussion of portfolio turnover, see this SAI and the Company's Prospectusunder "Portfolio Transactions."



Adverse Legislation. In 1989, legislation was enacted that requiredfederally insured savings and loan associations to divest their holdings oflower-rated bonds by 1994. This legislation also created the Resolution TrustCorporation (the "RTC"), which disposed of a substantial portion of lower-ratedbonds held by failed savings and loan associations. The reduction of the numberof institutions empowered to purchase and hold lower-rated bonds, and thedivestiture of bonds by these institutions and the RTC, have had an adverseimpact on the overall liquidity of the market for such bonds. Federal and statelegislatures and regulators have and may continue to propose new laws andregulations designed to limit the number or type of institutions that maypurchase lower-rated bonds, reduce the tax benefits to issuers of such bonds, orotherwise adversely impact the liquidity of such bonds. The Fund cannot predictthe likelihood that any of these proposals will be adopted, or their potentialimpact on the liquidity of lower-rated bonds.

Foreign Securities. For a discussion of certain risks involved withinvesting in foreign securities, including currency risks, see this SAI and theCompany's Prospectus under "Certain Risk Factors and Investment Methods."

Investment Policies Which May Be Changed Without Shareholder Approval. Thefollowing limitations are not "fundamental" restriction and may be changed bythe Directors of the Company without shareholder approval. The Fund will not:

1. Invest more than 15% of the value of its net assets in securities thatare not readily marketable, including repurchase agreements providing forsettlement in more than seven days after notice. The Directors of the Company,or the Investment Manager or the Sub-advisor acting pursuant to authoritydelegated by the Directors, may determine that a readily available market existsfor certain securities eligible for resale pursuant to Rule 144A under theSecurities Act of 1933, or any successor to such rule, and therefore that suchsecurities are not subject to the foregoing limitation;


3. Purchase any securities on margin but may obtain such short-term creditsas may be necessary for the clearance of transactions;

4. Invest more than 10% of the value of its total assets in foreignsecurities which are not publicly traded in the United States;

5. Make short sales of securities or maintain short positions, unless:during the time the short position is open, it owns an equal amount of thesecurities sold or securities readily and freely convertible into orexchangeable, without payment of additional consideration, for securities of thesame issue as, and equal in amount to, the securities sold short; and not morethan 10% of the Fund's net assets (taken at current value) is held as collateralfor such sales at any one time; or

6. Purchase securities of a company for the purpose of exercising controlor management. However, the Fund may invest in up to 10% of the votingsecurities of any one issuer and may exercise its voting powers consistent withthe best interests of the Fund. From time to time, the Fund, together with otherinvestment companies advised by subsidiaries or affiliates of the Sub-advisor,may together buy and hold substantial amounts of a company's voting stock. Allsuch stock may be voted together. In some such cases, the Fund and the otherinvestment companies might collectively be considered to be in control of thecompany in which they have invested. In some cases, directors, agents,employees, officers, or others affiliated with or acting for the Fund, theSub-advisor, or affiliated companies might possibly become directors ofcompanies in which the Fund holds stock.

ASAF TOTAL RETURN BOND FUND:

Investment Objective: The investment objective of the Fund is to maximize totalreturn, consistent with preservation of capital. The Sub-advisor will seek toemploy prudent investment management techniques, especially in light of thebroad range of investment instruments in which the Fund may invest.


Borrowing. The Fund may borrow for temporary administrative purposes.This borrowing may be unsecured. The Investment Company Act of 1940 requires theFund to maintain continuous asset coverage (that is, total assets includingborrowings, less liabilities exclusive of borrowings) of 300% of the amountborrowed. If the 300% asset coverage should decline as a result of marketfluctuations or other reasons, the Fund may be required to sell some of itsholdings within three days to reduce the debt and restore the 300% assetcoverage, even though it may be disadvantageous from an investment standpoint tosell securities at that time. Borrowing will tend to exaggerate the effect onnet asset value of any increase or decrease in the market value of the Fund.Money borrowed will be subject to interest costs which may or may not be



recovered by appreciation of the securities purchased. The Fund also may berequired to maintain minimum average balances in connection with such borrowingor to pay a commitment or other fee to maintain a line of credit; either ofthese requirements would increase the cost of borrowing over the stated interestrate.

In addition to the above, the Fund may enter into reverse repurchaseagreements and mortgage dollar rolls. A reverse repurchase agreement involvesthe sale of a portfolio-eligible security by the Fund, coupled with itsagreement to repurchase the instrument at a specified time and price. In a"dollar roll" transaction the Fund sells a mortgage-related security (such as aGNMA security) to a dealer and simultaneously agrees to repurchase a similarsecurity (but not the same security) in the future at a pre-determined price. A"dollar roll" can be viewed, like a reverse repurchase agreement, as acollateralized borrowing in which the Fund pledges a mortgage-related securityto a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,the dealer with which the Fund enters into a dollar roll transaction is notobligated to return the same securities as those originally sold by the Fund,but only securities which are "substantially identical." To be considered"substantially identical," the securities returned to the Fund generally must:(1) be collateralized by the same types of underlying mortgages; (2) be issuedby the same agency and be part of the same program; (3) have a similar originalstated maturity; (4) have identical net coupon rates; (5) have similar maturity:(4) have identical net coupon rates; (5) have similar market yields (andtherefore price); and (6) satisfy "good delivery" requirements, meaning that theaggregate principal amounts of the securities delivered and received back mustbe within 2.5% of the initial amount delivered. The Fund's obligations under adollar roll agreement must be covered by cash or other liquid assets equal invalue to the securities subject to repurchase by the Fund, maintained in asegregated account.

Both dollar roll and reverse repurchase agreements will be subject tothe Fund's limitations on borrowings, which will restrict the aggregate of suchtransactions (plus any other borrowings) to 33 1/3% of the Fund's total assets.Furthermore, because dollar roll transactions may be for terms ranging betweenone and six months, dollar roll transactions may be deemed "illiquid" andsubject to the Fund's overall limitations on investments in illiquid securities.

Corporate Debt Securities. The Fund's investments in U.S. dollar- orforeign currency-denominated corporate debt securities of domestic or foreignissuers are limited to corporate debt securities (corporate bonds, debentures,notes and other similar corporate debt instruments, including convertiblesecurities) which meet the minimum ratings criteria set forth for the Fund, or,if unrated, are in the Sub-advisor's opinion comparable in quality to corporatedebt securities in which the Fund may invest. The rate of return or return ofprincipal on some debt obligations may be linked or indexed to the level ofexchange rates between the U.S. dollar and a foreign currency or currencies.

Among the corporate bonds in which the Fund may invest are convertiblesecurities. A convertible security is a bond, debenture, note, or other securitythat entitles the holder to acquire common stock or other equity securities ofthe same or a different issuer. A convertible security generally entitles theholder to receive interest paid or accrued until the convertible securitymatures or is redeemed, converted or exchanged. Before conversion, convertiblesecurities have characteristics similar to nonconvertible debt securities.Convertible securities rank senior to common stock in a corporation's capitalstructure and, therefore, generally entail less risk than the corporation'scommon stock, although the extent to which such risk is reduced depends in largemeasure upon the degree to which the convertible security sells above its valueas a fixed-income security.

A convertible security may be subject to redemption at the option ofthe issuer at a predetermined price. If a convertible security held by the Fundis called for redemption, the Fund will be required to permit the issuer toredeem the security and convert it to underlying common stock, or will sell theconvertible security to a third party. The Fund generally would invest inconvertible securities for their favorable price characteristics and totalreturn potential and would normally not exercise an option to convert.

Investments in securities rated below investment grade that areeligible for purchase by the Fund (i.e., rated B or better by Moody's or S&P)are described as "speculative" by both Moody's and S&P. Investment inlower-rated corporate debt securities ("high yield securities") generallyprovides greater income and increased opportunity for capital appreciation thaninvestments in higher quality securities, but they also typically entail greaterprice volatility and principal and income risk. These high yield securities areregarded as high risk and predominantly speculative with respect to the issuer'scontinuing ability to meet principal and interest payments. The market for thesesecurities is relatively new, and many of the outstanding high yield securitieshave not endured a major business recession. A long-term track record on defaultrates, such as that for investment grade corporate bonds, does not exist forthis market. Analysis of the creditworthiness of issuers of debt securities thatare high yield may be more complex than for issuers of higher quality debt



securities.

High yield, high risk securities may be more susceptible to real orperceived adverse economic and competitive industry conditions than investmentgrade securities. The price of high yield securities have been found to be lesssensitive to interest-rate adverse economic downturns or individual corporatedevelopments. A projection of an economic downturn or of a period of risinginterest rates, for example, could cause a decline in high yield security pricesbecause the advent of a recession could lessen the ability of a highly leveragedcompany to make principal and interest payments on its debt securities. If anissuer of high yield securities defaults, in addition to risking payment of allor a portion of interest and principal, the Fund may incur additional expensesto seek recovery. In the case of high yield securities structured as zero-couponor pay-in-kind securities, their market prices are affected to a greater extentby interest rate changes, and therefore tend to be more volatile than securitieswhich pay interest periodically and in cash.

The secondary market on which high yield, high risk securities aretraded may be less liquid than the market for higher grade securities. Lessliquidity in the secondary trading market could adversely affect the price atwhich the Fund could sell a high yield security, and could adversely affect thedaily net asset value of the shares. Adverse publicity and investor perceptions,whether or not based on fundamental analysis, may decrease the values andliquidity of high yield securities especially in a thinly-traded market. Whensecondary markets for high yield securities are less liquid than the market forhigher grade securities, it may be more difficult to value the securitiesbecause such valuation may require more research, and elements of judgment mayplay a greater role in the valuation because there is less reliable, objectivedata available. The Sub-advisor seeks to minimize the risks of investing in allsecurities through diversification, in-depth credit analysis and attention tocurrent developments in interest rates and market conditions. For an additionaldiscussion of certain risks involved in lower-rated debt securities, see thisSAI and the Company's Prospectus under "Certain Risk Factors and InvestmentObjectives."

Participation on Creditors Committees. The Fund may from time to timeparticipate on committees formed by creditors to negotiate with the managementof financially troubled issuers of securities held by the Fund. Suchparticipation may subject the Fund to expenses such as legal fees and may makethe Fund an "insider" of the issuer for purposes of the federal securities laws,and therefore may restrict the Fund's ability to trade in or acquire additionalpositions in a particular security when it might otherwise desire to do so.Participation by the Fund on such committees also may expose the Fund topotential liabilities under the federal bankruptcy laws or other laws governingthe rights of creditors and debtors. The Fund will participate on suchcommittees only when the Sub-advisor believes that such participation isnecessary or desirable to enforce the Fund's rights as a creditor or to protectthe value of securities held by the Fund.

Mortgage-Related Securities. The Fund may invest in mortgage-backedsecurities. Mortgage-related securities are interests in pools of mortgage loansmade to residential home buyers, including mortgage loans made by savings andloan institutions, mortgage bankers, commercial banks and others. Pools ofmortgage loans are assembled as securities for sale to investors by variousgovernmental, government-related and private organizations (see "MortgagePass-Through Securities"). The Fund may also invest in debt securities which aresecured with collateral consisting of mortgage-related securities (see"Collateralized Mortgage Obligations"), and in other types of mortgage-relatedsecurities.

Interests in pools of mortgage-related securities differ from otherforms of debt securities, which normally provide for periodic payment ofinterest in fixed amounts with principal payments at maturity or specified calldates. Instead, these securities provide a monthly payment which consists ofboth interest and principal payments. In effect, these payments are a"pass-through" of the monthly payments made by the individual borrowers on theirresidential or commercial mortgage loans, net of any fees paid to the issuer orguarantor of such securities. Additional payments are caused by repayments ofprincipal resulting from the sale of the underlying property, refinancing orforeclosure, net of fees or costs which may be incurred. Some mortgage-relatedsecurities (such as securities issued by the Government National MortgageAssociation) are described as "modified pass-through." These securities entitlethe holder to receive all interest and principal payments owned on the mortgagepool, net of certain fees, at the scheduled payment dates regardless of whetheror not the mortgagor actually makes the payment.

The principal governmental guarantor of mortgage-related securities isthe Government National Mortgage Association ("GNMA"). GNMA is a wholly ownedUnited States Government corporation within the Department of Housing and UrbanDevelopment. GNMA is authorized to guarantee, with the full faith and credit ofthe United States Government, the timely payment of principal and interest onsecurities issued by institutions approved by GNMA (such as savings and loaninstitutions, commercial banks and mortgage bankers) and backed by pools of



FHA-insured or VA-guaranteed mortgages.

Government-related guarantors (i.e., not backed by the full faith andcredit of the United States Government) include the Federal National MortgageAssociation ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").FNMA is a government-sponsored corporation owned entirely by privatestockholders. It is subject to general regulation by the Secretary of Housingand Urban Development. FNMA purchases conventional (i.e., not insured orguaranteed by any government agency) residential mortgages from a list ofapproved seller/servicers which include state and federally chartered savingsand loan associations, mutual savings banks, commercial banks and credit unionsand mortgage bankers. Pass-though securities issued by FNMA are guaranteed as totimely payment of principal and interest by FNMA but are not backed by the fullfaith and credit of the United States Government.

FHLMC was created by Congress in 1970 for the purpose of increasing theavailability of mortgage credit for residential housing. It is agovernment-sponsored corporation formerly owned by the twelve Federal Home LoanBanks and now owned entirely by private stockholders. FHLMC issues ParticipationCertificates ("PC's") which represent interests in conventional mortgages fromFHLMC's national portfolio. FHLMC guarantees the timely payment of interest andultimate collection of principal, but PCs are not backed by the full faith andcredit of the United States Government.

Commercial banks, savings and loan institutions, private mortgageinsurance companies, mortgage bankers and other secondary market issuers alsocreate pass-though pools of conventional residential mortgage loans. Suchissuers may, in addition, be the originators and/or servicers of the underlyingmortgage loans as well as the guarantors of the mortgage-related securities.Pools created by such nongovernmental issuers generally offer a higher rate ofinterest than government and government-related pools because there are nodirect or indirect government or agency guarantees of payments in the formerpools. However, timely payment of interest and principal of these pools may besupported by various forms of insurance or guarantees, including individualloan, title, pool and hazard insurance and letters of credit. The insurance andguarantees are issued by governmental entities, private insurers and themortgage poolers. Such insurance and guarantees and the creditworthiness of theissuers thereof will be considered in determining whether a mortgage-relatedsecurity meets the Company's and the Trust's investment quality standards. Therecan be no assurance that the private insurers or guarantors can meet theirobligations under the insurance policies or guarantee arrangements. The Fund maybuy mortgage-related securities without insurance or guarantees if, through anexamination of the loan experience and practices of the originator/servicers andpoolers, the Sub-advisor determines that the securities meet the Company's andthe Trust's quality standards. Although the market for such securities isbecoming increasingly liquid, securities issued by certain private organizationsmay not be readily marketable. The Fund will not purchase mortgage-relatedsecurities or any other assets which in the Sub-advisor's opinion are illiquidif, as a result, more than 15% of the value of the Fund's total assets will beilliquid.

Mortgage-backed securities that are issued or guaranteed by the U.S.Government, its agencies or instrumentalities, are not subject to the Fund'sindustry concentration restrictions, set forth in this SAI under "FundamentalInvestment Restrictions," by virtue of the exclusion from that test available toall U.S. Government securities. In the case of privately issued mortgage-relatedsecurities, the Fund takes the position that mortgage-related securities do notrepresent interests in any particular "industry" or group of industries. Theassets underlying such securities may be represented by a portfolio of firstlien residential mortgages (including both whole mortgage loans and mortgageparticipation interests) or portfolios of mortgage pass-through securitiesissued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying amortgage-related security may in turn be insured or guaranteed by the FederalHousing Administration or the Department of Veterans Affairs. In the case ofprivate issue mortgage-related securities whose underlying assets are neitherU.S. Government securities nor U.S. Government-insured mortgages, to the extentthat real properties securing such assets may be located in the samegeographical region, the security may be subject to a greater risk of defaultthat other comparable securities in the event of adverse economic, political orbusiness developments that may affect such region and ultimately, the ability ofresidential homeowners to make payments of principal and interest on theunderlying mortgages.

Collateralized Mortgage Obligations (CMOs). A CMO is a hybridbetween a mortgage-backed bond and a mortgage pass-through security. Similar toa bond, interest and prepaid principal is paid, in most cases, semiannually.CMOs may be collateralized by whole mortgage loans, but are more typicallycollateralized by portfolios of mortgage pass-through securities guaranteed byGNMA, FHLMC, or FNMA, and their income streams.

CMOs are structured into multiple classes, each bearing adifferent stated maturity. Actual maturity and average life will depend upon theprepayment experience of the collateral. CMOs provide for a modified form of



call protection through a de facto breakdown of the underlying pool of mortgagesaccording to how quickly the loans are repaid. Monthly payment of principalreceived from the pool of underlying mortgages, including prepayments, is firstreturned to investors holding the shortest maturity class. Investors holding thelonger maturity classes receive principal only after the first class has beenretired. An investor is partially guarded against a sooner than desired returnor principal because of the sequential payments.

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

FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debtobligations of FHLMC issued in multiple classes having different maturity dateswhich are secured by the pledge of a pool of conventional mortgage loanspurchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on theCMOs are made semiannually, as opposed to monthly. The amount of principalpayable on each semiannual payment date is determined in accordance with FHLMC'smandatory sinking fund schedule, which, in turn, is equal to approximately 100%of FHA prepayment experience applied to the mortgage collateral pool. Allsinking fund payments in the CMOs are allocated to the retirement of theindividual classes of bonds in the order of their stated maturities. Payment ofprincipal on the mortgage loans in the collateral pool in excess of the amountof FHLMC's minimum sinking fund obligation for any payment date are paid to theholders of the CMOs as additional sinking fund payments. Because of the"pass-through" nature of all principal payments received on the collateral poolin excess of FHLMC's minimum sinking fund requirement, the rate at whichprincipal of the CMOs is actually repaid is likely to be such that each class ofbonds will be retired in advance of its scheduled maturity date.

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

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

For an additional discussion of mortgage-backed securities andcertain risks involved therein, see this SAI and the Company's Prospectus under"Certain Risk Factors and Investment Methods."

Other Mortgage-Related Securities. Other mortgage-relatedsecurities include securities other than those described above that directly orindirectly represent a participation in, or are secured by and payable from,mortgage loans on real property, including CMO residuals or strippedmortgage-backed securities. Other mortgage-related securities may be equity ordebt securities issued by agencies or instrumentalities of the U.S. Governmentor by private originators of, or investors in, mortgage loans, including savingsand loan associations, homebuilders, mortgage banks, commercial banks,investment banks, partnerships, trusts and special purpose entities of theforegoing.

CMO Residuals. CMO residuals are derivative mortgagesecurities issued by agencies or instrumentalities of the U.S. Government or byprivate originators of, or investors in, mortgage loans, including savings andloan associations, homebuilders, mortgage banks, commercial banks, investmentbanks and special purpose entities of the foregoing.

The cash flow generated by the mortgage assets underlying aseries of CMOs is applied first to make required payments of principal andinterest on the CMOs and second to pay the related administrative expenses ofthe issuer. The residual in a CMO structure generally represents the interest inany excess cash flow remaining after making the foregoing payments. Each paymentof such excess cash flow to a holder of the related CMO residual representsincome and/or a return of capital. The amount of residual cash flow resultingfrom a CMO will depend on, among other things, the characteristics of themortgage assets, the coupon rate of each class of CMO, prevailing interestrates, the amount of administrative expenses and the prepayment experience onthe mortgage assets. In particular, the yield to maturity on CMO residuals isextremely sensitive to prepayments on the related underlying mortgage assets, inthe same manner as an interest-only ("IO") class of stripped mortgage-backed



securities. See "Other Mortgage-Related Securities -- Stripped Mortgage-BackedSecurities." In addition, if a series of a CMO includes a class that bearsinterest at an adjustable rate, the yield to maturity on the related CMOresidual will also be extremely sensitive to changes in the level of the indexupon which interest rate adjustments are based. As described below with respectto stripped mortgage-backed securities, in certain circumstances the Fund mayfail to recoup fully its initial investment in a CMO residual.

CMO residuals are generally purchased and sold byinstitutional investors through several investment banking firms acting asbrokers or dealers. The CMO residual market has only very recently developed andCMO residuals currently may not have the liquidity of other more establishedsecurities trading in other markets. Transactions in CMO residuals are generallycompleted only after careful review of the characteristics of the securities inquestion. In addition, CMO residuals may or, pursuant to an exemption therefrom,may not have been registered under the Securities Act of 1933, as amended. CMOresiduals, whether or not registered under such Act, may be subject to certainrestrictions on transferability, and may be deemed "illiquid" and subject to theFund's limitations on investment in illiquid securities.

Stripped Mortgage-Backed Securities. Stripped mortgage-backedsecurities ("SMBS") are derivative multi-class mortgage securities. SMBS may beissued by agencies or instrumentalities of the U.S. Government, or by privateoriginators of, or investors in, mortgage loans, including savings and loanassociations, mortgage banks, commercial banks, investment banks and specialpurpose entities of the foregoing.

SMBS are usually structured with two classes that receivedifferent proportions of the interest and principal distributions on a pool ofmortgage assets. A common type of SMBS will have one class receiving some of theinterest and most of the principal from the mortgage assets, which the otherclass will receive most of the interest and the remainder of the principal. Inthe most extreme case, one class will receive all of the interest (the IOclass), while the other class will receive all of the principal (theprincipal-only or "PO" class). The yield to maturity on an IO class is extremelysensitive to the rate of principal payments (including prepayments) on therelated underlying mortgage assets, and a rapid rate of principal payments mayhave a material adverse effect on the Fund's yield to maturity from thesesecurities. If the underlying mortgage assets experience greater thananticipated prepayments of principal, the Fund may fail to fully recoup itsinitial investment in these securities even if the security is in one of thehighest rating categories.

Although SMBS are purchased and sold by institutionalinvestors through several investment banking firms acting as brokers or dealers,these securities were only recently developed. As a result, established tradingmarkets have not yet developed and, accordingly, these securities may be deemed"illiquid" and subject to the Fund's limitations on investment in illiquidsecurities.

Other Asset-Backed Securities. Similarly, the Sub-advisorexpects that other asset-backed securities (unrelated to mortgage loans) will beoffered to investors in the future. Several types of asset-backed securities maybe offered to investors, including Certificates for Automobile Receivables. Fora discussion of automobile receivables, see this SAI under "Certain Risk Factorsand Investment Methods." Consistent with the Fund's investment objectives andpolicies, the Sub-advisor also may invest in other types of asset-backedsecurities.

Foreign Securities. The Fund may invest in U.S. dollar- or foreigncurrency-denominated corporate debt securities of foreign issuers (includingpreferred or preference stock), certain foreign bank obligations (see "BankObligations") and U.S. dollar- or foreign currency-denominated obligations offoreign governments or their subdivisions, agencies and instrumentalities,international agencies and supranational entities. The Fund may invest up to 20%of its assets in securities denominated in foreign currencies, and may investbeyond this limit in U.S. dollar-denominated securities of foreign issuers. TheFund will limit its foreign investments to securities of issuers based indeveloped countries (which include newly industrialized countries such asMexico, Taiwan and South Korea). Investing in the securities of foreign issuersinvolves special risks and considerations not typically associated withinvesting in U.S. companies. For a discussion of certain risks involved inforeign investments, see the Company's Prospectus and this SAI under "CertainRisk Factors and Investment Methods."

The Fund also may purchase and sell foreign currency options andforeign currency futures contracts and related options (see ""DerivativeInstruments"), and enter into forward foreign currency exchange contracts inorder to protect against uncertainty in the level of future foreign exchangerates in the purchase and sale of securities.

A forward foreign currency contract involves an obligation to purchaseor sell a specific currency at a future date, which may be any fixed number of



days from the date of the contract agreed upon by the parties, at a price set atthe tine of the contract. These contracts may be bought or sold to protect theFund against a possible loss resulting from an adverse change in therelationship between foreign currencies and the U.S. dollar or, to increaseexposure to a particular foreign currency. Open positions in forward contractsare covered by the segregation with the Fund's custodian of cash or liquidassets and are marked to market daily. Although such contracts are intended tominimize the risk of loss due to a decline on the value of the hedgedcurrencies, at the same time, they tend to limit any potential gain which mightresult should the value of such currencies increase.

Brady Bonds. The Fund may invest in Brady Bonds. Brady Bonds aresecurities created through the exchange of existing commercial bank loans tosovereign entities for new obligations in connection with debt restructuringsunder a debt restructuring plan introduced by former U.S. Secretary of theTreasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructuringshave been implemented in a number of countries, including in Argentina, Bolivia,Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan, Mexico, Niger,Nigeria, the Philippines, Poland, Uruguay, and Venezuela. In addition, Brazilhas concluded a Brady-like plan. It is expected that other countries willundertake a Brady Plan in the future, including Panama and Peru.

Brady Bonds have been issued only recently, and accordingly do not havea long payment history. Brady Bonds may be collateralized or uncollateralized,are issued in various currencies (primarily the U.S. dollar) and are activelytraded in the over-the-counter secondary market. U.S. dollar-denominated,collateralized Brady Bonds, which may be fixed rate par bonds or floating ratediscount bonds, are generally collateralized in full as to principal by U.S.Treasury zero-coupon bonds having the same maturity as the Brady Bonds. Interestpayments on these Brady Bonds generally are collateralized on a one-year orlonger rolling-forward basis by cash or securities in an amount that, in thecase of fixed rate bonds, is equal to at least one year of interest payments or,in the case of floating rate bonds, initially is equal to at least one year'sinterest payments based on the applicable interest rate at that time and isadjusted at regular intervals thereafter. Certain Brady Bonds are entitled to"value recovery payments" in certain circumstances, which in effect constitutesupplemental interest payments but generally are not collateralized. Brady Bondsare often viewed as having three or four valuation components: (i) thecollateralized repayment of principal at final maturity; (ii) the collateralizedinterest payments; (iii) the uncollateralized interest payments; and (iv) anyuncollateralized repayment of principal at maturity (these uncollateralizedamounts constitute the "residual risk").

Most Mexican Brady Bonds issued to date have principal repayments atfinal maturity fully collateralized by U.S. Treasury zero-coupon bonds (orcomparable collateral denominated in other currencies) and interest couponpayments collateralized on an 18-month rolling-forward basis by funds held inescrow by an agent for the bondholders. A significant portion of the VenezuelanBrady Bonds and the Argentine Brady Bonds issued to date have principalrepayments at final maturity collateralized by U.S. Treasury zero-coupon bonds(or comparable collateral denominated in other currencies) and/or interestcoupon payments collateralized on a 14-month (for Venezuela) or 12-month (forArgentina) rolling-forward basis by securities held by the Federal Reserve Bankof New York as collateral agent.

Brady Bonds involve various risk factors including residual risk andthe history of defaults with respect to commercial bank loans by public andprivate entities of countries issuing Brady Bonds. There can be no assurancethat Brady Bonds in which the Fund may invest will not be subject torestructuring arrangements or to requests for new credit, which may cause theFund to suffer a loss of interest or principal on any of its holdings.

Bank Obligations. Bank obligations in which the Funds invest includecertificates of deposit, bankers' acceptances, and fixed time deposits.Certificates of deposit are negotiable certificates issued against fundsdeposited in a commercial bank for a definite period of time and earning aspecified return. Bankers' acceptances are negotiable drafts or bills ofexchange, normally drawn by an importer or exporter to pay for specificmerchandise, which are "accepted" by a bank, meaning, in effect, that the bankunconditionally agrees to pay the face value of the instrument on maturity.Fixed time deposits are bank obligations payable at a stated maturity date andbearing interest at a fixed rate. Fixed time deposits may be withdrawn on demandby the investor, but may be subject to early withdrawal penalties which varydepending upon market conditions and the remaining maturity of the obligation.There are no contractual restrictions on the right to transfer a beneficialinterest in a fixed time deposit to a third party, although there is no marketfor such deposits. The Fund will not invest in fixed time deposits which (1) arenot subject to prepayment or (2) provide for withdrawal penalties uponprepayment (other than overnight deposits) if, in the aggregate, more than 15%of its assets would be invested in such deposits, repurchase agreements maturingin more than seven days and other illiquid assets.

The Fund will limit its investments in United States bank obligations



to obligations of United States bank (including foreign branches) which havemore than $1 billion in total assets at the time of investment and are member ofthe Federal Reserve System, are examined by the Comptroller of the Currency orwhose deposits are insured by the Federal Deposit Insurance Corporation. TheFund also may invest in certificates of deposit of savings and loan associations(federally or state chartered and federally insured) having total assets inexcess $1 billion.

The Fund will limit its investments in foreign bank obligations toUnited States dollar- or foreign currency-denominated obligations of foreignbanks (including United States branches of foreign banks) which at the time ofinvestment (i) have more than $10 billion, or the equivalent in othercurrencies, in total assets; (ii) in terms of assets are among the 75 largestforeign banks in the world; (iii) have branches or agencies (limited purposeoffices which do not offer all banking services) in the United States; and (iv)in the opinion of the Sub-advisor, are of an investment quality comparable toobligations of United States banks in which the Fund may invest. Subject to theFund's limitation on concentration of no more than 25% of its assets in thesecurities of issuers in particular industry, there is no limitation on theamount of the Fund's assets which may be invested in obligations of foreignbanks which meet the conditions set forth herein.

Obligations of foreign banks involve somewhat different investmentrisks than those affecting obligations of United States banks, including thepossibilities that their liquidity could be impaired because of future politicaland economic developments, that their obligations may be less marketable thancomparable obligations of United States banks, that a foreign jurisdiction mightimpose withholding taxes on interest income payable on those obligations, thatforeign deposits may be seized or nationalized, that foreign governmentalrestrictions such as exchange controls may be adopted which might adverselyaffect the payment of principal and interest on those obligations and that theselection of those obligations may be more difficult because there may be lesspublicly available information concerning foreign banks or the accounting,auditing and financial reporting standards, practices and requirementsapplicable to foreign banks may differ from those applicable to United Statesbanks. Foreign banks are not generally subject to examination by any UnitedStates Government agency or instrumentality.

Derivative Instruments. In pursuing its individual objective, the Fundmay, as described in the Company's Prospectus, purchase and sell (write) bothput options and call options on securities, securities indexes, and foreigncurrencies, and enter into interest rate, foreign currency and index futurescontracts and purchase and sell options on such futures contracts ("futureoptions") for hedging purposes. The Fund also may enter into swap agreementswith respect to foreign currencies, interest rates and indexes of securities. Ifother types of financial instruments, including other types of options, futurescontracts, or futures options are traded in the future, the Fund may also usethose instruments, provided that the Directors of the Company determine thattheir use is consistent with the Fund's investment objective, and provided thattheir use is consistent with restrictions applicable to options and futurescontracts currently eligible for use by the Trust (i.e., that written call orput options will be "covered" or "secured" and that futures and futures optionswill be used only for hedging purposes).

Options on Securities and Indexes. The Fund may purchase and sell bothput and call options on debt or other securities or indexes in standardizedcontracts traded on foreign or national securities exchanges, boards of trade,or similar entities, or quoted on NASDAQ or on a regulated foreignover-the-counter market, and agreements sometimes called cash puts, which mayaccompany the purchase of a new issue of bonds from a dealer.

The Fund will write call options and put options only if they are"covered." In the case of a call option on a security, the option is "covered"if the Fund owns the security underlying the call or has an absolute andimmediate right to acquire that security without additional cash consideration(or, if additional cash consideration is required, cash or cash equivalents insuch amount are placed in a segregated account by its custodian) upon conversionor exchange of other securities held by the Fund. For a call option on an index,the option is covered if the Fund maintains with its custodian cash or cashequivalents equal to the contract value. A call option is also covered if theFund holds a call on the same security or index as the call written where theexercise price of the call held is (i) equal to or less than the exercise priceof the call written, or (ii) greater than the exercise price of the callwritten, provided the difference is maintained by the Fund in cash or cashequivalents in a segregated account with its custodian. A put option on asecurity or an index is "covered" if the Fund maintains cash or cash equivalentsequal to the exercise price in a segregated account with its custodian. A putoption is also covered if the Fund holds a put on the same security or index asthe put written where the exercise price of the put held is (i) equal to orgreater than the exercise price of the put written, or (ii) less than theexercise price of the put written, provided the difference is maintained by theFund in cash or cash equivalents in a segregated account with its custodian.



If an option written by the Fund expires, the Fund realizes a capitalgain equal to the premium received at the time the option was written. If anoption purchased by the Fund expires unexercised, the Fund realizes a capitalloss equal to the premium paid.

Prior to the earlier of exercise or expiration, an option may be closedout by an offsetting purchase or sale of an option of the same series (type,exchange, underlying security or index, exercise price, and expiration). Therecan be no assurance, however, that a closing purchase or sale transaction can beeffected when the Fund desires.

The Fund will realize a capital gain from a closing purchasetransaction if the cost of the closing option is less than the premium receivedfrom writing the option, or if it is more, the Fund will realize a capital loss.If the premium received from a closing sale transaction is more than the premiumpaid to purchase the option, the Fund will realize a capital gain or, if it isless, the Fund will realize a capital loss. The principal factors affecting themarket value of a put or a call option include supply and demand, interestrates, the current market price of the underlying security or index in relationto the exercise price of the option, the volatility of the underlying securityor index, and the time remaining until the expiration date.

The premium paid for a put or call option purchased by the Fund is anasset of the Fund. The premium received for a option written by the Fund isrecorded as a deferred credit. The value of an option purchased or written ismarked to market daily and is valued at the closing price on the exchange onwhich it is traded or, if not traded on an exchange or no closing price isavailable, at the mean between the last bid and asked prices. For a discussionof certain risks involved in options, see this SAI and the Company's Prospectusunder "Certain Risk Factors and Investment Methods."

Foreign Currency Options. The Fund may buy or sell put and call optionson foreign currencies either on exchanges or in the over-the-counter market. Aput option on a foreign currency gives the purchaser of the option the right tosell a foreign currency at the exercise price until the option expires. Currencyoptions traded on U.S. or other exchanges may be subject to position limitswhich may limit the ability of the Fund to reduce foreign currency risk usingsuch options. Over-the-counter options differ from traded options in that theyare two-party contracts with price and other terms negotiated between buyer andseller, and generally do not have as much market liquidity as exchange-tradedoptions.

Futures Contracts and Options on Futures Contracts. The Fund may useinterest rate, foreign currency or index futures contracts, as specified for theFund in the Company's Prospectus. An interest rate, foreign currency or indexfutures contract provides for the future sale by one party and purchase byanother party of a specified quantity of a financial instrument, foreigncurrency or the cash value of an index at a specified price and time. A futurescontract on an index is an agreement pursuant to which two parties agree to takeor make delivery of an amount of cash equal to the difference between the valueof the index at the close of the last trading day of the contract and the priceat which the index contract was originally written. Although the value of anindex might be a function of the value of certain specified securities, nophysical delivery of these securities is made.

The Fund may purchase and write call and put futures options. Futuresoptions possess many of the same characteristics as options on securities andindexes (discussed above). A futures option gives the holder the right, inreturn for the premium paid, to assume a long position (call) or short position(put) in a futures contract at a specified exercise price at any time during theperiod of the option. Upon exercise of a call option, the holder acquires a longposition in the futures contract and the writer is assigned the opposite shortposition. In the case of a put option, the opposite is true.

To comply with applicable rules of the Commodity Futures TradingCommission under which the Company and the Fund avoid being deemed a "commoditypool" or a "commodity pool operator," the Fund intends generally to limit itsuse of futures contracts and futures options to "bona fide hedging"transactions, as such term is defined in applicable regulations, interpretationsand practice. For example, the Fund might use futures contracts to hedge againstanticipated changes in interest rates that might adversely affect either thevalue of the Fund's securities or the price of the securities which the Fundintends to purchase. The Fund's hedging activities may include sales of futurescontracts as an offset against the effect or expected increases in interestrates, and purchases of futures contracts as an offset against the effect ofexpected declines in interest rates. Although other techniques could be used toreduce the Fund's exposure to interest rate fluctuations, the Fund may be ableto hedge its exposure more effectively and perhaps at a lower cost by usingfutures contracts and futures options.

The Fund will only enter into futures contracts and futures optionswhich are standardized and traded on a U.S. or foreign exchange, board of trade,or similar entity, or quoted on an automated quotation system.



When a purchase or sale of a futures contract is made by the Fund, theFund is required to deposit with its custodian (or broker, if legally permitted)a specified amount of cash or U.S. Government securities ("initial margin"). Themargin required for a futures contract is set by the exchange on which thecontract is traded and may be modified during the term of the contract. Theinitial margin is in the nature of a performance bond or good faith deposit onthe futures contract which is returned to the Fund upon termination of thecontract, assuming all contractual obligations have been satisfied. The Fundexpects to earn interest income on its initial margin deposits. A futurescontract held by the Fund is valued daily at the official settlement price ofthe exchange on which it is traded. Each day the Fund pays or receives cash,called "variation margin," equal to the daily change in value of the futurescontract. This process is known as "marking to market." Variation margin doesnot represent a borrowing or loan by the Fund but is instead a settlementbetween the Fund and the broker of the amount one would owe the other if thefutures contract expired. In computing daily net asset value, the Fund will markto market its open futures positions.

The Fund is also required to deposit and maintain margin with respectto put and call options on futures contracts written by it. Such margin depositswill vary depending on the nature of the underlying futures contract (and therelated initial margin requirements), the current market value of the option,and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery ofthe underlying securities, generally these obligations are closed out prior todelivery by offsetting purchases or sales of matching futures contracts (sameexchange, underlying security or index, and delivery month). If an offsettingpurchase price is less than the original sale price, the Fund realizes a capitalgain, or if it is more, the Fund realizes a capital loss. Conversely, if anoffsetting sale price is more than the original purchase price, the Fundrealizes a capital gain, or if it is less, the Fund realizes a capital loss. Thetransaction costs must also be included in these calculations.

Limitations on Use of Futures and Futures Options. In general, theFunds intend to enter into positions in futures contracts and related optionsonly for "bona fide hedging" purposes. With respect to positions in futures andrelated options that do not constitute bona fide hedging positions, the Fundwill not enter into a futures contract or futures option contract if,immediately thereafter, the aggregate initial margin deposits relating to suchpositions plus premiums paid by it for open futures option positions, less theamount by which any such options are "in-the-money," would exceed 5% of theFund's total assets. A call option is "in-the-money" if the value of the futurescontract that is the subject of the option exceeds the exercise price. A putoption is "in-the-money" if the exercise price exceeds the value of the futurescontract that is the subject of the option.

When purchasing a futures contract, the Fund will maintain with itscustodian (and mark-to-market on a daily basis) cash or other liquid assetsthat, when added to the amounts deposited with a futures commission merchant asmargin, are equal to the market value of the futures contract. Alternatively,the Fund may "cover" its position by purchasing a put option on the same futurescontract with a strike price as high or higher than the price of the contractheld by the Fund.

When selling a futures contract, the Fund will maintain with itscustodian (and mark-to-market on a daily basis) liquid assets that, when addedto the amount deposited with a futures commission merchant as margin, are equalto the market value of the instruments underlying the contract. Alternatively,the Fund may "cover" its position by owning the instruments underlying thecontract (or, in the case of an index futures contract, a portfolio with avolatility substantially similar to that of the index on which the futurescontract is based), or by holding a call option permitting the Fund to purchasethe same futures contract at a price no higher than the price of the contractwritten by the Fund (or at a higher price if the difference is maintained inliquid assets with the Fund's custodian).

When selling a call option on a futures contract, the Fund willmaintain with its custodian (and mark-to-market on a daily basis) cash or otherliquid assets that, when added to the amounts deposited with a futurescommission merchant as margin, equal the total market value of the futurescontract underlying the call option. Alternatively, the Fund may cover itsposition by entering into a long position in the same futures contract at aprice no higher than the strike price of the call option, by owning theinstruments underlying the futures contract, or by holding a separate calloption permitting the Fund to purchase the same futures contract at a price nothigher than the strike price of the call option sold by the Fund.

When selling a put option on a futures contract, the Fund will maintainwith its custodian (and mark-to market on a daily basis) cash or other liquidassets that equal the purchase price of the futures contract, less any margin ondeposit. Alternatively, the Fund may cover the position either by entering into



a short position in the same futures contract, or by owning a separate putoption permitting it to sell the same futures contract so long as the strikeprice of the purchased put option is the same or higher than the strike price ofthe put option sold by the Fund.

Swap Agreements. The Fund may enter into interest rate, index andcurrency exchange rate swap agreements for purposes of attempting to obtain aparticular desired return at a lower cost to the Fund than if the Fund hadinvested directly in an instrument that yielded that desired return. For adiscussion of swap agreements, see the Company's Prospectus under "InvestmentObjectives and Policies." The Fund's obligations under a swap agreement will beaccrued daily (offset against any amounts owing to the Fund) and any accrued butunpaid net amounts owed to a swap counterparty will be covered by themaintenance of a segregated account consisting of cash or other liquid assets toavoid any potential leveraging of the Fund's portfolio. The Fund will not enterinto a swap agreement with any single party if the net amount owned or to bereceived under existing contracts with that party would exceed 5% of the Fund'sassets.

Whether the Fund's use of swap agreements will be successful infurthering its investment objective of total return will depend on theSub-advisor's ability correctly to predict whether certain types of investmentsare likely to produce greater returns than other investments. Because they aretwo party contracts and because they may have terms of greater than seven days,swap agreements may be considered to be illiquid. Moreover, the Fund bears therisk of loss of the amount expected to be received under a swap agreement in theevent of the default or bankruptcy of a swap agreement counterpart. TheSub-advisor will cause the Fund to enter into swap agreements only withcounterparties that would be eligible for consideration as repurchase agreementcounterparties under the Fund's repurchase agreement guidelines. Certainrestrictions imposed on the Funds by the Internal Revenue Code may limit theFunds' ability to use swap agreements. The swaps market is a relatively newmarket and is largely unregulated. It is possible that developments in the swapsmarket, including potential government regulation, could adversely affect theFund's ability to terminate existing swap agreements or to realize amounts to bereceived under such agreements.

Certain swap agreements are exempt from most provisions of theCommodity Exchange Act ("CEA") and, therefore, are not regulated as futures orcommodity option transactions under the CEA, pursuant to regulations approved bythe Commodity Futures Trading Commission. To qualify for this exemption, a swapagreement must be entered into by "eligible participants." To be eligible,natural persons and most other entities must have total assets exceeding $10million; commodity pools and employee benefit plans must have assets exceeding$5 million. In addition, an eligible swap transaction must meet threeconditions. First, the swap agreement may not be part of a fungible class ofagreements that are standardized as to their material economic terms. Second,the creditworthiness of parties with actual or potential obligations under theswap agreement must be a material consideration in entering into or determiningthe terms of the swap agreement, including pricing, cost or credit enhancementterms. Third, swap agreements may not be entered into and traded on or through amultilateral transaction execution facility.

This exemption is not exclusive, and partnerships may continue to relyon existing exclusions for swaps, such as the Policy Statement issued in July1989 which recognized a safe harbor for swap transactions from regulation asfutures or commodity option transactions under the CEA or its regulations. ThePolicy Statement applies to swap transactions settled in cash that (1) haveindividual tailored terms, (2) lack exchange-style offset and the use of aclearing organization or margin system, (3) are undertaken in conjunction with aline of business, and (4) are not marketed to the public.

Structured Notes. Structured notes are derivative debt securities, theinterest rate or principal of which is determined by an unrelated indicator.Indexed securities include structured notes as well as securities other thandebt securities, the interest rate or principal of which is determined by anunrelated indicator. Indexed securities may include a multiplier that multipliesthe indexed element by a specified factor and, therefore, the value of suchsecurities may be very volatile. To the extent the Fund invests in thesesecurities, however, the Sub-advisor analyzes these securities in its overallassessment of the effective duration of the Fund's portfolio in an effort tomonitor the Fund's interest rate risk.

Foreign Currency Exchange-Related Securities. The Fund may invest inforeign currency warrants, principal exchange rate linked securities andperformance indexed paper. For a description of these instruments, see this SAIunder "Certain Risk Factor and Investment Methods."

Warrants to Purchase Securities. The Fund may invest in or acquirewarrants to purchase equity or fixed-income securities. Bonds with warrantsattached to purchase equity securities have many characteristics of convertiblebonds and their prices may, to some degree, reflect the performance of theunderlying stock. Bonds also may be issued with warrants attached to purchase



additional fixed-income securities at the same coupon rate. A decline ininterest rates would permit the Fund to buy additional bonds at the favorablerate or to sell the warrants at a profit. If interest rates rise, the warrantswould generally expire with no value.


1. Invest more than 15% of the assets of the Fund (taken at market value atthe time of the investment) in "illiquid securities;" illiquid securities beingdefined to include securities subject to legal or contractual restrictions onresale (which may include private placements), repurchase agreements maturing inmore than seven days, certain options traded over the counter that the Fund haspurchased, securities being used to cover options the Fund has written,securities for which market quotations are not readily available, or othersecurities which legally or in the Sub-advisor's option may be deemed illiquid;

2. Purchase securities for the Fund from, or sell portfolio securities to,any of the officers and directors or trustees of the Company, the Trust, theInvestment Manager or the Sub-advisor;

3. Invest more than 5% of the assets of the Fund (taken at market value atthe time of investment) in any combination of interest only, principal only, orinverse floating rate securities;




7. Purchase or sell oil, gas or other mineral programs;

8. Maintain a short position, or purchase, write or sell puts, calls,straddles, spreads or combinations thereof, except as set forth in the Company'sProspectus and this SAI for transactions in options, futures, and options onfutures transactions arising under swap agreements or other derivativeinstruments; or

9. Pledge, mortgage or hypothecate its assets, except as may be necessaryin connection with permissible borrowings or investments; and then suchpledging, mortgaging or hypothecating may not exceed 33 1/3% of the Fund's totalassets at the time of borrowing or investment. The deposit of assets in escrowin connection with the writing of covered put and call options and the purchaseof securities on a when-issued or delayed delivery basis, collateralarrangements with respect to initial or variation margin deposits for futurecontracts and commitments entered into under swap agreements or other derivativeinstruments, will not be deemed to be pledges of the Portfolio's assets.

ASAF JPM MONEY MARKET FUND:

Investment Objective: The investment objective of the Fund is to seek highcurrent income and maintain high levels of liquidity.


Bank Obligations. The Fund will not invest in bank obligations for whichany affiliate of the Sub-advisor is the ultimate obligor or accepting bank.

Asset-Backed Securities. The asset-backed securities in which the Fundmay invest are subject to the Fund's overall credit requirements. However,asset-backed securities, in general, are subject to certain risks. Most of theserisks are related to limited interests in applicable collateral. For example,credit card receivables are generally unsecured and the debtors are entitled tothe protection of a number of state and federal consumer credit laws, many ofwhich give such debtors the right to set off certain amounts on credit card debtthereby reducing the balance due. Additionally, if the letter of credit isexhausted, holders of asset-backed securities may also experience delays inpayments or losses if the full amounts due on underlying sales contracts are notrealized. Because asset-backed securities are relatively new, the marketexperience in these securities is limited and the market's ability to sustainliquidity through all phases of the market cycle has not been tested. For adiscussion of asset-backed securities and the risks involved therein see theCompany's Prospectus and this SAI under "Certain Risk Factors and InvestmentMethods."

Synthetic Instruments. As may be permitted by current laws andregulations and if expressly permitted by the Directors of the Company, the Fund



may invest in certain synthetic instruments. Such instruments generally involvethe deposit of asset-backed securities in a trust arrangement and the issuanceof certificates evidencing interests in the trust. The certificates aregenerally sold in private placements in reliance on Rule 144A of the SecuritiesAct of 1933.

Repurchase Agreements. Subject to guidelines promulgated by theDirectors of the Company, the Fund may enter into repurchase agreements. Therepurchase agreements into which the Fund may enter will usually be short, fromovernight to one week, and at no time will the Fund invest in repurchaseagreements for more than thirteen months. The securities which are subject torepurchase agreements, however, may have maturity dates in excess of thirteenmonths from the effective date of the repurchase agreement. For a discussion ofrepurchase agreements and certain risks involved therein, see the Company'sProspectus under "Certain Risk Factors and Investment Methods."

Reverse Repurchase Agreements. The Fund invests the proceeds ofborrowings under reverse repurchase agreements. The Fund will enter into areverse repurchase agreement only when the interest income to be earned from theinvestment of the proceeds is greater than the interest expense of thetransaction. The Fund will not invest the proceeds of a reverse repurchaseagreement for a period which exceeds the duration of the reverse repurchaseagreement. The Fund may not enter into reverse repurchase agreements exceedingin the aggregate one-third of the market value of its total assets, lessliabilities other than the obligations created by reverse repurchase agreements.The Fund will establish and maintain with its custodian a separate account witha segregated portfolio of securities in an amount at least equal to its purchaseobligations under its reverse repurchase agreements. If interest rates riseduring the term of a reverse repurchase agreement, such reverse repurchaseagreement may have a negative impact on the Fund's ability to maintain a netasset value of $1.00 per share.

Foreign Securities. The Fund may invest in U.S. dollar-denominatedforeign securities. Any foreign commercial paper must not be subject to foreignwithholding tax at the time of purchase. Foreign investments may be madedirectly in securities of foreign issuers or in the form of American DepositaryReceipts ("ADRs") and European Depositary Receipts ("EDRs"). Generally, ADRs andEDRs are receipts issued by a bank or trust company that evidence ownership ofunderlying securities issued by a foreign corporation and that are designed foruse in the domestic, in the case of ADRs, or European, in the case of EDRs,securities markets. For a discussion of depositary receipts and the risksinvolved in investing in foreign securities, see the Company's Prospectus under"Certain Risk Factors and Investment Methods."

Lending Portfolio Securities. Loans will be subject to termination bythe Fund in the normal settlement time, generally three business days afternotice, or by the borrower on one day's notice. Borrowed securities must bereturned when the loan is terminated. The Fund may pay reasonable finders' andcustodial fees in connection with a loan. In making a loan, the Fund willconsider all facts and circumstances surrounding the making of the loan,including the creditworthiness of the borrowing financial institution. The Fundwill not make any loans in excess of one year. The Fund will not lend itssecurities to any officer, employee, Director or Trustee of the Company, theTrust, the Investment Manager, any Sub-advisor of the Company or the Trust, orthe Administrator unless otherwise permitted by applicable law.




3. Purchase securities on margin, make short sales of securities, ormaintain a short position, provided that this restriction shall not be deemed tobe applicable to the purchase or sale of when-issued securities or of securitiesfor delivery at a future date;

4. Acquire any illiquid securities, such as repurchase agreements with morethan seven days to maturity or fixed time deposits with a duration of over sevencalendar days, if as a result thereof, more than 10% of the market value of theFund's total assets would be in investments which are illiquid;

5. Mortgage, pledge or hypothecate any assets, except as may be necessaryin connection with permissible borrowings or investments; and then suchmortgaging, pledging or hypothecating may not exceed 33 1/3% of the Fund's totalassets at the time of borrowing or investment;

6. Purchase or sell puts, calls, straddles, spreads, or any combinationthereof, except to the extent permitted by the Company's Prospectus and thisSAI; or



7. Purchase or sell interests in oil, gas or other mineral exploration ordevelopment programs.

FUNDAMENTAL INVESTMENT RESTRICTIONS

Investment Restrictions. Each Fund and Portfolio has adopted the followingfundamental investment restrictions which may not be changed without shareholderapproval.

1. Senior Securities. No Fund or Portfolio may issue senior securities,except as permitted under the Investment Company Act of 1940 (the "1940 Act").

2. Borrowing. No Fund or Portfolio may borrow money, except that a Fund orPortfolio may (i) borrow money for non-leveraging, temporary or emergencypurposes, and (ii) engage in reverse repurchase agreements and make otherinvestments or engage in other transactions, which may involve a borrowing, in amanner consistent with the Fund or Portfolio's investment objective andpolicies; provided that the combination of (i) and (ii) shall not exceed 33 1/3%of the value of the Fund or Portfolio's assets (including the amount borrowed)less liabilities (other than borrowings) or such other percentage permitted bylaw. Any borrowings which come to exceed this amount will be reduced inaccordance with applicable law. Subject to the above limitations, the Funds andPortfolios may borrow from banks or other persons to the extent permitted byapplicable law.

3. Underwriting. No Fund or Portfolio may underwrite securities issued byother persons, except to the extent that the Fund or Portfolio may be deemed tobe an underwriter (within the meaning of the Securities Act of 1933) inconnection with the purchase and sale of portfolio securities.

4. Real Estate. No Fund or Portfolio may purchase or sell real estateunless acquired as a result of the ownership of securities or other instruments;provided that this restriction shall not prohibit a Fund or Portfolio frominvesting in securities or other instruments backed by real estate or insecurities of companies engaged in the real estate business.

5. Commodities. No Fund or Portfolio may purchase or sell physicalcommodities unless acquired as a result of the ownership of securities orinstruments; provided that this restriction shall not prohibit a Fund orPortfolio from (i) engaging in permissible options and futures transactions andforward foreign currency contracts in accordance with the Fund's or Portfolio'sinvestment policies, or (ii) investing in securities of any kind.

6. Lending. No Fund or Portfolio may make loans, except that a Fund orPortfolio may (i) lend portfolio securities in accordance with the Fund orPortfolio's investment policies in amounts up to 33 1/3% of the total assets ofthe Fund or Portfolio taken at market value, (ii) purchase money marketsecurities and enter into repurchase agreements, and (iii) acquire publiclydistributed or privately placed debt securities and purchase debt.

7. Industry Concentration. No Fund or Portfolio may purchase any securityif, as a result, more than 25% of the value of the Fund or Portfolio's assetswould be invested in the securities of issuers having their principal businessactivities in the same industry; provided that this restriction does not applyto investments in obligations issued or guaranteed by the U.S. Government or anyof its agencies or instrumentalities (or repurchase agreements with respectthereto).

8. Diversification. No Fund or Portfolio may, with respect to 75% of thevalue of its total assets, purchase the securities of any issuer (other thansecurities issued or guaranteed by the U.S. Government or any of its agencies orinstrumentalities) if, as a result, (i) more than 5% of the value of the Fund'sor Portfolio's total assets would be invested in the securities of such issuer,or (ii) more than 10% of the outstanding voting securities of such issuer wouldbe held by the Fund or Portfolio.

Notes to Investment Restrictions. The following notes should be read inconjunction with the above fundamental investment restrictions. These notes arenot fundamental policies and may be changed without shareholder approval.

o Applicable to All Funds and Portfolios: If a restriction on a Fund'sor Portfolio's investments is adhered to at the time an investment is made, asubsequent change in the percentage of Fund or Portfolio assets invested incertain securities or other instruments, or change in average duration of theFund's or Portfolio's investment portfolio, resulting from changes in the valueof the Fund's or Portfolio's total assets, will not be considered a violation ofthe restriction; provided, however, that the asset coverage requirementapplicable to borrowings shall be maintained in the manner contemplated byapplicable law.

o Applicable to All Funds and Portfolios: With respect to investmentrestrictions (2) and (6), a Fund or Portfolio will not borrow or lend to any



other fund unless it applies for and receives an exemptive order from theSecurities and Exchange Commission (the "Commission"), if so required, or theCommission issues rules permitting such transactions. There is no assurance theCommission would grant any order requested by the Fund or Portfolio orpromulgate any rules allowing the transactions.

o Applicable Only to the ASAF Founders International SmallCapitalization Fund and the ASAF Founders Small Capitalization Fund: Withrespect to investment restriction (7), the Funds use industry classificationsbased, where applicable, on Bridge Information Systems, Reuters, the S&P StockGuide published by Standard & Poor's, information obtained from Bloomberg L.P.and Moody's International, and/or the prospectus of the issuing company.Selection of an appropriate industry classification resource will be made by theSub-advisor in the exercise of its reasonable discretion.

o Applicable Only to the ASAF T. Rowe Price International Equity Fund(and corresponding Portfolio) and the ASAF T. Rowe Price Small Company ValueFund: With respect to investment restrictions (2) and (6), the Fund andPortfolio have no current intention of borrowing or lending to any other fund.For purposes of investment restriction (6), the Fund and Portfolio will considerthe acquisition of a debt security to include the execution of a note or otherevidence of an extension of credit with a term of more than nine months.


Some of the investment instruments, techniques and methods which may beused by one or more of the Funds and the risks attendant thereto are describedbelow. Other risk factors and investment methods may be described in theCompany's Prospectus under "Investment Programs of the Funds" and "Certain RiskFactors and Investment Methods," and in this SAI under "Investment Objectivesand Policies." The risk factors and investment methods described below onlyapply to those Funds or Portfolios that may invest in such securities or usesuch investment methods. The below references to the investment methods used bythe Feeder Funds apply equally to the Funds' corresponding Portfolios.

Debt Obligations. Yields on short, intermediate, and long-termsecurities are dependent on a variety of factors, including, the generalconditions of the money and bond markets, the size of a particular offering, thematurity of the obligation, and the rating of the issue. Debt securities withlonger maturities tend to produce higher yields and are generally subject topotentially greater capital appreciation and depreciation than obligations withshorter maturities and lower yields. The market prices of debt securitiesusually vary, depending upon available yields. An increase in prevailinginterest rates will generally reduce the value of debt investments, and adecline in interest rates will generally increase the value of debt investments.The ability of a Fund to achieve its investment objective is also dependent onthe continuing ability of the issuers of the debt securities in which a Fundinvests to meet their obligations for the payment of interest and principal whendue.

Special Risks Associated with Low-Rated and Comparable UnratedSecurities. Low-rated and comparable unrated securities, while generallyoffering higher yields than investment-grade securities with similar maturities,involve greater risks, including the possibility of default or bankruptcy. Theyare regarded as predominantly speculative with respect to the issuer's capacityto pay interest and repay principal. The special risk considerations inconnection with such investments are discussed below. See the Appendix of thisStatement for a discussion of securities ratings.

Effect of Interest Rates and Economic Changes. The low-ratedand comparable unrated securities market is relatively new, and its growthparalleled a long economic expansion. As a result, it is not clear how thismarket may withstand a prolonged recession or economic downturn. Such aprolonged economic downturn could severely disrupt the market for and adverselyaffect the value of such securities.

All interest-bearing securities typically experienceappreciation when interest rates decline and depreciation when interest ratesrise. The market values of low-rated and comparable unrated securities tend toreflect individual corporate developments to a greater extent than dohigher-rated securities, which react primarily to fluctuations in the generallevel of interest rates. Low-rated and comparable unrated securities also tendto be more sensitive to economic conditions than are higher-rated securities.During an economic downturn or a sustained period of rising interest rates,highly leveraged issuers of low-rated and comparable unrated securities mayexperience financial stress and may not have sufficient revenues to meet theirpayment obligations. The issuer's ability to service its debt obligations mayalso be adversely affected by specific corporate developments, the issuer'sinability to meet specific projected business forecasts, or the unavailabilityof additional financing. The risk of loss due to default by an issuer oflow-rated and comparable unrated securities is significantly greater than



issuers of higher-rated securities because such securities are generallyunsecured and are often subordinated to other creditors. Further, if the issuerof a low-rated and comparable unrated security defaulted, a Fund might incuradditional expenses to seek recovery. Periods of economic uncertainty andchanges would also generally result in increased fluctuation in the marketprices of low-rated and comparable unrated securities and thus in a Fund's netasset value.

As previously stated, the value of such a security willdecrease in a rising interest rate market and accordingly, so will a Fund's netasset value. If a Fund experiences unexpected net redemptions in such a market,it may be forced to liquidate a portion of its portfolio securities withoutregard to their investment merits. Due to the limited liquidity of somehigh-yield securities (discussed below), a Fund may be forced to liquidate thesesecurities at a substantial discount. Any such liquidation would reduce a Fund'sasset base over which expenses could be allocated and could result in a reducedrate of return for a Fund.

Payment Expectations. Low-rated and comparable unratedsecurities typically contain redemption, call, or prepayment provisions whichpermit the issuer of securities containing such provisions to, at theirdiscretion, redeem the securities. During periods of falling interest rates,issuers of high-yield securities are likely to redeem or prepay the securitiesand refinance them with debt securities with a lower interest rate. To theextent an issuer is able to refinance the securities, or otherwise redeem them,a Fund may have to replace the securities with a lower-yielding security, whichwould result in a lower return for a Fund.

Issuers of lower-rated securities are often highly leveraged,so that their ability to service their debt obligations during an economicdownturn or during sustained periods of rising interest rates may be impaired.Such issuers may not have more traditional methods of financing available tothem and may be unable to repay outstanding obligations at maturity byrefinancing. The risk of loss due to default in payment of interest or repaymentof principal by such issuers is significantly greater because such securitiesfrequently are unsecured and subordinated to the prior payment of seniorindebtedness.

Credit Ratings. Credit ratings issued by credit-ratingagencies attempt to evaluate the safety of principal and interest payments ofrated securities. They do not, however, evaluate the market value risk oflow-rated and comparable unrated securities and, therefore, may not fullyreflect the true risks of an investment. In addition, credit-rating agencies mayor may not make timely changes in a rating to reflect changes in the economy orin the condition of the issuer that affect the market value of the security.Consequently, credit ratings may be used only as a preliminary indicator ofinvestment quality. Investments in low-rated and comparable unrated securitieswill be more dependent on the applicable Sub-advisor's credit analysis thanwould be the case with investments in investment-grade debt securities. SuchSub-advisor may employ its own credit research and analysis, which could includea study of existing debt, capital structure, ability to service debt and to paydividends, the issuer's sensitivity to economic conditions, its operatinghistory, and the current trend of earnings. The Sub-advisor continually monitorsthe investments in a Fund and evaluates whether to dispose of or to retainlow-rated and comparable unrated securities whose credit ratings or creditquality may have changed.

Liquidity and Valuation. A Fund may have difficulty disposingof certain low-rated and comparable unrated securities because there may be athin trading market for such securities. There is no established retailsecondary market for many of these securities. A Fund anticipates that suchsecurities could be sold only to a limited number of dealers or institutionalinvestors. To the extent a secondary trading market does exist, it is generallynot as liquid as the secondary market for higher-rated securities. The lack of aliquid secondary market may have an adverse impact on the market price of thesecurity. As a result, a Fund's asset value and a Fund's ability to dispose ofparticular securities, when necessary to meet a Fund's liquidity needs or inresponse to a specific economic event, may be impacted. The lack of a liquidsecondary market for certain securities may also make it more difficult for aFund to obtain accurate market quotations for purposes of valuing a portfolio.Market quotations are generally available on many low-rated and comparableunrated issues only from a limited number of dealers and may not necessarilyrepresent firm bids of such dealers or prices for actual sales. During periodsof thin trading, the spread between bid and asked prices is likely to increasesignificantly. In addition, adverse publicity and investor perceptions, whetheror not based on fundamental analysis, may decrease the values and liquidity oflow-rated and comparable unrated securities, especially in a thinly-tradedmarket.

Put and Call Options:

Writing (Selling) Call Options. A call option gives the holder(buyer) the "right to purchase" a security or currency at a specified price (the



exercise price), at expiration of the option (European style) or at any timeuntil a certain date (the expiration date) (American style). So long as theobligation of the writer of a call option continues, he may be assigned anexercise notice by the broker-dealer through whom such option was sold,requiring him to deliver the underlying security or currency against payment ofthe exercise price. This obligation terminates upon the expiration of the calloption, or such earlier time at which the writer effects a closing purchasetransaction by purchasing an option identical to that previously sold.

When writing a call option, a Fund, in return for the premium,gives up the opportunity for profit from a price increase in the underlyingsecurity or currency above the exercise price, but conversely retains the riskof loss should the price of the security or currency decline. Unlike one whoowns securities or currencies not subject to an option, a Fund has no controlover when it may be required to sell the underlying securities or currencies,since it may be assigned an exercise notice at any time prior to the expirationof its obligation as a writer. If a call option which a Fund has writtenexpires, the Fund will realize a gain in the amount of the premium; however,such gain may be offset by a decline in the market value of the underlyingsecurity or currency during the option period. If the call option is exercised,a Fund will realize a gain or loss from the sale of the underlying security orcurrency.

Writing (Selling) Put Options. A put option gives thepurchaser of the option the right to sell, and the writer (seller) has theobligation to buy, the underlying security or currency at the exercise priceduring the option period (American style) or at the expiration of the option(European style). So long as the obligation of the writer continues, he may beassigned an exercise notice by the broker-dealer through whom such option wassold, requiring him to make payment of the exercise price against delivery ofthe underlying security or currency. The operation of put options in otherrespects, including their related risks and rewards, is substantially identicalto that of call options.

Premium Received from Writing Call or Put Options. A Fund willreceive a premium from writing a put or call option, which increases such Fund'sreturn in the event the option expires unexercised or is closed out at a profit.The amount of the premium will reflect, among other things, the relationship ofthe market price of the underlying security to the exercise price of the option,the term of the option and the volatility of the market price of the underlyingsecurity. By writing a call option, a Fund limits its opportunity to profit fromany increase in the market value of the underlying security above the exerciseprice of the option. By writing a put option, a Fund assumes the risk that itmay be required to purchase the underlying security for an exercise price higherthan its then current market value, resulting in a potential capital loss if thepurchase price exceeds the market value plus the amount of the premium received,unless the security subsequently appreciates in value.

Closing Transactions. A Fund may terminate an option that ithas written prior to its expiration by entering into a closing purchasetransaction in which it purchases an option having the same terms as the optionwritten. Closing transactions may be effected in order to realize a profit on anoutstanding call option, to prevent an underlying security or currency frombeing called, or, to permit the sale of the underlying security or currency. AFund will realize a profit or loss from such transaction if the cost of suchtransaction is less or more than the premium received from the writing of theoption. In the case of a put option, any loss so incurred may be partially orentirely offset by the premium received from a simultaneous or subsequent saleof a different put option. Because increases in the market price of a calloption will generally reflect increases in the market price of the underlyingsecurity, any loss resulting from the repurchase of a call option is likely tobe offset in whole or in part by unrealized appreciation of the underlyingsecurity owned by such Fund.

Furthermore, effecting a closing transaction will permit aFund to write another call option on the underlying security or currency witheither a different exercise price or expiration date or both. If a Fund desiresto sell a particular security or currency from its portfolio on which it haswritten a call option, or purchased a put option, it will seek to effect aclosing transaction prior to, or concurrently with, the sale of the security orcurrency. There is, of course, no assurance that a Fund will be able to effectsuch closing transactions at a favorable price. If a Fund cannot enter into sucha transaction, it may be required to hold a security or currency that it mightotherwise have sold. When a Fund writes a covered call option, it runs the riskof not being able to participate in the appreciation of the underlyingsecurities or currencies above the exercise price, as well as the risk of beingrequired to hold on to securities or currencies that are depreciating in value.This could result in higher transaction costs. A Fund will pay transaction costsin connection with the writing of options to close out previously writtenoptions. Such transaction costs are normally higher than those applicable topurchases and sales of portfolio securities.

Purchasing Call Options. Call options may be purchased by a



Fund for the purpose of acquiring the underlying securities or currencies forits portfolio. Utilized in this fashion, the purchase of call options enables aFund to acquire the securities or currencies at the exercise price of the calloption plus the premium paid. At times the net cost of acquiring securities orcurrencies in this manner may be less than the cost of acquiring the securitiesor currencies directly. This technique may also be useful to a Fund inpurchasing a large block of securities or currencies that would be moredifficult to acquire by direct market purchases. So long as it holds such a calloption rather than the underlying security or currency itself, a Fund ispartially protected from any unexpected decline in the market price of theunderlying security or currency and in such event could allow the call option toexpire, incurring a loss only to the extent of the premium paid for the option.

Purchasing Put Options. A Fund may purchase a put option on anunderlying security or currency owned by the Fund (a "protective put") as adefensive technique in order to protect against an anticipated decline in thevalue of the security or currency. Such hedge protection is provided only duringthe life of the put option when the Fund, as the holder of the put option, isable to sell the underlying security or currency at the put exercise priceregardless of any decline in the underlying security's market price orcurrency's exchange value. For example, a put option may be purchased in orderto protect unrealized appreciation of a security or currency where a Sub-advisordeems it desirable to continue to hold the security or currency because of taxconsiderations. The premium paid for the put option and any transaction costswould reduce any capital gain otherwise available for distribution when thesecurity or currency is eventually sold.

If a Fund purchases put options at a time when the Fund doesnot own the underlying security or currency, the Fund seeks to benefit from adecline in the market price of the underlying security or currency. If the putoption is not sold when it has remaining value, and if the market price of theunderlying security or currency remains equal to or greater than the exerciseprice during the life of the put option, a Fund will lose its entire investmentin the put option. In order for the purchase of a put option to be profitable,the market price of the underlying security or currency must declinesufficiently below the exercise price to cover the premium and transactioncosts.

Dealer Options. Exchange-traded options generally have acontinuous liquid market while dealer options have none. Consequently, a Fundwill generally be able to realize the value of a dealer option it has purchasedonly by exercising it or reselling it to the dealer who issued it. Similarly,when a Fund writes a dealer option, it generally will be able to close out theoption prior to its expiration only by entering into a closing purchasetransaction with the dealer to which the Fund originally wrote the option. Whilea Fund will seek to enter into dealer options only with dealers who will agreeto and which are expected to be capable of entering into closing transactionswith the Fund, there can be no assurance that the Fund will be able to liquidatea dealer option at a favorable price at any time prior to expiration. Until aFund, as a covered dealer call option writer, is able to effect a closingpurchase transaction, it will not be able to liquidate securities (or otherassets) used as cover until the option expires or is exercised. In the event ofinsolvency of the other party, a Fund may be unable to liquidate a dealeroption. With respect to options written by a Fund, the inability to enter into aclosing transaction may result in material losses to a Fund. For example, sincea Fund must maintain a secured position with respect to any call option on asecurity it writes, a Fund may not sell the assets which it has segregated tosecure the position while it is obligated under the option. This requirement mayimpair a Fund's ability to sell portfolio securities at a time when such salemight be advantageous.

The Staff of the Commission has taken the position thatpurchased dealer options and the assets used to secure the written dealeroptions are illiquid securities. A Fund may treat the cover used for written OTCoptions as liquid if the dealer agrees that the Fund may repurchase the OTCoption it has written for a maximum price to be calculated by a predeterminedformula. In such cases, the OTC option would be considered illiquid only to theextent the maximum repurchase price under the formula exceeds the intrinsicvalue of the option. To this extent, a Fund will treat dealer options as subjectto a Fund's limitation on unmarketable or illiquid securities. If the Commissionchanges its position on the liquidity of dealer options, a Fund will change itstreatment of such instrument accordingly.

Certain Risk Factors in Writing Call Options and in Purchasing Call andPut Options. During the option period, a Fund, as writer of a call option has,in return for the premium received on the option, given up the opportunity forcapital appreciation above the exercise price should the market price of theunderlying security increase, but has retained the risk of loss should the priceof the underlying security decline. The writer has no control over the time whenit may be required to fulfill its obligation as a writer of the option. The riskof purchasing a call or put option is that a Fund may lose the premium it paidplus transaction costs. If a Fund does not exercise the option and is unable toclose out the position prior to expiration of the option, it will lose its



entire investment.

An exchange-traded option position may be closed out only on anexchange which provides a secondary market. There can be no assurance that aliquid secondary market will exist for a particular option at a particular timeand that a Fund can close out its position by effecting a closing transaction.If a Fund is unable to effect a closing purchase transaction, it cannot sell theunderlying security until the option expires or the option is exercised.Accordingly, a Fund may not be able to sell the underlying security at a timewhen it might otherwise be advantageous to do so. Possible reasons for theabsence of a liquid secondary market include the following: (i) insufficienttrading interest in certain options; (ii) restrictions on transactions imposedby an exchange; (iii) trading halts, suspensions or other restrictions imposedwith respect to particular classes or series of options or underlyingsecurities; (iv) inadequacy of the facilities of an exchange or the clearingcorporation to handle trading volume; and (v) a decision by one or moreexchanges to discontinue the trading of options or impose restrictions onorders. In addition, the hours of trading for options may not conform to thehours during which the underlying securities are traded. To the extent that theoptions markets close before the markets for the underlying securities,significant price and rate movements can take place in the underlying marketsthat cannot be reflected in the options markets. The purchase of options is ahighly specialized activity which involves investment techniques and risksdifferent from those associated with ordinary portfolio securities transactions.

Each exchange has established limitations governing the maximum numberof call options, whether or not covered, which may be written by a singleinvestor acting alone or in concert with others (regardless of whether suchoptions are written on the same or different exchanges or are held or written onone or more accounts or through one or more brokers). An exchange may order theliquidation of positions found to be in violation of these limits and it mayimpose other sanctions or restrictions.

Options on Stock Indices. Options on stock indices are similar tooptions on specific securities except that, rather than the right to take ormake delivery of the specific security at a specific price, an option on a stockindex gives the holder the right to receive, upon exercise of the option, anamount of cash if the closing level of that stock index is greater than, in thecase of a call, or less than, in the case of a put, the exercise price of theoption. This amount of cash is equal to such difference between the closingprice of the index and the exercise price of the option expressed in dollarsmultiplied by a specified multiple. The writer of the option is obligated, inreturn for the premium received, to make delivery of this amount. Unlike optionson specific securities, all settlements of options on stock indices are in cashand gain or loss depends on general movements in the stocks included in theindex rather than price movements in particular stocks.

Risk Factors of Options on Indices. Because the value of an indexoption depends upon the movements in the level of the index rather than uponmovements in the price of a particular security, whether a Fund will realize again or a loss on the purchase or sale of an option on an index depends upon themovements in the level of prices in the market generally or in an industry ormarket segment rather than upon movements in the price of the individualsecurity. Accordingly, successful use of positions will depend upon aSub-advisor's ability to predict correctly movements in the direction of themarket generally or in the direction of a particular industry. This requiresdifferent skills and techniques than predicting changes in the prices ofindividual securities.

Index prices may be distorted if trading of securities included in theindex is interrupted. Trading in index options also may be interrupted incertain circumstances, such as if trading were halted in a substantial number ofsecurities in the index. If this occurred, a Fund would not be able to close outoptions which it had written or purchased and, if restrictions on exercise wereimposed, might be unable to exercise an option it purchased, which would resultin substantial losses.

Price movements in portfolio securities will not correlate perfectlywith movements in the level of the index and therefore, a Fund bears the riskthat the price of the securities may not increase as much as the level of theindex. In this event, the Fund would bear a loss on the call which would not becompletely offset by movements in the prices of the securities. It is alsopossible that the index may rise when the value of a Fund's securities does not.If this occurred, a Fund would experience a loss on the call which would not beoffset by an increase in the value of its securities and might also experience aloss in the market value of its securities.

Unless a Fund has other liquid assets which are sufficient to satisfythe exercise of a call on the index, the Fund will be required to liquidatesecurities in order to satisfy the exercise. When a Fund has written a call onan index, there is also the risk that the market may decline between the timethe Fund has the call exercised against it, at a price which is fixed as of theclosing level of the index on the date of exercise, and the time the Fund is



able to sell securities. As with options on securities, the Sub-advisor will notlearn that a call has been exercised until the day following the exercise date,but, unlike a call on securities where a Fund would be able to deliver theunderlying security in settlement, a Fund may have to sell part of itssecurities in order to make settlement in cash, and the price of such securitiesmight decline before they could be sold.

If a Fund exercises a put option on an index which it has purchasedbefore final determination of the closing index value for the day, it runs therisk that the level of the underlying index may change before closing. If thischange causes the exercised option to fall "out-of-the-money," the Fund will berequired to pay the difference between the closing index value and the exerciseprice of the option (multiplied by the applicable multiplier) to the assignedwriter. Although a Fund may be able to minimize this risk by withholdingexercise instructions until just before the daily cutoff time or by sellingrather than exercising an option when the index level is close to the exerciseprice, it may not be possible to eliminate this risk entirely because the cutofftime for index options may be earlier than those fixed for other types ofoptions and may occur before definitive closing index values are announced.

Trading in Futures. A futures contract provides for the future sale byone party and purchase by another party of a specified amount of a specificfinancial instrument (e.g., units of a stock index) at a specified price, date,time and place designated at the time the contract is made. Brokerage fees areincurred when a futures contract is bought or sold and margin deposits must bemaintained. Entering into a contract to buy is commonly referred to as buying orpurchasing a contract or holding a long position. Entering into a contract tosell is commonly referred to as selling a contract or holding a short position.

Unlike when a Fund purchases or sells a security, no price would bepaid or received by a Fund upon the purchase or sale of a futures contract. Uponentering into a futures contract, and to maintain a Fund's open positions infutures contracts, a Fund would be required to deposit with its custodian in asegregated account in the name of the futures broker an amount of cash, U.S.government securities, suitable money market instruments, or other liquidsecurities, known as "initial margin." A margin deposit is intended to ensure aFund's performance of the futures contract. The initial margin required for aparticular futures contract is set by the exchange on which the contract istraded, and may be significantly modified from time to time by the exchangeduring the term of the contract. Futures contracts are customarily purchased andsold on margins that may range upward from less than 5% of the value of thecontract being traded.

If the price of an open futures contract changes (by increase in thecase of a sale or by decrease in the case of a purchase) so that the loss on thefutures contract reaches a point at which the margin on deposit does not satisfymargin requirements, the broker will require an increase in the margin. However,if the value of a position increases because of favorable price changes in thefutures contract so that the margin deposit exceeds the required margin, thebroker will pay the excess to a Fund.

These subsequent payments, called "variation margin," to and from thefutures broker are made on a daily basis as the price of the underlying assetsfluctuate making the long and short positions in the futures contract more orless valuable, a process known as "marking to the market." A Fund expects toearn interest income on its margin deposits. Although certain futures contracts,by their terms, require actual future delivery of and payment for the underlyinginstruments, in practice most futures contracts are usually closed out beforethe delivery date. Closing out an open futures contract purchase or sale iseffected by entering into an offsetting futures contract purchase or sale,respectively, for the same aggregate amount of the identical securities and thesame delivery date. If the offsetting purchase price is less than the originalsale price, a Fund realizes a gain; if it is more, a Fund realizes a loss.Conversely, if the offsetting sale price is more than the original purchaseprice, a Fund realizes a gain; if it is less, a Fund realizes a loss. Thetransaction costs must also be included in these calculations. There can be noassurance, however, that a Fund will be able to enter into an offsettingtransaction with respect to a particular futures contract at a particular time.If a Fund is not able to enter into an offsetting transaction, a Fund willcontinue to be required to maintain the margin deposits on the futures contract.

A stock index futures contract is an agreement in which one partyagrees to deliver to the other an amount of cash equal to a specific amountmultiplied by the difference between the value of a specific stock index at theclose of the last trading day of the contract and the price at which theagreement is made. No physical delivery of securities is made. For example, onecontract in the Financial Times Stock Exchange 100 Index future is a contract tobuy 25 pounds sterling multiplied by the level of the UK Financial Times 100Share Index on a given future date. Settlement of a stock index futures contractmay or may not be in the underlying security. If not in the underlying security,then settlement will be made in cash, equivalent over time to the differencebetween the contract price and the actual price of the underlying asset at thetime the stock index futures contract expires.



Options on futures are similar to options on underlying instrumentsexcept that options on futures give the purchaser the right, in return for thepremium paid, to assume a position in a futures contract (a long position if theoption is a call and a short position if the option is a put), rather than topurchase or sell the futures contract, at a specified exercise price at any timeduring the period of the option. Upon exercise of the option, the delivery ofthe futures position by the writer of the option to the holder of the optionwill be accompanied by the delivery of the accumulated balance in the writer'sfutures margin account which represents the amount by which the market price ofthe futures contract, at exercise, exceeds (in the case of a call) or is lessthan (in the case of a put) the exercise price of the option on the futurescontract. Alternatively, settlement may be made totally in cash. Purchasers ofoptions who fail to exercise their options prior to the exercise date suffer aloss of the premium paid.

The writer of an option on a futures contract is required to depositmargin pursuant to requirements similar to those applicable to futurescontracts. Upon exercise of an option on a futures contract, the delivery of thefutures position by the writer of the option to the holder of the option will beaccompanied by delivery of the accumulated balance in the writer's marginaccount. This amount will be equal to the amount by which the market price ofthe futures contract at the time of exercise exceeds, in the case of a call, oris less than, in the case of a put, the exercise price of the option on thefutures contract.

Although financial futures contracts by their terms call for actualdelivery or acceptance of securities, in most cases the contracts are closed outbefore the settlement date without the making or taking of delivery. Closing outis accomplished by effecting an offsetting transaction. A futures contract saleis closed out by effecting a futures contract purchase for the same aggregateamount of securities and the same delivery date. If the sale price exceeds theoffsetting purchase price, the seller immediately would be paid the differenceand would realize a gain. If the offsetting purchase price exceeds the saleprice, the seller would immediately pay the difference and would realize a loss.Similarly, a futures contract purchase is closed out by effecting a futurescontract sale for the same securities and the same delivery date. If theoffsetting sale price exceeds the purchase price, the purchaser would realize again, whereas if the purchase price exceeds the offsetting sale price, thepurchaser would realize a loss. Commissions on financial futures contracts andrelated options transactions may be higher than those which would apply topurchases and sales of securities directly.

A public market exists in interest rate futures contracts coveringprimarily the following financial instruments: U.S. Treasury bonds; U.S.Treasury notes; Government National Mortgage Association ("GNMA") modifiedpass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-daycommercial paper; bank certificates of deposit; and Eurodollar certificates ofdeposit. It is expected that futures contracts trading in additional financialinstruments will be authorized. The standard contract size is generally $100,000for futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMApass-through securities and $1,000,000 for the other designated futurescontracts. A public market exists in futures contracts covering a number ofindexes, including, but not limited to, the Standard & Poor's 500 Index, theStandard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line CompositeIndex and the New York Stock Exchange Composite Index.

Regulatory Matters Relating to Futures Contracts and Related Options.The Staff of the Commission has taken the position that the purchase and sale offutures contracts and the writing of related options may give rise to "seniorsecurities" for the purposes of the restrictions contained in Section 18 of the1940 Act on investment companies' issuing senior securities. However, the Staffhas taken the position that no senior security will be created if a Fundmaintains in a segregated account an amount of cash or other liquid assets atleast equal to the amount of the Fund's obligation under the futures contract oroption. Each Fund will conduct its purchases and sales of any futures contractsand writing of related options transactions in accordance with this requirement.

Certain Risks Relating to Futures Contracts and Related Options. There arespecial risks involved in futures transactions.

Volatility and Leverage. The prices of futures contracts arevolatile and are influenced, among other things, by actual and anticipatedchanges in the market and interest rates, which in turn are affected by fiscaland monetary policies and national and international policies and economicevents.

Most United States futures exchanges limit the amount offluctuation permitted in futures contract prices during a single trading day.The daily limit establishes the maximum amount that the price of a futurescontract may vary either up or down from the previous day's settlement price atthe end of a trading session. Once the daily limit has been reached in aparticular type of futures contract, no trades may be made on that day at a



price beyond that limit. The daily limit governs only price movement during aparticular trading day and therefore does not limit potential losses, becausethe limit may prevent the liquidation of unfavorable positions. Futures contractprices have occasionally moved to the daily limit for several consecutivetrading days with little or no trading, thereby preventing prompt liquidation offutures positions and subjecting some futures traders to substantial losses.

Because of the low margin deposits required, futures tradinginvolves an extremely high degree of leverage. As a result, a relatively smallprice movement in a futures contract may result in immediate and substantialloss, as well as gain, to the investor. For example, if at the time of purchase,10% of the value of the futures contract is deposited as margin, a subsequent10% decrease in the value of the futures contract would result in a total lossof the margin deposit, before any deduction for the transaction costs, if theaccount were then closed out. A 15% decrease would result in a loss equal to150% of the original margin deposit, if the contract were closed out. Thus, apurchase or sale of a futures contract may result in losses in excess of theamount invested in the futures contract. However, a Fund would presumably havesustained comparable losses if, instead of the futures contract, it had investedin the underlying instrument and sold it after the decline. Furthermore, in thecase of a futures contract purchase, in order to be certain that a Fund hassufficient assets to satisfy its obligations under a futures contract, a Fundearmarks to the futures contract liquid assets equal in value to the currentvalue of the underlying instrument less the margin deposit.

Liquidity. A Fund may elect to close some or all of itsfutures positions at any time prior to their expiration. A Fund would do so toreduce exposure represented by long futures positions or increase exposurerepresented by short futures positions. A Fund may close its positions by takingopposite positions which would operate to terminate the Fund's position in thefutures contracts. Final determinations of variation margin would then be made,additional cash would be required to be paid by or released to a Fund, and suchFund would realize a loss or a gain.

Futures contracts may be closed out only on the exchange orboard of trade where the contracts were initially traded. Although a Fund mayintend to purchase or sell futures contracts only on exchanges or boards oftrade where there appears to be an active market, there is no assurance that aliquid market on an exchange or board of trade will exist for any particularcontract at any particular time. In such event, it might not be possible toclose a futures contract, and in the event of adverse price movements, a Fundwould continue to be required to make daily cash payments of variation margin.However, in the event futures contracts have been used to hedge the underlyinginstruments, a Fund would continue to hold the underlying instruments subject tothe hedge until the futures contracts could be terminated. In suchcircumstances, an increase in the price of the underlying instruments, if any,might partially or completely offset losses on the futures contract. However, asdescribed below, there is no guarantee that the price of the underlyinginstruments will, in fact, correlate with the price movements in the futurescontract and thus provide an offset to losses on a futures contract.

Hedging Risk. A decision of whether, when, and how to hedgeinvolves skill and judgment, and even a well-conceived hedge may be unsuccessfulto some degree because of unexpected market behavior, market or interest ratetrends. There are several risks in connection with the use by a Fund of futurescontracts as a hedging device. One risk arises because of the imperfectcorrelation between movements in the prices of the futures contracts andmovements in the prices of the underlying instruments which are the subject ofthe hedge. The Sub-advisor will, however, attempt to reduce this risk byentering into futures contracts whose movements, in its judgment, will have asignificant correlation with movements in the prices of a Fund's underlyinginstruments sought to be hedged.

Successful use of futures contracts by a Fund for hedgingpurposes is also subject to a Sub-advisor's ability to correctly predictmovements in the direction of the market. It is possible that, when a Fund hassold futures to hedge its portfolio against a decline in the market, the index,indices, or underlying instruments on which the futures are written mightadvance and the value of the underlying instruments held in the Fund's portfoliomight decline. If this were to occur, a Fund would lose money on the futures andalso would experience a decline in value in its underlying instruments. However,while this might occur to a certain degree, the Sub-advisor may believe thatover time the value of a Fund's portfolio will tend to move in the samedirection as the market indices which are intended to correlate to the pricemovements of the underlying instruments sought to be hedged. It is also possiblethat if a Fund were to hedge against the possibility of a decline in the market(adversely affecting the underlying instruments held in its portfolio) andprices instead increased, the Fund would lose part or all of the benefit ofincreased value of those underlying instruments that it has hedged, because itwould have offsetting losses in its futures positions. In addition, in suchsituations, if a Fund had insufficient cash, it might have to sell underlyinginstruments to meet daily variation margin requirements. Such sales ofunderlying instruments might be, but would not necessarily be, at increased



prices (which would reflect the rising market). A Fund might have to sellunderlying instruments at a time when it would be disadvantageous to do so.

In addition to the possibility that there might be animperfect correlation, or no correlation at all, between price movements in thefutures contracts and the portion of the portfolio being hedged, the pricemovements of futures contracts might not correlate perfectly with pricemovements in the underlying instruments due to certain market distortions.First, all participants in the futures market are subject to margin deposit andmaintenance requirements. Rather than meeting additional margin depositrequirements, investors might close futures contracts through offsettingtransactions which could distort the normal relationship between the underlyinginstruments and futures markets. Second, the margin requirements in the futuresmarket are less onerous than margin requirements in the securities markets, andas a result the futures market might attract more speculators than thesecurities markets do. Increased participation by speculators in the futuresmarket might also cause temporary price distortions. Due to the possibility ofprice distortion in the futures market and also because of the imperfectcorrelation between price movements in the underlying instruments and movementsin the prices of futures contracts, even a correct forecast of general markettrends by the Sub-advisor might not result in a successful hedging transactionover a very short time period.

Certain Risks of Options on Futures Contracts. A Fund may seek to closeout an option position by writing or buying an offsetting option covering thesame index, underlying instruments, or contract and having the same exerciseprice and expiration date. The ability to establish and close out positions onsuch options will be subject to the maintenance of a liquid secondary market.Reasons for the absence of a liquid secondary market on an exchange include thefollowing: (i) there may be insufficient trading interest in certain options;(ii) restrictions may be imposed by an exchange on opening transactions orclosing transactions or both; (iii) trading halts, suspensions or otherrestrictions may be imposed with respect to particular classes or series ofoptions, or underlying instruments; (iv) unusual or unforeseen circumstances mayinterrupt normal operations on an exchange; (v) the facilities of an exchange ora clearing corporation may not at all times be adequate to handle currenttrading volume; or (vi) one or more exchanges could, for economic or otherreasons, decide or be compelled at some future date to discontinue the tradingof options (or a particular class or series of options), in which event thesecondary market on that exchange (or in the class or series of options) wouldcease to exist, although outstanding options on the exchange that had beenissued by a clearing corporation as a result of trades on that exchange wouldcontinue to be exercisable in accordance with their terms. There is no assurancethat higher than anticipated trading activity or other unforeseen events mightnot, at times, render certain of the facilities of any of the clearingcorporations inadequate, and thereby result in the institution by an exchange ofspecial procedures which may interfere with the timely execution of customers'orders.

Foreign Futures and Options. Participation in foreign futures andforeign options transactions involves the execution and clearing of trades on orsubject to the rules of a foreign board of trade. Neither the National FuturesAssociation nor any domestic exchange regulates activities of any foreign boardsof trade, including the execution, delivery and clearing of transactions, or hasthe power to compel enforcement of the rules of a foreign board of trade or anyapplicable foreign law. This is true even if the exchange is formally linked toa domestic market so that a position taken on the market may be liquidated by atransaction on another market. Moreover, such laws or regulations will varydepending on the foreign country in which the foreign futures or foreign optionstransaction occurs. For these reasons, customers who trade foreign futures orforeign options contracts may not be afforded certain of the protective measuresprovided by the Commodity Exchange Act, the Commodity Futures TradingCommission's ("CFTC") regulations and the rules of the National FuturesAssociation and any domestic exchange, including the right to use reparationsproceedings before the Commission and arbitration proceedings provided by theNational Futures Association or any domestic futures exchange. In particular,funds received from customers for foreign futures or foreign optionstransactions may not be provided the same protections as funds received inrespect of transactions on United States futures exchanges. In addition, theprice of any foreign futures or foreign options contract and, therefore, thepotential profit and loss thereon may be affected by any variance in the foreignexchange rate between the time an order is placed and the time it is liquidated,offset or exercised.

Foreign Currency Futures Contracts and Related Options. A forwardforeign currency exchange contract involves an obligation to purchase or sell aspecific currency at a future date, which may be any fixed number of days fromthe date of the contract agreed upon by the parties, at a price set at the timeof the contract. These contracts are principally traded in the interbank marketconducted directly between currency traders (usually large, commercial banks)and their customers. A forward contract generally has no deposit requirement,and no commissions are charged at any stage for trades.



Depending on the applicable investment policies and restrictionsapplicable to a Fund, a Fund may generally enter into forward foreign currencyexchange contracts under two circumstances. First, when a Fund enters into acontract for the purchase or sale of a security denominated in a foreigncurrency, it may desire to "lock in" the U.S. dollar price of the security. Byentering into a forward contract for the purchase or sale, for a fixed amount ofdollars, of the amount of foreign currency involved in the underlying securitytransactions, the Fund may be able to protect itself against a possible lossresulting from an adverse change in the relationship between the U.S. dollar andthe subject foreign currency during the period between the date the security ispurchased or sold and the date on which payment is made or received.

Second, when a Sub-advisor believes that the currency of a particularforeign country may suffer or enjoy a substantial movement against anothercurrency, including the U.S. dollar, it may enter into a forward contract tosell or buy the amount of the former foreign currency, approximating the valueof some or all of a Fund's securities denominated in such foreign currency.Alternatively, where appropriate, a Fund may hedge all or part of its foreigncurrency exposure through the use of a basket of currencies or a proxy currencywhere such currencies or currency act as an effective proxy for othercurrencies. In such a case, a Fund may enter into a forward contract where theamount of the foreign currency to be sold exceeds the value of the Fund'ssecurities denominated in such currency. The use of this basket hedgingtechnique may be more efficient and economical than entering into separateforward contracts for each currency held in a Fund. The precise matching of theforward contract amounts and the value of the securities involved will notgenerally be possible since the future value of such securities in foreigncurrencies will change as a consequence of market movements in the value ofthose securities between the date the forward contract is entered into and thedate it matures. The projection of short-term currency market movement isextremely difficult, and the successful execution of a short-term hedgingstrategy is highly uncertain.

As indicated above, it is impossible to forecast with absoluteprecision the market value of portfolio securities at the expiration of theforward contract. Accordingly, it may be necessary for a Fund to purchaseadditional foreign currency on the spot market (and bear the expense of suchpurchase) if the market value of the security is less than the amount of foreigncurrency a Fund is obligated to deliver and if a decision is made to sell thesecurity and make delivery of the foreign currency. Conversely, it may benecessary to sell on the spot market some of the foreign currency received uponthe sale of the portfolio security if its market value exceeds the amount offoreign currency a Fund is obligated to deliver. However, as noted, in order toavoid excessive transactions and transaction costs, a Fund may use liquid assetsdenominated in any currency to cover the amount by which the value of a forwardcontract exceeds the value of the securities to which it relates.

If a Fund retains the portfolio security to which the foreign currencyhedging transaction related and engages in an offsetting forward contracttransaction, the Fund will incur a gain or a loss (as described below) to theextent that there has been movement in forward contract prices. If the Fundengages in an offsetting transaction, it may subsequently enter into a newforward contract to sell the foreign currency. Should forward prices declineduring the period between a Fund's entering into a forward contract for the saleof a foreign currency and the date it enters into an offsetting contract for thepurchase of the foreign currency, the Fund will realize a gain to the extent theprice of the currency it has agreed to sell exceeds the price of the currency ithas agreed to purchase. Should forward prices increase, a Fund will suffer aloss to the extent of the price of the currency it has agreed to purchaseexceeds the price of the currency it has agreed to sell.

As noted above, a currency futures contract sale creates an obligationby a Fund, as seller, to deliver the amount of currency called for in thecontract at a specified future time for a special price. A currency futurescontract purchase creates an obligation by a Fund, as purchaser, to takedelivery of an amount of currency at a specified future time at a specifiedprice. Although the terms of currency futures contracts specify actual deliveryor receipt, in most instances the contracts are closed out before the settlementdate without the making or taking of delivery of the currency. Closing out of acurrency futures contract is effected by entering into an offsetting purchase orsale transaction. Unlike a currency futures contract, which requires the partiesto buy and sell currency on a set date, an option on a currency futures contractentitles its holder to decide on or before a future date whether to enter intosuch a contract. If the holder decides not to enter into the contract, thepremium paid for the option is fixed at the point of sale.

Interest Rate Swaps and Interest Rate Caps and Floors. Interest rateswaps involve the exchange by the Fund with another party of their respectivecommitments to pay or receive interest, e.g., an exchange of floating ratepayments for fixed rate payments. The exchange commitments can involve paymentsto be made in the same currency or in different currencies. The purchase of aninterest rate cap entitles the purchaser, to the extent that a specified indexexceeds a predetermined interest rate, to receive payments of interest on a



contractually based principal amount from the party selling the interest ratecap. The purchase of an interest rate floor entitles the purchaser, to theextent that a specified index falls below a predetermined interest rate, toreceive payments of interest on a contractually based principal amount from theparty selling the interest rate floor.

Hybrid Instruments. Hybrid instruments combine the elements of futurescontracts or options with those of debt, preferred equity or a depositoryinstrument. The risks of investing in hybrid instruments reflect a combinationof the risks from investing in securities, futures and currencies, includingvolatility and lack of liquidity. Reference is made to the discussion of futuresand forward contracts in this Statement for a discussion of these risks.Further, the prices of the hybrid instrument and the related commodity orcurrency may not move in the same direction or at the same time. Hybridinstruments may bear interest or pay preferred dividends at below market (oreven relatively nominal) rates. In addition, because the purchase and sale ofhybrid instruments could take place in an over-the-counter market or in aprivate transaction between a Fund and the seller of the hybrid instrument, thecreditworthiness of the other party to the transaction would be a risk factorwhich a Fund would have to consider. Hybrid instruments also may not be subjectto the regulation of the CFTC, which generally regulates the trading ofcommodity futures by U.S. persons, the Commission, which regulates the offer andsale of securities by and to U.S. persons, or any other governmental regulatoryauthority.

Foreign Currency Exchange-Related Securities. Certain Funds may investin foreign currency warrants, principal exchange rate linked securities andperformance indexed paper.

Foreign Currency Warrants. Foreign currency warrants arewarrants which entitle the holder to receive from their issuer an amount of cash(generally, for warrants issued in the United States, in U.S. dollars) which iscalculated pursuant to a predetermined formula and based on the exchange ratebetween a specified foreign currency and the U.S. dollar as of the exercise dateof the warrant. Foreign currency warrants generally are exercisable upon theirissuance and expire as of a specified date and time. Foreign currency warrantshave been issued in connection with U.S. dollar-denominated debt offerings bymajor corporate issuers in an attempt to reduce the foreign currency exchangerisk which, from the point of view of prospective purchasers of the securities,is inherent in the international fixed-income marketplace. Foreign currencywarrants may attempt to reduce the foreign exchange risk assumed by purchasersof a security by, for example, providing for a supplemental payment in the eventthat the U.S. dollar depreciates against the value of a major foreign currencysuch as the Japanese Yen or German Deutschmark. The formula used to determinethe amount payable upon exercise of a foreign currency warrant may make thewarrant worthless unless the applicable foreign currency exchange rate moves ina particular direction (e.g., unless the U.S. dollar appreciates or depreciatesagainst the particular foreign currency to which the warrant is linked orindexed). Foreign currency warrants are severable from the debt obligations withwhich they may be offered, and may be listed on exchanges. Foreign currencywarrants may be exercisable only in certain minimum amounts, and an investorwishing to exercise warrants who possesses less than the minimum number requiredfor exercise may be required either to sell the warrants or to purchaseadditional warrants, thereby incurring additional transaction costs. In the caseof any exercise of warrants, there may be a time delay between the time a holderof warrants gives instructions to exercise and the time the exchange raterelating to exercise is determined, during which time the exchange rate couldchange significantly, thereby affecting both the market and cash settlementvalues of the warrants being exercised. The expiration date of the warrants maybe accelerated if the warrants should be delisted from an exchange or if theirtrading should be suspended permanently, which would result in the loss of anyremaining "time value" of the warrants (i.e., the difference between the currentmarket value and the exercise value of the warrants), and, in the case thewarrants were "out-of-the-money," in a total loss of the purchase price of thewarrants. Warrants are generally unsecured obligations of their issuers and arenot standardized foreign currency options issued by the Options ClearingCorporation ("OCC"). Unlike foreign currency options issued by OCC, the terms offoreign exchange warrants generally will not be amended in the event ofgovernmental or regulatory actions affecting exchange rates or in the event ofthe imposition of other regulatory controls affecting the international currencymarkets. The initial public offering price of foreign currency warrants isgenerally considerably in excess of the price that a commercial user of foreigncurrencies might pay in the interbank market for a comparable option involvingsignificantly larger amounts of foreign currencies. Foreign currency warrantsare subject to significant foreign exchange risk, including risks arising fromcomplex political or economic factors.

Principal Exchange Rate Linked Securities. Principal exchangerate linked securities are debt obligations the principal on which is payable atmaturity in an amount that may vary based on the exchange rate between the U.S.dollar and a particular foreign currency at or about that time. The return on"standard" principal exchange rate linked securities is enhanced if the foreigncurrency to which the security is linked appreciates against the U.S. dollar,



and is adversely affected by increases in the foreign exchange value of the U.S.dollar. "Reverse" principal exchange rate linked securities are like the"standard" securities, except that their return is enhanced by increases in thevalue of the U.S. dollar and adversely impacted by increases in the value offoreign currency. Interest payments on the securities are generally made in U.S.dollars at rates that reflect the degree of foreign currency risk assumed orgiven up by the purchaser of the notes (i.e., at relatively higher interestrates if the purchaser has assumed some of the foreign exchange risk, orrelatively lower interest rates if the issuer has assumed some of the foreignexchange risk, based on the expectations of the current market). Principalexchange rate linked securities may in limited cases be subject to accelerationof maturity (generally, not without the consent of the holders of thesecurities), which may have an adverse impact on the value of the principalpayment to be made at maturity.

Performance Indexed Paper. Performance indexed paper is U.S.dollar-denominated commercial paper the yield of which is linked to certainforeign exchange rate movements. The yield to the investor on performanceindexed paper is established at maturity as a function of spot exchange ratesbetween the U.S. dollar and a designated currency as of or about that time(generally, the spot exchange rate two days prior to maturity). The yield to theinvestor will be within a range stipulated at the time of purchase of theobligation, generally with a guaranteed minimum rate of return that is below,and a potential maximum rate of return that is above, market yields on U.S.dollar-denominated commercial paper, with both the minimum and maximum rates ofreturn on the investment corresponding to the minimum and maximum values of thespot exchange rate two business days prior to maturity.

Zero-Coupon Securities. Zero-coupon securities pay no cash income andare sold at substantial discounts from their value at maturity. When held tomaturity, their entire income, which consists of accretion of discount, comesfrom the difference between the issue price and their value at maturity.Zero-coupon securities are subject to greater market value fluctuations fromchanging interest rates than debt obligations of comparable maturities whichmake current distributions of interest (cash). Zero-coupon securities which areconvertible into common stock offer the opportunity for capital appreciation asincreases (or decreases) in market value of such securities closely follows themovements in the market value of the underlying common stock. Zero-couponconvertible securities generally are expected to be less volatile than theunderlying common stocks, as they usually are issued with maturities of 15 yearsor less and are issued with options and/or redemption features exercisable bythe holder of the obligation entitling the holder to redeem the obligation andreceive a defined cash payment.

Zero-coupon securities include securities issued directly by the U.S.Treasury, and U.S. Treasury bonds or notes and their unmatured interest couponsand receipts for their underlying principal ("coupons") which have beenseparated by their holder, typically a custodian bank or investment brokeragefirm. A holder will separate the interest coupons from the underlying principal(the "corpus") of the U.S. Treasury security. A number of securities firms andbanks have stripped the interest coupons and receipts and then resold them incustodial receipt programs with a number of different names, including TreasuryIncome Growth Receipts ("TIGRSTM") and Certificate of Accrual on Treasuries("CATSTM"). The underlying U.S. Treasury bonds and notes themselves are held inbook-entry form at the Federal Reserve Bank or, in the case of bearer securities(i.e., unregistered securities which are owned ostensibly by the bearer orholder thereof), in trust on behalf of the owners thereof. Counsel to theunderwriters of these certificates or other evidences of ownership of the U.S.Treasury securities have stated that, for federal tax and securities purposes,in their opinion purchasers of such certificates, such as a Fund, most likelywill be deemed the beneficial holder of the underlying U.S. Governmentsecurities.

The U.S. Treasury has facilitated transfers of ownership of zero-couponsecurities by accounting separately for the beneficial ownership of particularinterest coupon and corpus payments on Treasury securities through the FederalReserve book-entry record keeping system. The Federal Reserve program asestablished by the Treasury Department is known as "STRIPS" or "Separate Tradingof Registered Interest and Principal of Securities." Under the STRIPS program, aFund will be able to have its beneficial ownership of zero-coupon securitiesrecorded directly in the book-entry record-keeping system in lieu of having tohold certificates or other evidences of ownership of the underlying U.S.Treasury securities.

When U.S. Treasury obligations have been stripped of their unmaturedinterest coupons by the holder, the principal or corpus is sold at a deepdiscount because the buyer receives only the right to receive a future fixedpayment on the security and does not receive any rights to periodic interest(cash) payments. Once stripped or separated, the corpus and coupons may be soldseparately. Typically, the coupons are sold separately or grouped with othercoupons with like maturity dates and sold bundled in such form. Purchasers ofstripped obligations acquire, in effect, discount obligations that areeconomically identical to the zero-coupon securities that the Treasury sells



itself.

When-Issued Securities. The price of when-issued securities, which maybe expressed in yield terms, is fixed at the time the commitment to purchase ismade, but delivery and payment for the when-issued securities take place at alater date. Normally, the settlement date occurs within 90 days of the purchase.During the period between purchase and settlement, no payment is made by a Fundto the issuer and no interest accrues to such Fund. Forward commitments involvea risk of loss if the value of the security to be purchased declines prior tothe settlement date, which risk is in addition to the risk of decline in valueof a Fund's other assets. While when-issued securities may be sold prior to thesettlement date, a Fund intends to purchase such securities with the purpose ofactually acquiring them unless a sale appears desirable for investment reasons.

Mortgage-Backed Securities. Principal and interest payments made on themortgages in an underlying mortgage pool are passed through to a Fund.Unscheduled prepayments of principal shorten the securities' weighted averagelife and may lower their total return. (When a mortgage in the underlyingmortgage pool is prepaid, an unscheduled principal prepayment is passed throughto a Fund. This principal is returned to a Fund at par. As a result, if amortgage security were trading at a premium, its total return would be loweredby prepayments, and if a mortgage security were trading at a discount, its totalreturn would be increased by prepayments.) The value of these securities alsomay change because of changes in the market's perception of the creditworthinessof the federal agency that issued them. In addition, the mortgage securitiesmarket in general may be adversely affected by changes in governmentalregulation or tax policies.

Asset-Backed Securities. Asset-backed securities directly or indirectlyrepresent a participation interest in, or are secured by and payable from, astream of payments generated by particular assets such as motor vehicle orcredit card receivables. Payments of principal and interest may be guaranteed upto certain amounts and for a certain time period by a letter of credit issued bya financial institution unaffiliated with the entities issuing the securities.Asset-backed securities may be classified as pass-through certificates orcollateralized obligations.

Pass-through certificates are asset-backed securities which representan undivided fractional ownership interest in an underlying pool of assets.Pass-through certificates usually provide for payments of principal and interestreceived to be passed through to their holders, usually after deduction forcertain costs and expenses incurred in administering the pool. Becausepass-through certificates represent an ownership interest in the underlyingassets, the holders thereof bear directly the risk of any defaults by theobligors on the underlying assets not covered by any credit support. See "Typesof Credit Support" below.

Asset-backed securities issued in the form of debt instruments, alsoknown as collateralized obligations, are generally issued as the debt of aspecial purpose entity organized solely for the purpose of owning such assetsand issuing such debt. Such assets are most often trade, credit card orautomobile receivables. The assets collateralizing such asset-backed securitiesare pledged to a trustee or custodian for the benefit of the holders thereof.Such issuers generally hold no assets other than those underlying theasset-backed securities and any credit support provided. As a result, althoughpayments on such asset-backed securities are obligations of the issuers, in theevent of defaults on the underlying assets not covered by any credit support(see "Types of Credit Support"), the issuing entities are unlikely to havesufficient assets to satisfy their obligations on the related asset-backedsecurities.

Methods of Allocating Cash Flows. While many asset-backedsecurities are issued with only one class of security, many asset-backedsecurities are issued in more than one class, each with different payment terms.Multiple class asset-backed securities are issued for two main reasons. First,multiple classes may be used as a method of providing credit support. This isaccomplished typically through creation of one or more classes whose right topayments on the asset-backed security is made subordinate to the right to suchpayments of the remaining class or classes. See "Types of Credit Support."Second, multiple classes may permit the issuance of securities with paymentterms, interest rates or other characteristics differing both from those of eachother and from those of the underlying assets. Examples include so-called"strips" (asset-backed securities entitling the holder to disproportionateinterests with respect to the allocation of interest and principal of the assetsbacking the security), and securities with a class or classes havingcharacteristics which mimic the characteristics of non-asset-backed securities,such as floating interest rates (i.e., interest rates which adjust as aspecified benchmark changes) or scheduled amortization of principal.

Asset-backed securities in which the payment streams on theunderlying assets are allocated in a manner different than those described abovemay be issued in the future. A Fund may invest in such asset-backed securitiesif such investment is otherwise consistent with its investment objectives and



policies and with the investment restrictions of the Fund.

Types of Credit Support. Asset-backed securities are oftenbacked by a pool of assets representing the obligations of a number of differentparties. To lessen the effect of failures by obligors on underlying assets tomake payments, such securities may contain elements of credit support. Suchcredit support falls into two classes: liquidity protection and protectionagainst ultimate default by an obligor on the underlying assets. Liquidityprotection refers to the provision of advances, generally by the entityadministering the pool of assets, to ensure that scheduled payments on theunderlying pool are made in a timely fashion. Protection against ultimatedefault ensures ultimate payment of the obligations on at least a portion of theassets in the pool. Such protection may be provided through guarantees,insurance policies or letters of credit obtained from third parties, throughvarious means of structuring the transaction or through a combination of suchapproaches. Examples of asset-backed securities with credit support arising outof the structure of the transaction include "senior-subordinated securities"(multiple class asset-backed securities with certain classes subordinate toother classes as to the payment of principal thereon, with the result thatdefaults on the underlying assets are borne first by the holders of thesubordinated class) and asset-backed securities that have "reserve funds" (wherecash or investments, sometimes funded from a portion of the initial payments onthe underlying assets, are held in reserve against future losses) or that havebeen "over collateralized" (where the scheduled payments on, or the principalamount of, the underlying assets substantially exceeds that required to makepayment of the asset-backed securities and pay any servicing or other fees). Thedegree of credit support provided on each issue is based generally on historicalinformation respecting the level of credit risk associated with such payments.Delinquency or loss in excess of that anticipated could adversely affect thereturn on an investment in an asset-backed security. Additionally, if a letterof credit is exhausted, holders of asset-backed securities may also experiencedelays in payments or losses if the full amounts due on underlying salescontracts are not realized.

Automobile Receivable Securities. Asset-backed securities maybe backed by receivables from motor vehicle installment sales contracts orinstallment loans secured by motor vehicles ("Automobile ReceivableSecurities"). Since installment sales contracts for motor vehicles orinstallment loans related thereto ("Automobile Contracts") typically haveshorter durations and lower incidences of prepayment, Automobile ReceivableSecurities generally will exhibit a shorter average life and are lesssusceptible to prepayment risk.

Most entities that issue Automobile Receivable Securitiescreate an enforceable interest in their respective Automobile Contracts only byfiling a financing statement and by having the servicer of the AutomobileContracts, which is usually the originator of the Automobile Contracts, takecustody thereof. In such circumstances, if the servicer of the AutomobileContracts were to sell the same Automobile Contracts to another party, inviolation of its obligation not to do so, there is a risk that such party couldacquire an interest in the Automobile Contracts superior to that of the holdersof Automobile Receivable Securities. Also although most Automobile Contractsgrant a security interest in the motor vehicle being financed, in most statesthe security interest in a motor vehicle must be noted on the certificate oftitle to create an enforceable security interest against competing claims ofother parties. Due to the large number of vehicles involved, however, thecertificate of title to each vehicle financed, pursuant to the AutomobileContracts underlying the Automobile Receivable Security, usually is not amendedto reflect the assignment of the seller's security interest for the benefit ofthe holders of the Automobile Receivable Securities. Therefore, there is thepossibility that recoveries on repossessed collateral may not, in some cases, beavailable to support payments on the securities. In addition, various state andfederal securities laws give the motor vehicle owner the right to assert againstthe holder of the owner's Automobile Contract certain defenses such owner wouldhave against the seller of the motor vehicle. The assertion of such defensescould reduce payments on the Automobile Receivable Securities.

Credit Card Receivable Securities. Asset-backed securities maybe backed by receivables from revolving credit card agreements ("Credit CardReceivable Securities"). Credit balances on revolving credit card agreements("Accounts") are generally paid down more rapidly than are Automobile Contracts.Most of the Credit Card Receivable Securities issued publicly to date have beenPass-Through Certificates. In order to lengthen the maturity of Credit CardReceivable Securities, most such securities provide for a fixed period duringwhich only interest payments on the underlying Accounts are passed through tothe security holder and principal payments received on such Accounts are used tofund the transfer to the pool of assets supporting the related Credit CardReceivable Securities of additional credit card charges made on an Account. Theinitial fixed period usually may be shortened upon the occurrence of specifiedevents which signal a potential deterioration in the quality of the assetsbacking the security, such as the imposition of a cap on interest rates. Theability of the issuer to extend the life of an issue of Credit Card ReceivableSecurities thus depends upon the continued generation of additional principal



amounts in the underlying accounts during the initial period and thenon-occurrence of specified events. An acceleration in cardholders' paymentrates or any other event which shortens the period during which additionalcredit card charges on an Account may be transferred to the pool of assetssupporting the related Credit Card Receivable Security could shorten theweighted average life and reduce the yield of the Credit Card ReceivableSecurity.

Credit card holders are entitled to the protection of a numberof state and federal consumer credit laws, many of which give such holder theright to set off certain amounts against balances owed on the credit card,thereby reducing amounts paid on Accounts. In addition, unlike most otherasset-backed securities, Accounts are unsecured obligations of the cardholder.

Warrants. Warrants basically are options to purchase equity securitiesat a specific price valid for a specific period of time. They do not representownership of the securities but only the right to buy them. Investments inwarrants are speculative in that warrants have no voting rights, pay nodividends, and have no rights with respect to the assets of the corporationissuing them. Warrants differ from call options in that warrants are issued bythe issuer of the security which may be purchased on their exercise, whereascall options may be written or issued by anyone. The prices of warrants do notnecessarily move parallel to the prices of the underlying securities.

Certain Risks of Foreign Investing:

Currency Fluctuations. Investment in securities denominated inforeign currencies involves certain risks. A change in the value of any suchcurrency against the U.S. dollar will result in a corresponding change in theU.S. dollar value of a Fund's assets denominated in that currency. Such changeswill also affect a Fund's income. Generally, when a given currency appreciatesagainst the dollar (the dollar weakens) the value of a Fund's securitiesdenominated in that currency will rise. When a given currency depreciatesagainst the dollar (the dollar strengthens), the value of a Fund's securitiesdenominated in that currency would be expected to decline.

Investment and Repatriation Restrictions. Foreign investmentin the securities markets of certain foreign countries is restricted orcontrolled in varying degrees. These restrictions may at times limit or precludeinvestment in certain of such countries and may increase the cost and expensesof a Fund. Investments by foreign investors are subject to a variety ofrestrictions in many developing countries. These restrictions may take the formof prior governmental approval, limits on the amount or type of securities heldby foreigners, and limits on the types of companies in which foreigners mayinvest. Additional or different restrictions may be imposed at any time by theseor other countries in which a Fund invests. In addition, the repatriation ofboth investment income and capital from several foreign countries is restrictedand controlled under certain regulations, including in some cases the need forcertain government consents.

Market Characteristics. Foreign securities may be purchased inover-the-counter markets or on stock exchanges located in the countries in whichthe respective principal offices of the issuers of the various securities arelocated, if that is the best available market. Foreign stock markets aregenerally not as developed or efficient as, and may be more volatile than, thosein the United States. While growing in volume, they usually have substantiallyless volume than U.S. markets and a Fund's securities may be less liquid andmore volatile than securities of comparable U.S. companies. Equity securitiesmay trade at price/earnings multiples higher than comparable U.S. securities andsuch levels may not be sustainable. Commissions on foreign stock exchanges,which may be fixed, may generally be higher than negotiated commissions on U.S.exchanges, although a Fund will endeavor to achieve the most favorable netresults on its portfolio transactions. There is generally less governmentsupervision and regulation of foreign stock exchanges, brokers and listedcompanies than in the United States. Moreover, settlement practices fortransactions in foreign markets may differ from those in U.S. markets, and mayinclude delays beyond periods customary in the United States.

Political and Economic Factors. Individual foreign economiesof certain countries may differ favorably or unfavorably from the United States'economy in such respects as growth of gross national product, rate of inflation,capital reinvestment, resource self-sufficiency and balance of paymentsposition. The internal politics of certain foreign countries are not as stableas in the United States.

Governments in certain foreign countries continue toparticipate to a significant degree, through ownership interest or regulation,in their respective economies. Action by these governments could have asignificant effect on market prices of securities and payment of dividends. Theeconomies of many foreign countries are heavily dependent upon internationaltrade and are accordingly affected by protective trade barriers and economicconditions of their trading partners. The enactment by these trading partners ofprotectionist trade legislation could have a significant adverse effect upon the



securities markets of such countries.

Information and Supervision. There is generally less publiclyavailable information about foreign companies comparable to reports and ratingsthat are published about companies in the United States. Foreign companies arealso generally not subject to uniform accounting, auditing and financialreporting standards, practices and requirements comparable to those applicableto U.S. companies.

Taxes. The dividends and interest payable on certain of aFund's foreign securities may be subject to foreign withholding taxes, thusreducing the net amount of income available for distribution to the Fund'sshareholders. A shareholder otherwise subject to U.S. federal income taxes may,subject to certain limitations, be entitled to claim a credit or deduction forU.S. federal income tax purposes for his or her proportionate share of suchforeign taxes paid by the Fund.

Costs. Investors should understand that the expense ratio of aFund investing primarily in foreign securities can be expected to be higher thaninvestment companies investing in domestic securities since the cost ofmaintaining the custody of foreign securities and the rate of advisory fees paidby a Fund are higher.

Other. With respect to certain foreign countries, especiallydeveloping and emerging ones, there is the possibility of adverse changes ininvestment or exchange control regulations, expropriation or confiscatorytaxation, limitations on the removal of funds or other assets of a Fund,political or social instability, or diplomatic developments which could affectinvestments by U.S. persons in those countries.

Eastern Europe. Changes occurring in Eastern Europe and Russiatoday could have long-term potential consequences. As restrictions fall, thiscould result in rising standards of living, lower manufacturing costs, growingconsumer spending, and substantial economic growth. However, investment in thecountries of Eastern Europe and Russia is highly speculative at this time.Political and economic reforms are too recent to establish a definite trend awayfrom centrally-planned economies and state owned industries. In many of thecountries of Eastern Europe and Russia, there is no stock exchange or formalmarket for securities. Such countries may also have government exchangecontrols, currencies with no recognizable market value relative to theestablished currencies of western market economies, little or no experience intrading in securities, no financial reporting standards, a lack of a banking andsecurities infrastructure to handle such trading, and a legal tradition whichdoes not recognize rights in private property. In addition, these countries mayhave national policies which restrict investments in companies deemed sensitiveto the country's national interest. Further, the governments in such countriesmay require governmental or quasi-governmental authorities to act as custodianof a Fund's assets invested in such countries and these authorities may notqualify as a foreign custodian under the 1940 Act and exemptive relief from suchAct may be required. All of these considerations are among the factors whichcould cause significant risks and uncertainties to investment in Eastern Europeand Russia.

Latin America. The political history of certain Latin Americancountries has been characterized by political uncertainty, intervention by themilitary in civilian and economic spheres, and political corruption. Suchdevelopments, if they were to reoccur, could reverse favorable trends towardmarket and economic reform, privatization and removal of trade barriers andresult in significant disruption in securities markets. Persistent levels ofinflation or in some cases, hyperinflation, have led to high interest rates,extreme measures by governments to keep inflation in check and a generallydebilitating effect on economic growth. Although inflation in many countries haslessened, there is no guarantee it will remain at lower levels. In addition, ofdeveloping countries, a number of Latin American countries are also among thelargest debtors. There have been moratoria on, and reschedulings of, repaymentwith respect to these debts. Such events can restrict the flexibility of thesedebtor nations in the international markets and result in the imposition ofonerous conditions on their economies.

Certain Latin American countries may have managed currencieswhich are maintained at artificial levels to the U.S. dollar rather than atlevels determined by the market. This type of system can lead to sudden andlarge adjustments in the currency which, in turn, can have a disruptive andnegative effect on foreign investors. Certain Latin American countries also mayrestrict the free conversion of their currency into foreign currencies,including the U.S. dollar. There is no significant foreign exchange market forcertain currencies and it would, as a result, be difficult for a Fund to engagein foreign currency transactions designed to protect the value of the Fund'sinterests in securities denominated in such currencies.

ADDITIONAL PERFORMANCE INFORMATION

ASAF JPM MONEY MARKET FUND (the "Money Market Fund"):



In accordance with regulations prescribed by the Commission, theCompany is required to compute the Money Market Fund's current annualized yieldfor a seven-day period in accordance with a specified formula, which does nottake into consideration any realized or unrealized gains or losses on itsportfolio securities. This current annualized yield is computed by determiningthe net change (exclusive of realized gains and losses on the sale of securitiesand unrealized appreciation and depreciation) in the value of a hypotheticalaccount having a balance of one share of the Money Market Fund at the beginningof such seven-day period, dividing such net change in account value by the valueof the account at the beginning of the period to determine the base periodreturn and annualizing this quotient on a 365-day basis.

The Commission also permits the Company to disclose the effective yieldof the Money Market Fund for the same seven-day period, which is the Fund'syield determined on a compounded basis. The effective yield is calculated bycompounding the unannualized base period return by adding one to the base periodreturn, raising the sum to a power equal to 365 divided by 7, and subtractingone from the result.

The yield on amounts held in the Money Market Fund normally willfluctuate on a daily basis. Therefore, the disclosed yield for any given pastperiod is not an indication or representation of future yields or rates ofreturn. The Money Market Fund's actual yield is affected by changes in interestrates on money market securities, the average portfolio maturity of thecorresponding Portfolio in which the Money Market Fund invests, the types andquality of portfolio securities held by such Portfolio, and the Fund's andPortfolio's operating expenses.

ALL OTHER FUNDS:

Standardized Average Annual Total Return Quotations. "Total return" isone of the primary methods used to measure performance and represents thepercentage change in value of a class of a Fund, or of a hypothetical investmentin a class of a Fund, over any period up to the lifetime of the class. Averageannual total return quotations for Class A, B, C and X shares are computed byfinding the average annual compounded rates of return that would cause ahypothetical investment made on the first day of a designated period to equalthe ending redeemable value of such hypothetical investment on the last day ofthe designated period in accordance with the following formula:

P(1+T)n = ERV

Where: P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years

ERV = ending redeemable value of the hypothetical $1,000initial payment made at the beginning of the designated period (or fractionalportion thereof)

The computation above assumes that the maximum sales charge applicableto a class of Fund shares is deducted from the initial $1,000 payment, and thatall dividends and distributions made by a Fund are reinvested at net asset value("NAV") during the designated period. The average annual total return quotationis determined to the nearest 1/100 of 1%.

Total return percentages for periods longer than one year will usuallybe accompanied by total return percentages for each year within the periodand/or by the average annual compounded total return for the period. The incomeand capital components of a given return may be separated and portrayed in avariety of ways in order to illustrate their relative significance. Performancemay also be portrayed in terms of cash or investment values, withoutpercentages. Past performance cannot guarantee any particular future result. Indetermining the average annual total return (calculated as provided above),recurring fees, if any, that are charged to all shareholder accounts are takeninto consideration. For any account fees that vary with the size of the account,the account fee used for purposes of the above computation is assumed to be thefee that would be charged to the mean account size of a class of the Fund.

In addition, with respect to the Class X shares, a standardized returnwill reflect the impact of the 2.5% bonus shares. The impact of the bonus shareson total return is particularly pronounced for shorter periods for which totalreturn is measured, such as one and three years. You should take this intoconsideration in any comparison of total return between the Funds and othermutual funds. For a discussion of the Class X bonus shares, see the Company'sProspectus under "How to Buy Shares."

Standardized Yield Quotations. The yield of a class of Fund shares iscomputed by dividing the class's net investment income per share during a baseperiod of 30 days, or one month, by the maximum offering price per share of the



class on the last day of such base period in accordance with the followingformula:

YIELD = 2 [ (a - b + 1)6 - 1 ]cd

Where: a = net investment income earned during the period attributable tothe subject class

b = net expenses accrued for the period attributable to the subject class

c = the average daily number of shares of the subject class outstandingduring the period that were entitled to receive dividends

d = the maximum offering price per share of the subject class

Net investment income will be determined in accordance with rulesestablished by the Commission. The price per share of Class A shares willinclude the maximum sales charge imposed on purchases of Class A shares whichdecreases with the amount of shares purchased.

Non-Standardized Performance. In order to more completely represent aFund's performance or more accurately compare such performance to other measuresof investment return, a Fund also may include in advertisements, salesliterature and shareholder reports other total return performance data("Non-Standardized Return"). Non-Standardized Return may be quoted for the sameor different periods as those for which standardized return is quoted; it mayconsist of an aggregate or average annual percentage rate of return, actualyear-by-year rates or any combination thereof. Non-Standardized Return may ormay not take sales charges into account; performance data calculated withouttaking the effect of sales charges into account will be higher than dataincluding the effect of such charges. Non-standardized performance will beadvertised only if the standard performance data for the same period, as well asfor the required periods, is also presented.

Each Fund may also publish its distribution rate and/or its effectivedistribution rate. A Fund's distribution rate is computed by dividing the mostrecent monthly distribution per share annualized, by the current NAV per share.A Fund's effective distribution rate is computed by dividing the distributionrate by the ratio used to annualize the most recent monthly distribution andreinvesting the resulting amount for a full year on the basis of such ratio. Theeffective distribution rate will be higher than the distribution rate because ofthe compounding effect of the assumed reinvestment. Unlike a Fund's yield, whichis computed from the yields to maturity of all debt obligations held by theFund, the distribution rate is based on a Fund's last monthly distribution. AFund's monthly distribution tends to be relatively stable and may be more orless than the amount of net investment income and short-term capital gainactually earned by the Fund during the month (see the Company's Prospectus under"Dividends, Capital Gains and Taxes").

Other data that may be advertised or published about each Fund includethe average portfolio quality, the average portfolio maturity and the averageportfolio duration.

Comparative Information. From time to time, the Funds may advertisetheir performance compared to similar funds using certain unmanaged indices,reporting services and publications. Descriptions of some of the indices whichmay be used are listed below:

o The Standard & Poor's 500 Composite Stock Price Index is awell-diversified list of 500 large capitalization companies representing theU.S. Stock Market.

o The Standard and Poor's Small Cap 600 index is designed to representprice movements in the small cap U.S. equity market. It contains companieschosen by the Standard & Poor's Index Committee for their size, industrycharacteristics, and liquidity. None of the companies in the S&P 600 overlapwith the S&P 500 or the S&P 400 (MidCap Index). The S&P 600 is weighted bymarket capitalization.

o The NASDAQ Composite OTC Price Index is a market value-weighted andunmanaged index showing the changes in the aggregate market value ofapproximately 3,500 stocks.

o The Lehman Government Bond Index is a measure of the market value ofall public obligations of the U.S. Treasury; all publicly issued debt of allagencies of the U.S. Government and all quasi-federal corporations; and allcorporate debt guaranteed by the U.S. Government. Mortgage backed securities,bonds and foreign targeted issues are not included in the Lehman GovernmentIndex.

o The Lehman Government/Corporate Bond Index is a measure of the marketvalue of approximately 5,300 bonds with a face value currently in excess of $1.3



trillion. To be included in the Lehman Government/Corporate Index, an issue musthave amounts outstanding in excess of $1 million, have at least one year tomaturity and be rated "Baa" or its equivalent or higher ("investment grade") bya nationally recognized rating agency.

o The Russell 2000 Index represents the bottom two thirds of thelargest 3000 publicly traded companies domiciled in the U.S. Russell uses totalmarket capitalization to determine the companies that are included in the Index.Only common stocks are included in the Index.

o The Russell 2500 Index is a market value-weighted, unmanaged indexshowing total return (i.e., principal changes with income) in the aggregatemarket value of 2,500 stocks of publicly traded companies domiciled in theUnited States. The Index includes stocks traded on the New York Stock Exchangeand the American Stock Exchange as well as in the over-the-counter market.

o The Morgan Stanley Capital International EAFE Index (the "EAFEIndex") is an unmanaged index, which includes over 1,000 companies representingthe stock markets of Europe, Australia, New Zealand and the Far East. The EAFEIndex is typically shown weighted by the market capitalization. However, EAFE isalso available weighted by Gross Domestic Product ("GDP"). These weights aremodified on July 1st of each year to reflect the prior year's GDP.

o The Lehman Brothers High Yield BB Index is a measure of the marketvalue of public debt issues with a minimum par value of $100 million and ratedBa1-Ba3 by Moody's. All bonds within the index are U.S. dollar denominated,non-convertible and have at least one year remaining to maturity.

Each Fund's investment performance may be advertised in variousfinancial publications, newspapers, magazines, including: Across the Board,Advertising Age, Adviser's Magazine, Adweek, Agent, American Banker, AmericanAgent and Broker, Associated Press, Barron's, Best's Review, Bloomberg, BrokerWorld, Business Daily, Business Insurance, Business Marketing, Business Month,Business News Features, Business Week, Business Wire, California Broker,Changing Times, Consumer Reports, Consumer Digest, Crain's, Dow Jones NewsService, Economist, Entrepreneur, Entrepreneurial Woman, Financial Planning,Financial Services Week, Financial Times, Financial World, Forbes, Fortune,Hartford Courant, Inc., Independent Business, Institutional Investor, InsuranceForum, Insurance Advocate Independent, Insurance Review Investor's, InsuranceTimes, Insurance Week, Insurance Product News, Insurance Sales, InvestmentDealers Digest, Investment Advisor, Journal of Commerce, Journal of Accountancy,Journal of the American Society of CLU & ChFC, Kiplinger's Personal Finance,Knight-Ridder, Life Association News, Life Insurance Selling, Life Times,LIMRA's MarketFacts, Lipper Analytical Services, Inc., MarketFacts, MedicalEconomics, Money, Morningstar, Inc., Nation's Business, National Underwriter,New Choices, New England Business, New York Times, Pension World, Pensions &Investments, Professional Insurance Agents, Professional Agent, RegisteredRepresentative, Reuter's, Rough Notes, Round the Table, Service, Success, TheStandard, The Boston Globe, The Washington Post, Tillinghast, Time, U.S. News &World Report, U.S. Banker, United Press International, USA Today, Value Line,The Wall Street Journal, Wiesenberger Investment and Working Woman.

From time to time the Company may publish the sales of shares of one ormore of the Funds on a gross or net basis and for various periods of time, andcompare such sales with sales similarly reported by other investment companies.

MANAGEMENT OF THE COMPANY

The following table sets forth information concerning the officers andDirectors of the Company, including their addresses and principal businessoccupations for the last five years:<TABLE><CAPTION>

<S> <C> <C>Name, Age and Address:(1) Position Held with the Company:(2) Principal Occupation:(3)

Gordon C. Boronow (44)* Vice President & Director President & Chief Operating Officer:American Skandia Life AssuranceCorporation

Jan R. Carendi (52)* President, Principal Executive Officer Senior Executive Vice President &and Director Member of Corporate Management Group:

Skandia Insurance Company Ltd.

David E. A. Carson (62) Director President, Chairman & Chief ExecutivePeople's Bank Officer: People's Bank850 Main StreetBridgeport, CT 06604

Richard G. Davy, Jr. (48) Controller Vice President, Operations: AmericanSkandia Investment Services,Incorporated (January 1997 to present)



Controller: American SkandiaInvestment Services, Incorporated(September 1994 to January 1997)

Self-employed Consultant (December 1991to September 1994)

Eric C. Freed (34) Secretary Securities Counsel: American SkandiaInvestment Holding Corporation(December 1996 to present)

Attorney, Senior Attorney and SpecialCounsel: U.S. Securities and ExchangeCommission (March 1991 to November 1996)

Julian A. Lerner (72) Director Semi-retired since 1995; Senior Vice12850 Spurling Road President & Portfolio Manager of AIMSuite 208 Charter Fund and AIM Summit Fund fromDallas, TX 75230 1986 to 1995

Thomas M. Mazzaferro (44)* Treasurer and Director Executive Vice President & ChiefFinancial Officer: American SkandiaLife Assurance Corporation

Thomas M. O'Brien (46) Director Vice Chairman: North Fork Bank (JanuaryNorth Fork Bank 1997 to present)275 Broad Hollow RoadMelville, NY 11747 President & Chief Executive Officer:

North Side Savings Bank (December 1984to December 1996)

F. Don Schwartz (61) Director Management Consultant1101 Penn Grant Road (April 1985 to present)Lancaster, PA 17602</TABLE>

* Indicates a Director of the Company who is an "interested person" withinthe meaning set forth in the 1940 Act.

(1) Unless otherwise indicated, the address of each officer and director listedabove is One Corporate Drive, Shelton, Connecticut 06484.

(2) All of the officers and Directors of the Company listed above serve insimilar capacities for the Trust and/or American Skandia Trust, both of whichare also investment companies managed by the Investment Manager.

(3) Unless otherwise indicated, each officer and director listed above has heldhis principal occupation for at least the last five years. In addition to theprincipal occupations noted above, the following officers and Directors of theCompany hold the following positions with American Skandia Life AssuranceCorporation ("ASLAC"), American Skandia Investment Services, Incorporated("ASISI"), American Skandia Marketing, Incorporated ("ASM"), American SkandiaInformation Services and Technology Corporation ("ASIST") or American SkandiaInvestment Holding Corporation ("ASIHC"): Mr. Boronow also serves as ExecutiveVice President, Chief Operating Officer and a Director of ASIHC, and a Directorof ASLAC, ASISI, ASM and ASIST; Mr. Carendi also serves as Chairman, President,Chief Executive Officer and a Director of ASIHC, and Chief Executive Officer anda Director of ASLAC, ASISI, ASM and ASIST; Mr. Davy also serves as a Director ofASISI; Mr. Mazzaferro also serves as Executive Vice President, Chief FinancialOfficer and a Director of ASIHC, a Director of ASLAC, President, Chief FinancialOfficer and a Director of ASISI, and Executive Vice President and ChiefFinancial Officer of ASM and ASIST.

The Company's Articles of Incorporation provides that the Directors,officers and employees of the Company may be indemnified by the Company to thefullest extent permitted by federal and state law, including Maryland law.Neither the Articles of Incorporation nor the By-laws of the Company authorizethe Company to indemnify any director or officer against any liability to whichhe or she would otherwise be subject by reason of or for willful misfeasance,bad faith, gross negligence or reckless disregard of such person's duties.

The officers and Directors of the Company who are "interested persons"within the meaning of the 1940 Act do not receive compensation directly from theCompany for serving in the capacities described above. Those officers andDirectors of the Company, however, who are affiliated with the InvestmentManager may receive remuneration indirectly from the Company for servicesprovided in their respective capacities with the Investment Manager. Each of thenon-interested Directors is expected to receive for his service on the Board ofDirectors an annual and "per-meeting" fee, plus reimbursement for reasonableout-of-pocket expenses incurred in connection with attendance at Board meetings.The following table sets forth information concerning the compensation



anticipated to be paid by the Company to the Directors in the current fiscalyear. Neither the Company nor any investment company in the Fund Complex offersany pension or retirement benefits to its directors or trustees.<TABLE><CAPTION>

Aggregate Compensation Total Compensation from the

Name of Director: from the Company:(1) Company and Fund Complex:(2)

<S> <C> <C>Gordon C. Boronow $ 0 $ 0

Jan R. Carendi $ 0 $ 0

David E.A. Carson $9,167 $39,500

Julian A. Lerner $9,167 $7,500

Thomas M. Mazzaferro $ 0 $ 0

Thomas M. O'Brien $9,167 $39,500

F. Don Schwartz $9,167 $39,500</TABLE>

(1) Because the Company commenced operations in July, 1997, no compensationhas been paid to the Directors of the Company as of June 1, 1997. The amountindicated estimates the compensation anticipated to be paid to the Directors ofthe Company for the remaining period of the Company's fiscal year ending October31, 1997.

(2) As of the date of this SAI, the "Fund Complex" consisted of theCompany, the Trust and American Skandia Trust. Because the Company commencedoperations in July, 1997 and the Trust commenced operations in June, 1997, theamount indicated reflects the compensation paid to the Directors, to the extentapplicable, solely for their service on the Board of Trustees of AmericanSkandia Trust for the year ending December 31, 1996. Note that Mr. Lerner wasappointed as a Trustee of American Skandia Trust in November 1996.

As of June 1, 1997, the officers, Directors and Trustees of the Company andthe Trust, as a group, owned beneficially or of record less than 1% of theoutstanding shares of the Funds.

INVESTMENT ADVISORY & ADMINISTRATION SERVICES

THE INVESTMENT MANAGER:

American Skandia Investment Services, Incorporated ("ASISI," aspreviously defined) acts as investment manager to each Non-Feeder Fund andPortfolio pursuant to separate investment management agreements with the Companyand the Trust, respectively (the "Management Agreements"). Unlike the Non-FeederFunds, each of the Feeder Funds invests all of its respective investable assetsin a corresponding Portfolio of the Trust and thus does not require aninvestment manager.

ASISI, a Connecticut corporation organized in 1991, is registered as aninvestment adviser with the Commission and is a wholly-owned subsidiary ofAmerican Skandia Investment Holding Corporation, whose indirect parent isSkandia Insurance Company Ltd. ("Skandia"). Skandia is a Swedish company thatowns, directly or indirectly, a number of insurance companies in many countries.The predecessor to Skandia commenced operations in 1855. In addition to servingas investment manager to the Company and the Trust, ASISI currently serves asthe investment manager to American Skandia Trust, an open-end managementinvestment company whose shares are made available to life insurance companieswriting variable annuity contracts and variable life insurance policies. Sharesof American Skandia Trust also may be offered directly to qualified pension andretirement plans. For a list of those officers and Directors of the Company whoalso serve in similar capacities for the Investment Manager, see this SAI under"Management of the Company."

The Management Agreements provide, in substance, that the InvestmentManager will furnish each Non-Feeder Fund and Portfolio with investment adviceand investment management and administrative services subject to the supervisionof the Directors of the Company or the Trustees of the Trust, where applicable,and in conformity with the stated investment objective, policies and limitationsof the applicable Fund or Portfolio. The Investment Manager is responsible forproviding, at its expense, such personnel as is required by each Non-Feeder Fund



or Portfolio for the proper conduct of its affairs and may engage a sub-advisorto conduct the investment program of the Fund or Portfolio pursuant to theInvestment Manager's obligations under the Management Agreements. The InvestmentManager, not the Funds or Portfolios, is responsible for the expenses ofconducting the investment programs of the Funds and Portfolios.

The Management Agreements provide further that neither the InvestmentManager nor its personnel shall be liable for any act or omission in the courseof, or connected with, rendering services under the agreements, or for anylosses that may be sustained in the purchase, holding or sale of any security onbehalf of the Funds or Portfolios, except for willful misfeasance, bad faith orgross negligence in the performance of its or their duties or by reason ofreckless disregard of its or their obligations and duties under the agreements.The Management Agreements also permit the Investment Manager to render servicesto others.

Under the terms of the Management Agreements, each Non-Feeder Fund andPortfolio has agreed to pay ASISI an investment management fee, which is accrueddaily and paid monthly, equal on an annual basis to a stated percentage of therespective Fund or Portfolio's average daily NAV. The Investment Manager, notany Fund or Portfolio, is responsible for the payment of the sub-advisory feesto the Sub-advisors. Because the Company commenced operations in July, 1997 andthe Trust commenced operations in June, 1997, neither the Funds nor thePortfolios have paid any advisory fees to the Investment Manager as of June 1,1997. For a discussion of the fees payable to the Investment Manager and theSub-advisors, as well as any applicable voluntary fee waiver arrangements, seethe Company's Prospectus under "Expense Information" and "Management of theFunds."

Each Management Agreement will continue in effect from year to year,provided it is approved at least annually by a vote of the majority of theDirectors or Trustees, where applicable, who are not parties to the agreement orinterested persons of any such party, cast in person at a meeting specificallycalled for the purpose of voting on such approval. Each Management Agreement maybe terminated without penalty on 60 days' written notice by vote of a majorityof the Directors or Trustees, where applicable, or by the Investment Manager, orby holders of a majority of the applicable Fund or Portfolio's outstandingshares, and will automatically terminate in the event of its "assignment" (asthat term is defined in the 1940 Act).

THE SUB-ADVISORS:

ASISI currently engages the following Sub-advisors to conduct theinvestment programs of each Non-Feeder Fund and Portfolio pursuant to separatesub-advisory agreements with the Investment Manager (the "Sub-AdvisoryAgreements"): (a) Founders Asset Management, Inc. for the ASAF FoundersInternational Small Capitalization Fund and the ASAF Founders SmallCapitalization Fund; (b) Rowe Price-Fleming International, Inc. for the ASMT T.Rowe Price International Equity Portfolio; (c) T. Rowe Price Associates, Inc.for the ASAF T. Rowe Price Small Company Value Fund; (d) Janus CapitalCorporation for the ASMT Janus Capital Growth Portfolio; (e) INVESCO TrustCompany for the ASMT INVESCO Equity Income Portfolio; (f) American CenturyInvestment Management, Inc. (formerly known as, "Investors ResearchCorporation") for the ASAF American Century Strategic Balanced Fund; (g)Federated Investment Counseling for the ASAF Federated High Yield Bond Fund; (h)Pacific Investment Management Company for the ASMT PIMCO Total Return BondPortfolio; (i) J.P. Morgan Investment Management, Inc. for the ASMT JPM MoneyMarket Portfolio.

The Sub-Advisory Agreements provide that the Sub-advisors willformulate and implement a continuous investment program for each Non-Feeder Fundor Portfolio in accordance with the Fund or Portfolio's investment objective,policies and limitations and any investment guidelines established by theInvestment Manager. Each Sub-advisor will, subject to the supervision andcontrol of the Investment Manager, determine in its discretion which issuers andsecurities will be purchased, held, sold or exchanged by the Fund or Portfolio,and will place orders with and give instructions to brokers and dealers to causethe execution of such transactions. The Sub-advisors are required to furnish theInvestment Manager with periodic reports concerning the transactions andperformance of the Fund or Portfolio. Each Sub-advisor is required to furnish atits own expense all investment facilities necessary to perform its obligationsunder the Sub-Advisory Agreement. Nothing in the Sub-advisory Agreementsprevents the Investment Manager from engaging other sub-advisors to provideinvestment advice and other services to a Fund or Portfolio, or from providingsuch services itself.

Each Sub-Advisory Agreement will continue in effect from year to year,provided it is approved at least annually by a vote of the majority of theDirectors or Trustees, where applicable, who are not parties to the agreement orinterested persons of any such party, cast in person at a meeting specificallycalled for the purpose of voting on such approval. Each Sub-Advisory Agreement



may be terminated without penalty at any time by the Investment Manager or theSub-advisor upon 60 days' written notice, and will automatically terminate inthe event of its "assignment" (as that term is defined in the 1940 Act) or upontermination of the Management Agreement with respect to that particular Fund orPortfolio (provided that the Sub-advisor has received notice of suchtermination).

THE ADMINISTRATOR:

PFPC Inc. (the "Administrator"), 103 Bellevue Parkway, Wilmington,Delaware 19809, a Delaware corporation which is an indirect wholly-ownedsubsidiary of PNC Financial Corp., serves as the administrator for both theCompany and the Trust. Pursuant to administration agreements between theAdministrator and the Company and the Trust, respectively (the "AdministrationAgreements"), the Administrator has agreed to provide certain fund accountingand administrative services to the Company and the Trust, including, among otherservices, accounting relating to the Company and the Trust and the investmenttransactions of the foregoing; computing daily NAVs; monitoring the investmentsand income of the Company and the Trust for compliance with applicable tax laws;preparing for execution and filing federal and state tax returns, and annual andsemi-annual shareholder reports; preparing monthly financial statementsincluding a schedule of investments; assisting in the preparation ofregistration statements and other filings related to the registration of shares;coordinating contractual relationships and communications between the InvestmentManager and the Company's and the Trust's custodians; preparing and maintainingthe Company's and the Trust's books of account, records of securitiestransactions, and all other books and records in accordance with applicablelaws, rules and regulations (including, but not limited to, those recordsrequired to be kept pursuant to the 1940 Act); and performing such other dutiesrelated to the administration of the Company and the Trust as may be agreed uponin writing by the parties to the respective Administration Agreements.

Under the terms of the Administration Agreements, the Administratorshall be obligated to exercise care and diligence in the performance of itsduties, to act in good faith and to use its best efforts, within reasonablelimits, in performing services to be provided for under the agreements. TheAdministrator shall be liable for any damages arising out of its failure toperform its duties under the Administration Agreements to the extent suchdamages arise out of its willful misfeasance, bad faith, gross negligence orreckless disregard of such duties. Any person, even though also an officer,director, partner, employee or agent of the Administrator, who may be or becomean officer, director, trustee, employee or agent of the Company or the Trust,shall be deemed when rendering services to the Company or the Trust or acting onany business of the Company or the Trust (other than services or business inconnection with the Administrator's duties under the Administration Agreements)to be rendering such services to or acting solely for the Company or the Trustand not as an officer, director, partner, employee or agent or one under thecontrol or direction of the Administrator even though paid by them. TheAdministration Agreements shall continue until terminated by either party on 60days' prior written notice to the other party.

Compensation for the services and facilities provided by theAdministrator under the Administration Agreements includes payment of theAdministrator's "out-of-pocket" expenses. Such reimbursable "out-of-pocket"expenses include, but are not limited to, postage and mailing, telephone, telex,Federal Express, outside independent pricing service charges and recordretention/storage. Because the Company commenced operations in July, 1997 andthe Trust commenced operations in June, 1997, neither the Company nor the Trusthave paid any fees to the Administrator as of June 1, 1997.

FUND EXPENSES

Each Non-Feeder Fund and Portfolio pays its own expenses including,without limitation: (i) expenses of maintaining the Fund or Portfolio andcontinuing its existence; (ii) registration of the Fund or Portfolio under the1940 Act; (iii) auditing, accounting and legal expenses; (iv) taxes andinterest; (v) governmental fees; (vi) expenses of issue, sale, repurchase andredemption of Fund shares; (vii) expenses of registering and qualifying the Fundor Portfolio and its shares under federal and state securities laws and ofpreparing and printing prospectuses for such purposes and for distributing thesame to shareholders and investors; (viii) fees and expenses of registering andmaintaining registrations of the Fund or Portfolio and of the Fund's principalunderwriter as a broker-dealer or agent under state securities laws; (ix)expenses of reports and notices to shareholders and of meetings of shareholdersand proxy solicitations therefor; (x) expenses of reports to governmentalofficers and commissions; (xi) insurance expenses; (xii) association membershipdues; (xiii) fees, expenses and disbursements of custodians for all services tothe Fund or Portfolio; (xiv) fees, expenses and disbursements of transferagents, dividend disbursing agents, shareholder servicing agents and registrars



for all services to the Fund or Portfolio; (xv) expenses for servicingshareholder accounts; (xvi) any direct charges to shareholders approved by theDirectors of the Company or the Trustees of the Trust, where applicable; (xvii)compensation and expenses of Directors of the Company or the Trustees of theTrust, where applicable, who are not "interested persons" of the Fund orPortfolio, respectively; and (xviii) such nonrecurring items as may arise,including expenses incurred in connection with litigation, proceedings andclaims and the obligation of the Company and the Trust to indemnify itsdirectors, trustees and officers with respect thereto. Expenses incurred by theCompany or the Trust not directly attributable to any specific Non-Feeder Fundor Portfolio are allocated on the basis of the net assets of the respectiveNon-Feeder Funds and Portfolios.

The Investment Manager has voluntarily agreed until October 31, 1998 toreimburse each Fund for its respective operating expenses (and, in the case ofthe Feeder Funds, the Feeder Fund's pro rata share of operating expenses of theFund's corresponding Portfolio), exclusive of taxes, interest, brokeragecommissions, distribution fees and extraordinary expenses, but inclusive of themanagement fee, which in the aggregate exceed specified percentages of theFund's average net assets as follows:

ASAF Founders International Small Capitalization Fund: 1.60%

ASAF T. Rowe Price International Equity Fund: 1.60%

ASAF Founders Small Capitalization Fund: 1.20%

ASAF T. Rowe Price Small Company Value Fund: 1.25%

ASAF Janus Capital Growth Fund: 1.20%

ASAF INVESCO Equity Income Fund: 1.05%

ASAF American Century Strategic Balanced Fund: 1.10%

ASAF Federated High Yield Bond Fund: 1.00%

ASAF Total Return Bond Fund: 0.90%

ASAF JPM Money Market Fund: 1.00%

The Investment Manager may terminate the above voluntary agreements atany time after October 31, 1998. Voluntary payments of Fund expenses by theInvestment Manager may be made subject to reimbursement by the Fund, at theInvestment Manager's discretion, within the two year period following suchpayment to the extent permissible under applicable law and provided that theFund is able to effect such reimbursement and remain in compliance withapplicable expense limitations.

DISTRIBUTION ARRANGEMENTS

THE DISTRIBUTOR:

American Skandia Marketing, Incorporated ("ASM" or the "Distributor"),located at One Corporate Drive, Shelton, Connecticut 06484, serves as theprincipal underwriter and distributor for each Fund pursuant to an underwritingagreement initially approved by the Directors of the Company (the "UnderwritingAgreement"). The Distributor is a registered broker-dealer and member of theNational Association of Securities Dealers, Inc. ("NASD"). The Distributor is an"affiliated person" (within the meaning of the 1940 Act) of the Company, theTrust and the Investment Manager, being a wholly-owned subsidiary of AmericanSkandia Investment Holding Corporation.

Shares of each Fund will be continuously offered and will be sold byselected broker-dealers who have executed selling agreements with theDistributor. The Distributor bears all the expenses of providing servicespursuant to the Underwriting Agreement. Each Fund bears the expenses ofregistering its shares with the Commission and with applicable state regulatoryauthorities. The Underwriting Agreement continues in effect for two years frominitial approval and for successive one-year periods thereafter, provided thateach such continuance is specifically approved (i) by the vote of a majority ofthe Directors of the Company, including a majority of the Directors who are notparties to the Underwriting Agreement or "interested persons" of any such party(as defined in the 1940 Act); or (ii) by the vote of a "majority of theoutstanding voting securities" of a Fund (as defined in the 1940 Act). TheDistributor is not obligated to sell any specific amount of shares of any Fund.

THE DISTRIBUTION PLANS:

The Company has adopted separate Distribution and Service plans(commonly referred to as "12b-1 Plans") for Class A, B, C and X shares of eachFund (the "Class A Plan," "Class B Plan," "Class C Plan" and "Class X Plan,"



individually, and collectively, the "Plans") pursuant to appropriate resolutionsof the Directors of the Company and in accordance with the requirements of Rule12b-1 under the 1940 Act and the requirements of the applicable rules of theNASD regarding asset based sales charges. The Plans permit the payment ofcertain fees to the Distributor for its services and costs in distributing Fundshares and providing for services to shareholder accounts. The fees payable tothe Distributor for its services and costs in distributing Class B and Class Xshares of each Fund are remitted to FEP Capital, L.P. to compensate FEP Capital,L.P. for financing the sale of Class B and Class X shares pursuant to certainfinancing agreements between the Distributor and FEP Capital, L.P. Under theterms of the Plans, the Distributor provides to each Fund, for review by theDirectors of the Company, a quarterly written report of the amounts expendedunder the respective Plans and the purpose for which such expenditures weremade. The Directors of the Company will review such levels of compensation thePlans provide in considering the continued appropriateness of the Plans.

The Plans were adopted by a majority vote of the Directors of theCompany, including at least a majority of Directors who are not "interestedpersons" of the Funds (as defined in the 1940 Act) and who do not have anydirect or indirect financial interest in the operation of the Plans, cast inperson at a meeting called for the purpose of voting on the Plans. In approvingthe Plans, the Directors of the Company identified and considered a number ofpotential benefits which the Plans may provide, including, but not limited to,the adequate provision for the costs of implementing effective distributionactivities in the competitive environment and the availability to shareholdersof services provided by representatives who have knowledge of the shareholders'particular circumstances and goals. With respect to the Class X Plan, theDirectors considered the possible increase in investor interest and consequentincrease in portfolio assets resulting from the use of the fees payable undersuch plan, in part, to facilitate the Distributor's purchase of additionalshares for Class X investors as a bonus. The Directors of the Company believethat there is a reasonable likelihood that the Plans will benefit each Fund andits current and future shareholders in the manner contemplated.

The Plans, pursuant to their terms, remain in effect from year to yearprovided such continuance is approved annually by vote of the Directors in themanner described above. The Plans may not be amended to increase materially theamount to be spent for distribution without approval of the shareholders of eachclass of a Fund affected thereby entitled to vote thereon under the 1940 Act,and material amendments to the Plans must also be approved by the Directors ofthe Company in the manner described above. A Plan may be terminated at any time,without payment of a penalty, by vote of the majority of the Directors of theCompany who are not interested persons of the Fund and have no direct orindirect financial interest in the operations of the Plan, or by a vote of a"majority of the outstanding voting securities" (as defined in the 1940 Act) ofeach class of a Fund affected thereby entitled to vote thereon under the 1940Act. A Plan will automatically terminate in the event of its "assignment" (asdefined in the 1940 Act).

Because the Company commenced operations in July, 1997, no compensationhas been paid to the Distributor in connection with the Plans as of the date ofthis SAI. For a discussion of the details of each Plan, see the Company'sProspectus under "How to Buy Shares."


The net asset value ("NAV") per share of each Fund is determined in themanner described in the Company's Prospectus. Each Fund will determine the NAVof its shares on each day that the New York Stock Exchange (the "NYSE") is openfor business. The Directors of the Company and the Trustees of the Trust haveeach established procedures for valuing the assets of the Funds and Portfolios,respectively. In general, these valuations are based on market value withspecial provisions for: securities not listed on an exchange or securitiesmarket; securities for which recent market quotations are not readily available;short-term obligations; and open short positions and options written onsecurities.

Securities held by each Non-Feeder Fund and Portfolio, other than theASMT JPM Money Market Portfolio (the "Money Market Portfolio"), will be valuedas follows: portfolio securities which are traded on stock exchanges are valuedat the last sale price on the principal exchange as of the close of business onthe day the securities are being valued, or, lacking any sales on that day, atthe mean between the bid and asked prices. Securities traded in theover-the-counter market that are included in the National Market System arevalued at the mean between the bid and asked prices which may be based onvaluations furnished by a pricing service or from independent securitiesdealers. Otherwise, over-the-counter securities are valued at the mean betweenthe bid and asked prices or yield equivalent as obtained from one or moredealers that make markets in the securities. Portfolio securities which aretraded both in the over-the-counter market and on an exchange are valuedaccording to the broadest and most representative market, and it is expectedthat for debt securities this ordinarily will be the over-the-counter market.



Securities and assets for which market quotations are not readily available arevalued at fair value as determined in good faith by or under procedures orguidelines established by the Directors of the Company and the Trustees of theTrust, where applicable.

The NAV per share of the Money Market Portfolio is determined by usingthe amortized cost method of valuing portfolio instruments. Under the amortizedcost method of valuation, an instrument is valued at cost and the interestpayable at maturity upon the instrument is accrued as income, on a daily basis,over the remaining life of the instrument. Neither the amount of daily incomenor the NAV is affected by unrealized appreciation or depreciation of thePortfolio's investments assuming the instrument's obligation is paid in full onmaturity. In periods of declining interest rates, the indicated daily yield onshares of the Portfolio computed using amortized cost may tend to be higher thana similar computation made using a method of valuation based upon market pricesand estimates. In periods of rising interest rates, the indicated daily yield onshares of the Portfolio computed using amortized cost may tend to be lower thana similar computation made using a method of valuation based upon market pricesand estimates. In addition, short-term obligations with remaining maturities ofless than 60 days that are held by any Fund or Portfolio are valued at amortizedcost.

The amortized method of valuation is intended to permit the MoneyMarket Portfolio to maintain a constant NAV per share of $1.00. No assurancescan be given that this can be attained. The Directors of the Company and theTrustees of the Trust, where applicable, periodically review the extent of anydeviation from the $1.00 per share value that would occur if a method ofvaluation based on market prices and estimates were used. In the event such adeviation would exceed one-half of one percent, the Directors of the Company andthe Trustees of the Trust, where applicable, will promptly consider any actionthat reasonably should be initiated to eliminate or reduce material dilution orother unfair results to shareholders. Such action may include selling portfoliosecurities prior to maturity, not declaring earned income dividends, valuingportfolio securities on the basis of current market prices, if available, or, ifnot available, at fair market value as determined in good faith by the Directorsof the Company or the Trustees of the Trust, where applicable, and (consideredhighly unlikely by management of the Company and the Trust) redemption of sharesin kind (i.e., with portfolio securities).

A Fund's maximum offering price per Class A share is determined byadding the maximum sales charge to the NAV per share. Class B, C and X sharesare offered at NAV without the imposition of an initial sales charge.

ADDITIONAL INFORMATION ON THEPURCHASE AND REDEMPTION OF SHARES

RIGHTS OF ACCUMULATION:

Each Fund offers to all qualifying investors certain "rights ofaccumulation" under which investors are permitted to purchase Class A shares ofany Fund at the price applicable to the total of (a) the then current purchaseamount plus (b) an amount equal to the then current NAV of the purchaser'sholdings of all shares of any Fund of the Company. Acceptance of the purchaseorder is subject to confirmation of qualification. A qualifying investor'srights of accumulation may be amended or terminated at any time as to subsequentpurchases.

LETTER OF INTENT:

Any person may qualify for a reduced sales charge on purchases of ClassA shares made within a thirteen-month period pursuant to a Letter of Intent("LOI"). In computing the total amount purchased for purposes of determining theapplicable sales commission, the offering price of shares currently held in theFunds which were purchased within 90 days from the date of acceptance of the LOImay be used as a credit toward Fund shares to be purchased under the LOI. ClassA, B, C and X shares acquired through the reinvestment of distributions do notconstitute purchases for purposes of the LOI. During the term of an LOI, BostonFinancial Data Services, Inc., the Company's transfer agent (the "TransferAgent"), will hold shares in escrow to secure payment of the higher sales chargeapplicable for shares actually purchased if the amount indicated on the LOI isnot purchased. Dividends and capital gains will be paid on all escrowed sharesand these shares will be released when the amount indicated on the LOI has beenpurchased. An LOI does not obligate the investor to buy or the Fund to sell theindicated amount of the LOI. If the specified amount of the LOI is notpurchased, the shareholder shall remit to the Transfer Agent an amount equal tothe difference between the sales charge paid and the sales charge that wouldhave been paid had the aggregate purchases been made at a single time. If theClass A shareholder does (not within twenty days after a written request by theTransfer Agent) pay such difference in sales charge, the Transfer Agent willredeem an appropriate number of escrowed shares in order to realize suchdifference. Additional information about the terms of the LOI are available fromyour registered representative.



SPECIAL REDEMPTIONS:

Although it would not normally do so, each Fund has the right to paythe redemption price of shares of the Fund in whole or in part in portfoliosecurities as prescribed by the Directors of the Company. When the shareholdersells portfolio securities received in this fashion, he would incur a brokeragecharge. Any such securities would be valued for the purposes of making suchpayment at the same value as used in determining NAV. The Funds have elected tobe governed by Rule 18f-1 under the 1940 Act, pursuant to which each Fund isobligated to redeem shares solely in cash from any one account during any 90-dayperiod up to the lesser of $250,000 or 1% of the NAV of the applicable Fund orPortfolio at the beginning of such period.

SUSPENSION OF REDEMPTIONS:

A Fund may not suspend a shareholder's right of redemption or postponepayment for a redemption for more than seven days, unless the New York StockExchange ("NYSE") is closed for other than customary weekends or holidays, ortrading on the NYSE is restricted, or for any period during which an emergencyexists as a result of which (1) disposal by a Fund or Portfolio of securitiesowned by it is not reasonably practicable, or (2) it is not reasonablypracticable for a Fund to fairly determine the value of its assets, or for suchother periods as the Commission may permit for the protection of investors.

For further information regarding the purchase and redemption of Fundshares, see "How to Buy Shares" and "How to Redeem Shares," respectively, in theCompany's Prospectus.


BROKERAGE ALLOCATION:

Subject to the supervision of the Directors of the Company and theTrustees of the Trust, where applicable, decisions to buy and sell securitiesfor the Company and the Trust are made for each Non-Feeder Fund and Portfolio byits respective Sub-advisor. Each Sub-advisor is authorized to allocate theorders placed by it on behalf of the applicable Fund or Portfolio to brokers whoalso provide research or statistical material or other services to theSub-advisor or the Fund or Portfolio for the use of the applicable Fund orPortfolio and other accounts as to which the Sub-advisor exercises investmentdiscretion. Such allocation shall be in such amounts and proportions as theSub-advisor shall determine. The Sub-advisor will report on allocations ofbrokerage either to the Investment Manager, which will report on suchallocations to the Directors of the Company or the Trustees of the Trust, whereapplicable, or, if requested, directly to the Directors or Trustees. Thesereports will indicate the brokers to whom such allocations have been made andthe basis therefor. The Sub-advisor may consider sale of shares of the Funds, ormay consider or follow recommendations of the Investment Manager that take suchsales into account, as factors in the selection of brokers to effect portfoliotransactions for a Fund or Portfolio, subject to the requirements of best netprice available and most favorable execution. In this regard, the InvestmentManager may direct certain of the Sub-advisors to try to effect a portion oftheir Fund or Portfolio's investment transactions through broker-dealers thatsell shares of the Fund (or corresponding Fund, in the case of the Portfolios),to the extent consistent with best net price available and most favorableexecution.

Subject to the rules promulgated by the Commission, as well as otherregulatory requirements, a Sub-advisor also may allocate orders to brokers ordealers affiliated with the Sub-advisor or the Investment Manager. Suchallocation shall be in amounts and proportions as the Sub-advisor shalldetermine. The Sub-advisor will report on these allocations of brokerage eitherto the Investment Manager, which will report on such allocations to theDirectors of the Company or the Trustees of the Trust, where applicable, or, ifrequested, directly to the Directors or Trustees.

In selecting a broker to effect each particular transaction, eachSub-advisor will take the following into consideration: the best net priceavailable; the reliability, integrity and financial condition of the broker; thesize and difficulty in executing the order; and the value of the expectedcontribution of the broker to the investment performance of the Fund on acontinuing basis. Subject to such policies and procedures as the Directors ofthe Company and the Trustees of the Trust may determine, a Sub-advisor shall notbe deemed to have acted unlawfully or to have breached any duty solely by reasonof its having caused a Fund or Portfolio to pay a broker that provides researchservices to the Sub-advisor an amount of commission for effecting an investmenttransaction in excess of the amount of commission another broker would havecharged for effecting that transaction, if the Sub-advisor determines in goodfaith that such amount of commission was reasonable in relation to the value ofthe research service provided by such broker viewed in terms of either that



particular transaction or the Sub-advisor's ongoing responsibilities withrespect to the Fund or Portfolio and other accounts as to which the Sub-advisorexercises investment discretion. Accordingly, the amount of the brokeragecommission in any transaction may be greater than that available from otherbrokers if the difference is reasonably justified by other aspects of theservices offered.

Because the Company commenced operations in July, 1997 and the Trustcommenced operations in June, 1997, no brokerage commissions have been paid onbehalf of the Non-Feeder Funds or the Portfolios as of June 1, 1997.

ALLOCATION OF INVESTMENTS:

The Sub-advisors of the Non-Feeder Funds and Portfolios have otheradvisory clients, some of which have similar investment objectives to one ormore of the Funds or Portfolios for which advisory services are being provided.In addition, a Sub-advisor may be engaged to provide advisory services for morethan one Fund or Portfolio. There will be times when a Sub-advisor may recommendpurchases and/or sales of the same securities for a Fund or Portfolio and theSub-advisor's other clients. In such circumstances, it will be the policy ofeach Sub-advisor to allocate purchases and sales among a Fund or Portfolio andits other clients, including other Funds or Portfolios for which the Sub-advisorprovides advisory services, in a manner which the Sub-advisor deems equitable,taking into consideration such factors as size of account, concentration ofholdings, investment objectives, tax status, cash availability, purchase costs,holding period and other pertinent factors relative to each account.

PORTFOLIO TURNOVER:

Each Non-Feeder Fund and Portfolio may sell its portfolio securities,regardless of the length of time that they have been held, if the Sub-advisorand/or the Investment Manager determines that such a disposition is in theFund's or Portfolio's best interest. Portfolio turnover rates may increase as aresult of the need for a Fund or Portfolio to effect significant amounts ofpurchases or redemptions of portfolio securities due to economic, market, orother factors that are not within the Sub-advisor's or Investment Manager'scontrol. A high rate of portfolio turnover (generally in excess of 100%)involves correspondingly higher brokerage commission expenses and othertransaction costs, which must be ultimately borne by a Fund's shareholders.Trading in fixed income securities does not generally involve the payment ofbrokerage commissions, but does involve indirect transaction costs. Highportfolio turnover rates may also generate larger taxable income and taxablecapital gains than would result from lower portfolio turnover rates and maycreate higher tax liability for a Fund's shareholders. Although it is notpossible to predict future portfolio turnover rates accurately, and such ratesmay vary from year to year, it is anticipated that portfolio turnover rates forthe ASMT T. Rowe Price International Equity Portfolio, ASAF T. Rowe Price SmallCompany Value Fund, ASMT INVESCO Equity Income Portfolio and the ASAF FederatedHigh Yield Bond Fund will not exceed 100% under normal market conditions. Theportfolio turnover rates for the ASAF Founders International SmallCapitalization Fund, ASAF Founders Small Capitalization Fund, ASMT Janus CapitalGrowth Portfolio, ASAF American Century Strategic Balanced Fund and ASMT PIMCOTotal Return Bond Portfolio are not anticipated to exceed 150%, 150%, 200%, 150%and 350%, respectively, under normal market conditions. A 100% portfolioturnover rate would occur if all of the securities in a portfolio of investmentswere replaced during a given period. For additional information regardingportfolio turnover, see the Company's Prospectus under "Portfolio Transactions."

ADDITIONAL TAX CONSIDERATIONS

Federal Income Tax Consequences. Each Fund is treated as a separateentity for federal income tax purposes. Each Fund has qualified and elected orintends to qualify and elect to be treated as a "regulated investment company"under Subchapter M of the Code, and intends to continue to so qualify in thefuture. As a regulated investment company, a Fund must, among other things, (a)derive at least 90% of its gross income from dividends, interest, payments withrespect to loans of stock and securities, gains from the sale or otherdisposition of stock, securities or foreign currency and other income (includingbut not limited to gains from options, futures, and forward contracts) derivedwith respect to its business of investing in such stock, securities or foreigncurrency; (b) derive less than 30% of its gross income from the sale or otherdisposition of stock, securities, options, futures or forward contracts (otherthan options, futures or forward contracts on foreign currencies) held less thanthree months, or foreign currencies (or options, futures or forward contracts onforeign currencies), but only if such currencies (or options, futures or forwardcontracts on foreign currencies) are not directly related to a Fund's principalbusiness of investing in stocks or securities (or options and futures withrespect to stocks or securities); and (c) diversify its holdings so that, at theend of each quarter of its taxable year, (i) at least 50% of the value of theFund's total assets is represented by cash, cash items, U.S. Governmentsecurities, securities of other regulated investment companies, and othersecurities limited, in respect of any one issuer, to an amount not greater than



5% of the Fund's total assets, and 10% of the outstanding voting securities ofsuch issuer, and (ii) not more than 25% of the value of its total assets isinvested in the securities of any one issuer (other than U.S. Governmentsecurities or securities of other regulated investment companies). As aregulated investment company, a Fund (as opposed to its shareholders) will notbe subject to federal income taxes on the net investment income and capital gainthat it distributes to its shareholders, provided that at least 90% of its netinvestment income and realized net short-term capital gain in excess of netlong-term capital loss for the taxable year is distributed in accordance withthe Code's timing requirements (the "Distribution Requirement").

Each Fund will be subject to a 4% non-deductible federal excise tax ona portion of its undistributed taxable income and capital gains if it fails tomeet certain distribution requirements by the end of the calendar year. EachFund intends to avoid liability for such tax by satisfying such distributionrequirements.

Each of the Feeder Funds will invest all of its investable assets in acorresponding Portfolio of the Trust. Each such Fund will be deemed to own aproportionate share of its corresponding Portfolio's assets and income for thepurpose of determining whether the Fund qualifies as a regulated investmentcompany. Accordingly, each Portfolio intends to conduct its operations so thatits corresponding Fund will be able to satisfy applicable tax requirements.

If a Fund or Portfolio acquires stock in certain non-U.S. corporations("passive foreign investment companies" or "PFICs") that receive at least 75% oftheir annual gross income from passive sources (such as interest, dividends,rents, royalties or capital gains) or at least 50% of whose average assetsproduce or are held for the production of such passive income, that Fund (or, inthe case of a Portfolio, its corresponding Fund indirectly through its interestin the Portfolio) could be subject to federal income tax and additional interestcharges on "excess distributions" received from such companies or gain from thesale of stock in such companies, even if the Fund distributes its share of thePFIC income as a taxable dividend to its shareholders. A certain election(treating the PFIC as a "qualified electing fund") filed with the Fund's federalincome tax return may, if available, ameliorate these adverse tax consequences,but any such election would require the applicable Fund to recognize ordinarytaxable income and net capital gain of the PFIC without the correspondingreceipt of cash which may need to be distributed by the Fund to satisfy theDistribution Requirement.

Pursuant to proposed regulations, open-end regulated investmentcompanies such as the Funds would be entitled to avoid the tax consequencesdescribed in the previous paragraph by electing to mark-to-market their stock incertain PFICs. Marking to market in this context means recognizing as gain foreach taxable year the excess, as of the end of that year, of the fair marketvalue of each PFIC's stock over the owner's adjusted basis in that stock(including mark to market gains of a prior year for which an election was ineffect).

Gains and losses realized by a Fund (directly, or through its interestin a Portfolio) in connection with certain transactions involving foreigncurrency-denominated debt securities, certain foreign currency futures andoptions, foreign currency forward contracts, foreign currencies themselves, orpayables or receivables denominated in a foreign currency are generally treatedas ordinary income and loss.

Some Funds, or, in certain cases, the Portfolio in which a Fund mayinvest its assets, may be subject to withholding and other taxes imposed byforeign countries with respect to their investments in foreign securities. Taxconventions between certain countries and the U.S. may reduce or eliminate suchtaxes. A Fund, more than 50% of the value of whose total assets at the close ofa taxable year (held directly or indirectly through a corresponding Portfolio)consists of stock or securities in foreign corporations, may elect to"pass-through" these foreign taxes to its shareholders, in which case eachshareholder will be required to include its pro rata portion thereof in itsgross income but, if it itemizes deductions, will be able to deduct or (subjectto various limitations) will be able to claim a credit for its portion of suchtaxes, in computing its federal income tax liability.

Each Fund or Portfolio that invests in zero coupon securities or inother securities with original issue discount (or securities with marketdiscount, if the Fund or Portfolio elects to include market discount in incomecurrently) must accrue such discount income currently even if no correspondingpayment is received. However, because income subject to a Fund's DistributionRequirement includes such accrued discount, to satisfy that requirement, a Fundmay have to dispose of its (or, as the case may be, its correspondingPortfolio's) securities under disadvantageous circumstances, or borrow, togenerate the needed cash.

Forward currency contracts, options and futures contracts entered intoby a Fund or Portfolio may create "straddles" for federal income tax purposeswith other such contracts or with securities positions, and this may affect the



character and timing of gains or losses realized by the Fund (or, in the case ofa Portfolio, by its corresponding Fund) on such contracts, options orsecurities. Certain straddles treated as short sales for tax purposes may alsoresult in the loss of the holding period of securities included in the straddlesfor purposes of the 30% of gross income test described above, and therefore, aFund's or Portfolio's ability to enter into forward currency contracts, optionsand futures contracts may be limited.

Certain options, futures and foreign currency contracts held by a Fundor Portfolio at the end of each taxable year will be required to be"marked-to-market" for federal income tax purposes -- i.e., treated as havingbeen sold at market value. For options and futures contracts, 60% of any gain orloss recognized on these deemed sales and on actual dispositions will be treatedas long-term capital gain or loss, and the remainder will be treated asshort-term capital gain or loss regardless of how long the Fund or Portfolio hasheld such options or futures. However, gain or loss recognized on certainforeign currency contracts will be treated as ordinary income or loss.

If a Fund or Portfolio satisfies certain requirements, any increase invalue of a position that is part of a "designated hedge" will be offset by anydecrease in value (whether realized or not) of the offsetting hedging positionduring the period of the hedge for purposes of determining whether the Fund (or,in the case of a Portfolio, its corresponding Fund) satisfies the 30% grossincome test above. Thus, only the net gain (if any) from the designated hedgewill be included in gross income for purposes of that limitation. Each Fund orPortfolio will consider whether it should seek to satisfy those requirements toenable the Fund (or, in the case of a Portfolio, its corresponding Fund) toqualify for this treatment for hedging transactions.

To maintain a constant $1.00 per share NAV, the Directors of the ASAFJPM Money Market Fund (the "Money Market Fund") may direct that the number ofoutstanding shares be reduced pro rata. If this adjustment is made, it willreflect the lower market value of portfolio securities and not realized losses.The adjustment may result in a shareholder having more dividend income than netincome in his account for a period. When the number of outstanding shares of theMoney Market Fund is reduced, the shareholder's basis in the shares of the Fundmay be adjusted to reflect the difference between taxable income and netdividends actually distributed. This difference may be realized as a capitalloss when the shares are liquidated.

Distributions from a Fund's current or accumulated earnings and profits("E&P"), as computed for federal income tax purposes, will be taxable asdescribed in the Company's Prospectus whether taken in shares or in cash. Thesedistributions will be treated as dividends, but will qualify for the 70%dividends-received deduction for the Fund's corporate shareholders only to theextent designated in a notice to the Fund's shareholders as being attributableto dividends received by the Fund. Distributions, if any, in excess of E&P willconstitute a return of capital, which will first reduce an investor's tax basisin a Fund's shares and thereafter (after such basis is reduced to zero) willgenerally give rise to capital gains. Shareholders electing to receivedistributions in the form of additional shares will have a cost basis forfederal income tax purposes in each share so received equal to the amount ofcash they would have received had they elected to receive the distributions incash, divided by the number of shares received.

At the time of an investor's purchase of shares of a Fund (other thanthe Money Market Fund), a portion of the purchase price is often attributable torealized or unrealized appreciation in the Fund's portfolio or undistributedtaxable income of the Fund. Consequently, subsequent distributions from suchappreciation or income may be taxable to such investor even if the NAV of theinvestor's shares is, as a result of the distributions, reduced below theinvestor's cost for such shares, and the distributions in reality represent areturn of a portion of the purchase price.

Upon a redemption of shares of a Fund, other than the Money Market Fund(including an exchange for other Fund shares), a shareholder may realize ataxable gain or loss. Such gain or loss will be capital if the shares arecapital assets in the shareholder's hands and will be long-term or short-termcapital gain or loss, depending upon the shareholder's holding period for theshares. A sales charge paid in purchasing shares of a Fund ("load charge")cannot be taken into account for purposes of determining gain or loss on theredemption or exchange of such shares within 90 days after their purchase to theextent shares of the same or another Fund are subsequently acquired withoutpayment of a load charge pursuant to a reinvestment or exchange privilege. Suchdisregarded load charge will result in an increase in the shareholder's taxbasis in the Fund shares subsequently acquired. Also, any loss realized on aredemption or exchange of shares of a Fund will be disallowed to the extent theshares disposed of are replaced with shares of the same Fund within a period of61 days beginning 30 days before and ending 30 days after such disposition. Insuch a case, the basis of the shares acquired will be adjusted to reflect thedisallowed loss. If Fund shares are redeemed or exchanged at a loss after beingheld for six months or less, the loss will treated as long-term, instead ofshort-term, capital loss to the extent of any capital gains distributions



received on those shares.

Each shareholder will be required to furnish its social security ortaxpayer identification number and certify that such number is correct and thatthe shareholder is not subject to back-up withholding for failure to reportincome to the Internal Revenue Service ("IRS"). Failure to comply withapplicable IRS regulations, including the certification procedures describedabove, may result in the Fund being required to collect back-up withholding at a31% rate on taxable distributions and redemptions to the shareholder.

Different tax treatment, including penalties on certain excesscontributions and deferrals, certain pre-retirement and post-retirementdistributions and certain prohibited transactions, is accorded to shareholderaccounts maintained as qualified retirement plans. Shareholders should consulttheir tax advisers for more information.

The foregoing discussion relates solely to federal income tax law asapplicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domesticcorporations, partnerships, trusts or estates) generally. The discussion doesnot address special tax rules applicable to certain classes of investors, suchas tax-exempt entities, insurance companies, and financial institutions.

A foreign shareholder (i.e., a nonresident alien individual, foreigntrust or estate, foreign corporation or foreign partnership) not engaged in aU.S. trade or business with which its investment in a Fund is effectivelyconnected will be subject to federal income tax treatment that is different fromthat described above. These investors may be subject to U.S. withholding tax atthe rate of 30% (or a lower rate under an applicable tax treaty) on amountstreated as ordinary dividends from a Fund and, unless an effective IRS Form W-8or authorized substitute is on file, to backup withholding at the rate of 31% oncertain other payments from the Fund. Distributions treated as long term capitalgains to foreign shareholders will not be subject to federal income tax unlessthe distributions are effectively connected with the shareholder's U.S. trade orbusiness or, in the case of a non-resident alien individual, the shareholder ispresent in the U.S. for more than 182 days during the taxable year and certainother conditions are met. Non-U.S. investors should consult their tax advisersregarding such treatment and the application of foreign taxes to an investmentin any Fund.

State and Local Tax Consequences. Each Fund may be subject to state orlocal taxes in jurisdictions in which such Fund may be deemed to be doingbusiness. In addition, in those states or localities which have income tax laws,the treatment of such Fund and its shareholders under such laws may differ fromtheir treatment under federal income tax laws, and investment in such Fund mayhave different tax consequences for shareholders than would direct investment insuch Fund's (or, in the case of a Feeder Fund, its corresponding Portfolio's)portfolio securities. Shareholders should consult their own tax advisers withrespect to any state or local taxes.

CAPITAL STOCK OF THE COMPANY &PRINCIPAL HOLDERS OF SECURITIES

The Company is an open-end management investment company organizedunder the laws of Maryland on March 5, 1997. The Company currently has tenseparate series of shares of beneficial interest, each of which is divided intoClass A, B, C and X shares. The Directors of the Company are authorized toestablish, from time to time and without shareholder approval, additional seriesor classes of shares.

The shares of the Funds are entitled to vote separately to approveinvestment advisory agreements or changes in investment restrictions, butshareholders of all series vote together in the election and selection ofdirectors. Shares of a Fund vote together as a class on matters that affect theFund in substantially the same manner. Matters pertaining only to one or moreFunds will be voted upon only by those Funds. As to matters affecting a singleclass, shares of such class will vote separately. Shares of the Funds do nothave cumulative voting rights. The Company and the Funds do not intend to holdannual meetings of shareholders unless required to do so by the 1940 Act or theMaryland statutes under which the Company is organized. Although Directors arenot elected annually by the shareholders, shareholders have under certaincircumstances the right to remove one or more Directors. If required byapplicable law, a meeting will be held to vote on the removal of a Director orDirectors of the Company if requested in writing by the holders of not less than10% of the Company's outstanding shares. Each Fund's shares when issued arefully paid, non-assessable and freely transferable, and have no preference,preemptive or similar rights.

As of the date of this SAI, American Skandia Investment Services,Incorporated, which contributed the initial capital of the Funds, owned 100% ofthe Funds' outstanding shares.



OTHER INFORMATION

REPORTS TO SHAREHOLDERS:

Shareholders of each Fund are provided unaudited semi-annual financialstatements, as well as year-end financial statements audited by the Company'sindependent public accountants. Each Fund's financial statements show theinvestments owned by the Fund or its corresponding Portfolio, where applicable,and the market values thereof. Additionally, each Fund's financial statementsprovide other information about the Fund and its operations, including in thecase of the Feeder Funds, the Fund's beneficial interest in its correspondingPortfolio.

DOMESTIC AND FOREIGN CUSTODIANS:

PNC Bank, located at Airport Business Center, International Court 2,200 Stevens Drive, Philadelphia, Pennsylvania 19113, has been selected ascustodian for all domestic cash and securities holdings of the Funds andPortfolios investing primarily in domestic securities. Morgan Stanley TrustCompany, located at One Pierrepont Plaza, Brooklyn, New York 11201, has beenselected as custodian for all cash and securities holdings of the ASAF FoundersInternational Small Capitalization Fund and the ASAF T. Rowe Price InternationalEquity Fund (and corresponding Portfolio), and co-custodian for all foreignsecurities holdings of the Funds and Portfolios which invest primarily indomestic securities.

TRANSFER AGENT:

Boston Financial Data Services, Inc. (the "Transfer Agent," as previouslydefined), located at Two Heritage Drive, Quincy, Massachusetts 02171, has beenselected as the transfer agent for the Company.

INDEPENDENT ACCOUNTANTS:

Coopers & Lybrand L.L.P., located at 2400 Eleven Penn Center,Philadelphia, Pennsylvania 19103, has been selected as the independent certifiedpublic accountants of the Company, providing audit services and assistance andconsultation with respect to the preparation of filings with the Commission.

REGISTRATION STATEMENT:

This SAI and the Company's Prospectus do not contain all theinformation included in the Company's Registration Statement filed with theCommission under the Securities Act of 1933 with respect to the securitiesoffered by the Prospectus. The Registration Statement, including the exhibitsfiled therewith, may be examined at the Commission's offices in Washington, D.C.The Commission maintains a Website (http: / / www.sec.gov) that contains thisSAI, material incorporated by reference, and other information regarding theFunds and Portfolios.

FINANCIAL STATEMENTS

An audited statement of assets and liabilities of each Fund as of thedate of initial capital contribution, together with the notes thereto and thereport of Coopers & Lybrand L.L.P., are attached to this SAI.

<TABLE><CAPTION>AMERICAN SKANDIA ADVISOR FUNDS, INC.STATEMENTS OF ASSETS AND LIABILITIESMay 28, 1997

<S> <C> <C> <C> <C> <C>ASAF Janus ASAF T. ASAF ASAF JPM ASAF Total

Capital Rowe INVESCO Money Market Return BondGrowth Price Equity

International IncomeEquity

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

ASSETS

Investment in ASMT Janus $10,000 - - - -Capital Growth, at value(cost $10,000)

Investment in ASMT T. Rowe - $10,000 - - -



Price InternationalEquity, at value (cost$10,000)

Investment in ASMT INVESCO - - $10,000 - -Equity Income, at value(cost $10,000)

Investment in ASMT JPM - - - $10,000 -Money Market, at value(cost $10,000)

Investment in ASMT PIMCO - - - - $10,000Total Return Bond, atvalue (cost $10,000)

Prepaid State Registration 39,447 39,447 39,447 39,447 39,447Expenses

Deferred organization 49,329 49,329 49,329 49,329 49,327expenses

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

Total assets 98,776 98,776 98,776 98,776 98,774-------------------------- ----------- ------------- ------------

LIABILITIESExpenses payable to the 39,447 39,447 39,447 39,447 39,447Distributor

Organization expenses 49,329 49,329 49,329 49,329 49,327payable to the InvestmentAdvisor

-------------------------- ----------- ------------- ------------Total liabilities 88,776 88,776 88,776 88,776 88,774

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

NET ASSETS $10,000 $10,000 $10,000 $10,000 $10,000========================== =========== ============= ============

SHARES OUTSTANDING(PAR VALUE .001) 1,000 1,000 1,000 10,000 1,000

========================== =========== ============= ============

NET ASSET VALUE ANDREDEMPTION PRICE PER SHARE $10.00 $10.00 $10.00 $1.00** $10.00

Offering Price Per Share (Class A Only):* 100/95.0% x $10.00 $10.53 $10.53 $10.53* 100/95.75% x $10.00 $10.44

** Also offering price per share.</TABLE>

<TABLE><CAPTION><S> <C> <C> <C> <C> <C>

ASAF ASAF ASAF ASAF ASAF T.Founders Founders Federated American Rowe Price

International Small High Yield Century SmallSmall Capitalization Bond Strategic Company

Capitalization Balanced Value------------------------------------------------------------------

ASSETS

Cash $10,000 $10,000 $10,000 $10,000 $10,000

Prepaid State Registration 39,446 39,446 39,446 39,446 39,446Expenses


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

Total assets 101,937 101,937 101,937 101,935 101,935-------------------------- ----------- ------------- ------------



LIABILITIESExpenses payable to the 39,446 39,446 39,446 39,446 39,446Distributor

Organization expenses 52,491 52,491 52,491 52,489 52,489payable to the InvestmentAdvisor

-------------------------- ----------- ------------- ------------Total liabilities 91,937 91,937 91,937 91,935 91,935

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

NET ASSETS $10,000 $10,000 $10,000 $10,000 $10,000========================== =========== ============= ============

SHARES OUTSTANDING(PAR VALUE .001) 1,000 1,000 1,000 1,000 1,000

========================== =========== ============= ============

NET ASSET VALUE ANDREDEMPTION PRICE PER SHARE $10.00 $10.00 $10.00 $10.00 $10.00

Offering Price Per Share (Class A Only):* 100/95.0% x $10.00 $10.53 $10.53 $10.53 $10.53* 100/95.75% x $10.00 $10.44

* On sales of $50,000 or more, the offering price is reduced.</TABLE>

See notes to the financial statements.


NOTES TO STATEMENTS OF ASSETS AND LIABILITIESMay 28, 1997

1. ORGANIZATION

American Skandia Advisor Funds, Inc. (the "Company"), a Maryland Corporation, isregistered under the Investment Company Act of 1940, as amended, as adiversified open-end management investment company currently offering tenseparate series: ASAF Janus Capital Growth, ASAF T. Rowe Price InternationalEquity, ASAF INVESCO Equity Income, ASAF JPM Money Market, ASAF Total ReturnBond, ASAF Founders International Small Capitalization, ASAF Founders SmallCapitalization, ASAF Federated High Yield, ASAF American Century StrategicBalanced, ASAF T. Rowe Price Small Company Value (each a "Fund"). The Companyhas not commenced operations except those relating to organizational matters andthe issuance of Class A shares of beneficial interest to American SkandiaInvestment Services, Inc. (ASISI), the Funds' investment advisor, and theinvestment of proceeds in ASMT Janus Capital Growth, ASMT T. Rowe PriceInternational Equity, ASMT INVESCO Equity Income, ASMT JPM Money Market, andASMT PIMCO Total Return Bond (each a "Portfolio" in American Skandia MasterTrust). The investment in each Portfolio is valued at the aggregate net assetvalue of each Portfolio multiplied by each Fund's proportionate share of itsrespective Portfolio.

2. SIGNIFICANT ACCOUNTING POLICIES

Organization expenses will be amortized on a straight line basis over a periodnot to exceed five years from the date that operations commence. In the eventthat ASISI redeems all or part of its initial investment in shares of a Fund,the proceeds will be reduced by the product of any unamortized organizationexpenses and the proportion of the number of shares redeemed to the initialshares invested.

Initial state registration costs have been deferred and will be charged toexpense over the period that a benefit is expected to be realized.

3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONSWITH AFFILIATES

The Company has entered into (1) a Management Agreement with ASISI, (2) aShareholder Servicing Agreement and a Distribution Agreement with AmericanSkandia Marketing, Inc. under which American Skandia Marketing, Inc. willdistribute shares of the Company's Funds and provide information andadministrative services for shareholders, and (3) an Administration andAccounting Services Agreement with PFPC Inc. under which PFPC Inc. providesadministration and accounting services to the Company pursuant to such Agreementand (4) a Transfer Agency Agreement with Boston Financial Data Services, Inc.



REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of American Skandia AdvisorFunds, Inc.:

We have audited the accompanying Statements of Assets and Liabilities of theAmerican Skandia Advisor Funds, Inc. (the "Fund") as of May 28, 1997. Thisfinancial statement is the responsibility of the Fund's management. Ourresponsibility is to express an opinion on this financial statement based on ouraudit.

We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statement is free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statement. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, inall material respects, the financial position of the American Skandia AdvisorFunds, Inc. as of May 28, 1997 in conformity with generally accepted accountingprinciples.

/s/ Coopers & Lybrand L.L.P.COOPERS & LYBRAND L.L.P.

2400 Eleven Penn CenterPhiladelphia, PennsylvaniaMay 28, 1997

<TABLE><CAPTION>

AMERICAN SKANDIA MASTER TRUSTSTATEMENTS OF ASSETS AND LIABILITIESMay 28, 1997

ASMT ASMT T. ASMT ASMT JPM ASMT PIMCO TotalJanus Rowe Price INVESCO Money Return BondCapital InternationalEquity Market

Growth Equity Income-----------------------------------------------------------------

ASSETS

<S> <C> <C> <C> <C> <C>Cash $20,000 $20,000 $20,000 $20,000 $20,000


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

Total assets 39,628 39,628 39,628 39,629 39,629----------------------- -------------------- ------------

LIABILITIES

Organization expenses 19,628 19,628 19,628 19,629 19,629payable to theInvestment Advisor

----------------------- -------------------- ------------NET ASSETS $20,000 $20,000 $20,000 $20,000 $20,000

======================= ==================== ============

See notes to the financial statements.</TABLE>

AMERICAN SKANDIA MASTER TRUST

NOTES TO STATEMENTS OF ASSETS AND LIABILITIES



May 28, 1997

1. ORGANIZATION

American Skandia Master Trust (the "Trust"), a Delaware Business Trust, isregistered under the Investment Company Act of 1940, as amended, as adiversified open-end management investment company currently offering fiveportfolios: ASMT Janus Capital Growth, ASMT T. Rowe Price International Equity,ASMT INVESCO Equity Income, ASMT JPM Money Market, ASMT PIMCO Total Return Bond(each a "Portfolio"). The Trust has not commenced operations except thoserelating to organizational matters and the sale of beneficial interest in theamount of $10,000 each to ASAF Janus Capital Growth, ASAF T. Rowe PriceInternational Equity, ASAF INVESCO Equity Income, ASAF JPM Money Market, ASAFTotal Return Bond (collectively "American Skandia Advisor Funds"), Skandia JanusCapital Growth, Skandia T. Rowe Price International Equity, Skandia INVESCOEquity Income, Skandia J.P. Morgan Money Market, and Skandia PIMCO Total ReturnBond (collectively "Skandia Advisor Funds").

2. SIGNIFICANT ACCOUNTING POLICIES

Organization expenses will be amortized on a straight line basis over a periodnot to exceed five years from the date that operations commence. The abovementioned Funds will reimburse their respective portfolios for any unamortizedorganization expenses upon the withdrawal of any initial beneficial interest.The amount to be reimbursed will be determined by the proportion of the amountof initial beneficial interest withdrawn to the initial beneficial interest ofall holders after taking into account any prior withdrawals of such initialbeneficial interest.

The value of an investor's beneficial interest in the Portfolio is equal to theproduct of the aggregate net asset value of the Portfolio and the percentagerepresenting that investor's share of the aggregate beneficial interest in thePortfolio effective for that day.

3. INVESTMENT ADVISORY FEES, ADMINISTRATIVE FEES AND OTHER TRANSACTIONSWITH AFFILIATES

The Trust has entered into a Management Agreement with American SkandiaInvestment Services, Inc. ("ASISI") and an Administration and AccountingServices Agreement with PFPC International Ltd. ("PFPC") under which PFPCprovides administration and accounting services to the Trust pursuant to theAgreements.

NB135463.10

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of American Skandia Master Trust:

We have audited the accompanying Statements of Assets and Liabilities ofAmerican Skandia Master Trust (the "Trust") as of May 28, 1997. This financialstatement is the responsibility of the Trust's management. Our responsibility isto express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statement is free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statement. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statement referred to above presents fairly, inall material respects, the financial position of American Skandia Master Trustas of May 28, 1997 in conformity with generally accepted accounting principles.

/s/ Coopers & LybrandCoopers & Lybrand



Dublin, Republic of IrelandMay 28, 1997

APPENDIX

The rating information which follows describes how the rating servicesmentioned presently rate the described securities. No reliance is made upon therating firms as "experts" as that term is defined for securities purposes.Rather, reliance on this information is on the basis that such ratings havebecome generally accepted in the investment business.

DESCRIPTION OF CERTAIN DEBT SECURITIES RATINGS

MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"):

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

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

A -- Bonds which are rated A possess many favorable investmentattributes and are to be considered as upper-medium-grade obligations. Factorsgiving security to principal and interest are considered adequate, but elementsmay be present which suggest a susceptibility to impairment some time in thefuture.

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

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

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

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

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

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

STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S"):

AAA -- Debt rated AAA has the highest rating assigned by Standard &Poor's. Capacity to pay interest and repay principal is extremely strong.

AA -- Debt rated AA has a strong capacity to pay interest and repayprincipal, and differs from the highest rated issues only in a small degree.

A -- Debt rated A has a strong capacity to pay interest and repayprincipal, although it is somewhat more susceptible to the adverse effects of



changes in circumstances and economic conditions than debt in higher ratedcategories.

BBB - Debt rated BBB is regarded as having an adequate capacity to payinterest and repay principal. Whereas they normally exhibit adequate protectionparameters, adverse economic conditions or changing circumstances are morelikely to lead to a weakened capacity to pay interest and repay principal fordebt in this category than in higher rated categories.

BB, B, CCC, CC, C -- Debt rated BB, B, CCC, CC and C is regarded ashaving predominantly speculative characteristics with respect to capacity to payinterest and repay principal. BB indicates the least degree of speculation and Cthe highest. While such debt will likely have some quality and protectivecharacteristics, these are outweighed by large uncertainties of major riskexposures to adverse conditions.

BB -- Debt rated BB has less near-term vulnerability to default thanother speculative issues. However, it faces major ongoing uncertainties orexposure to adverse business, financial, or economic conditions which could leadto inadequate capacity to meet timely interest and principal payments. The BBrating is also used for debt subordinated to senior debt that is assigned anactual or implied BBB rating.

B -- Debt rated B has a greater vulnerability to default but currentlyhas the capacity to meet interest payments and principal repayments. Adversebusiness, financial, or economic conditions will likely impair capacity orwillingness to pay interest and repay principal. The B rating category is alsoused for debt subordinated to senior debt that is assigned an actual or impliedBB or BB-rating.

CCC -- Debt rated CCC has a currently identifiable vulnerability todefault, and is dependent upon favorable business, financial, and economicconditions to meet timely payment of interest and repayment of principal. In theevent of adverse business, economic or financial conditions, it is not likely tohave the capacity to pay interest and repay principal. The CCC rating categoryis also used for debt subordinated to senior debt that is assigned an actual orimplied B or B- rating.

CC -- The rating CC typically is applied to debt subordinated to seniordebt that is assigned an actual or implied CCC rating.

C -- The C rating may be used to cover a situation where a bankruptcypetition has been filed, but debt service payments are continued.

CI -- The rating CI is reserved for income bonds on which no interestis being paid.

D -- Debt rated D is in payment default. The D rating category is usedwhen interest payments or principal payments are not made on the date due, evenif the applicable grace period has not expired, unless Standard & Poor'sbelieves that such payments will be made during such grace period. The D ratingalso will be used upon the filing of bankruptcy petition if debt servicepayments are jeopardized.

Plus (+) or minus (-) -- Ratings from AA to CCC may be modified by theaddition of a plus of minus sign to show relative standing within the majorrating categories.

c -- The letter c indicates that the holder's option to tender thesecurity for purchase may be canceled under certain prestated conditionsenumerated in the tender option documents.

L -- The letter L indicates that the rating pertains to the principalamount of those bonds to the extent that the underlying deposit collateral isfederally insured and interest is adequately collateralized. In the case ofcertificates of deposit, the letter L indicates that the deposit, combined withother deposits being held in the same and right capacity, will be honored forprincipal and accrued predefault interest up to the federal insurance limitswithin 30 days after closing of the insured institution or, in the event thatthe deposit is assumed by a successor insured institution, upon maturity.

p -- The letter p indicates that the rating is provisional. Aprovisional rating assumes the successful completion of the project beingfinanced by the debt being rated and indicates that payment of debt servicerequirements is largely or entirely dependent upon the successful and timelycompletion of the project. This rating, however, while addressing credit qualitysubsequent to completion of the project, makes no comment on the likelihood of,or the risk of default upon failure of, such completion. The investor shouldexercise his own judgment with respect to such likelihood and risk.

* -- Continuance of the rating is contingent upon Standard & Poor'sreceipt of an executed copy of the escrow agreement or closing documentationconfirming investments and cash flows.



r -- The r is attached to highlight derivative, hybrid, and certainother obligations that Standard & Poor's believes may experience high volatilityor high variability in expected returns due to noncredit risks. Examples of suchobligations are: securities whose principal or interest return is indexed toequities, commodities, or currencies; certain swaps and options; andinterest-only and principal-only mortgage securities.

DESCRIPTION OF CERTAIN COMMERCIAL PAPER RATINGS

MOODY'S:

Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have asuperior ability for repayment of senior short-term debt obligations. Prime-1repayment ability will often be evidenced by many of the followingcharacteristics: leading market positions in well-established industries; highrates of return on funds employed; conservative capitalization structures withmoderate reliance on debt and ample asset protection; broad margins in earningscoverage of fixed financial charges and high internal cash generation; andwell-established access to a range of financial markets and assured sources ofalternate liquidity.

Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)have a strong ability for repayment of senior short-term debt obligations. Thiswill normally be evidenced by many of the characteristics cited above, but to alesser degree. Earnings trends and coverage ratios, while sound, may be moresubject to variation. Capitalization characteristics, while still appropriate,may be more affected by external conditions. Ample alternate liquidity ismaintained.

Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)have an acceptable ability for repayment of senior short-term debt obligations.The effect of industry characteristics and market compositions may be morepronounced. Variability in earnings and profitability may result in changes inthe level of debt protection measurements and may require relatively highfinancial leverage. Adequate alternate liquidity is maintained.

Not Prime - Issuers rated Not Prime do not fall within any of the Primerating categories.

STANDARD & POOR'S:

A-1 -- This highest category indicates that the degree of safetyregarding time payment is strong. Those issues determined to possess extremelystrong safety characteristics are denoted with a plus sign designation.

A-2 -- Capacity for timely payment on issues with this designation issatisfactory. However, the relative degree of safety is not as high as forissues designated "A-1".

A-3 -- Issues carrying this designation have adequate capacity fortimely payment. They are, however, more vulnerable to the adverse effects of thechanges in circumstances than obligations carrying the higher designations.

B -- Issues rated B are regarded as having only speculative capacityfor timely payment.

C -- This rating is assigned to short-term debt obligations with adoubtful capacity for payment.

D - Debt rated D is in payment default. The D rating category is usedwhen interest payments or principal payments are not made on the date due, evenif the applicable grace period has not expired, unless Standard & Poor'sbelieves that such payments will be made during such grace period.

16176-1

PART C: OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits

(a) Financial Statements contained in Part B:

1. Statement of Assets and Liabilities of each Fund ofRegistrant, as of May 28, 1997, together with the notes thereto and the reportof Coopers & Lybrand L.L.P.



2. Statement of Assets and Liabilities of each Portfolio ofAmerican Skandia Master Trust, as of May 28, 1997, together with the notesthereto and the report of Coopers & Lybrand.

(b) Exhibits:

(i) 1. Articles of Incorporation of Registrant.

(i) 2. By-laws of Registrant.

3. None.

4. None.<TABLE><CAPTION>

<S> <C> <C>5. (a) Form of Investment Management Agreement between Registrant and American Skandia

Investment Services, Incorporated for the ASAF Founders International SmallCapitalization Fund.

(b) Form of Investment Management Agreement between Registrant and American SkandiaInvestment Services, Incorporated for the ASAF Founders Small Capitalization Fund.

(c) Form of Investment Management Agreement between Registrant and American SkandiaInvestment Services, Incorporated for the ASAF T. Rowe Price Small Company Value Fund.

(d) Form of Investment Management Agreement between Registrant and American SkandiaInvestment Services, Incorporated for the ASAF American Century Strategic BalancedFund.

(e) Form of Investment Management Agreement between Registrant and American SkandiaInvestment Services, Incorporated for the ASAF Federated High Yield Bond Fund.

(f) Form of Sub-advisory Agreement between American Skandia Investment Services,Incorporated and Founders Asset Management, Inc. for the ASAF Founders InternationalSmall Capitalization Fund.

(g) Form of Sub-advisory Agreement between American Skandia Investment Services,Incorporated and Founders Asset Management, Inc. for the ASAF Founders SmallCapitalization Fund.

(h) Form of Sub-advisory Agreement between American Skandia Investment Services,Incorporated and T. Rowe Price Associates, Inc. for the ASAF T. Rowe Price SmallCompany Value Fund.

(i) Form of Sub-advisory Agreement between American Skandia Investment Services,Incorporated and American Century Investment Management, Inc. for the ASAF AmericanCentury Strategic Balanced Fund.

(j) Form of Sub-advisory Agreement between American Skandia Investment Services,Incorporated and Federated Investment Counseling for the ASAF Federated High YieldBond Fund.

6. (a) Form of Underwriting and Distribution Agreement between Registrant and AmericanSkandia Marketing, Incorporated.

(b) Form of Dealer Sales Agreement with American Skandia Marketing, Incorporated.

(c) Form of Financial Institution Sales Agreement with American Skandia Marketing,Incorporated.

7. None.

8. (a) Form of Custody Agreement between Registrant and PNC Bank.

(b) Form of Custody Agreement between Registrant and Morgan Stanley Trust Company.

9. (a) Form of Administration Agreement between Registrant and PFPC Inc.

(b) Form of Transfer Agency and Service Agreement between Registrant and State Street Bank andTrust Company.

10. Opinion and Consent of Counsel to Registrant.

11. (a) Consent of Independent Public Accountants of Registrant.



(b) Consent of Independent Public Accountants of American Skandia Master Trust.

12. None.

13. Form of Share Purchase Agreement.

14. None.

15. (a) Form of Distribution and Service Plan for Class A Shares.

(b) Form of Distribution and Service Plan for Class B Shares.

(c) Form of Distribution and Service Plan for Class C Shares.

(d) Form of Distribution and Service Plan for Class X Shares.

16. None.

17. None.

18. Form of Rule 18f-3 Plan.</TABLE>

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

(i) Incorporated by reference to Registrant's Initial RegistrationStatement on Form N-1A as filed with the Securities and ExchangeCommission (the "Commission") on March 10, 1997.

ITEM 25. Persons Controlled By or Under Common Control with Registrant

Five series of the Registrant currently are organized under a"master/feeder" fund structure and may be considered to control thecorresponding master portfolios of American Skandia Master Trust in which theyinvest. Registrant is not under common control with any person except to theextent Registrant is deemed to be under the control of its Investment Manager.

<TABLE><CAPTION>ITEM 26. Number of Holders of Securities

Number of Record HoldersFund Name (All Four Classes) as of May 1, 1997---------------------------- -----------------

<S> <C>ASAF Founders International Small Capitalization Fund 0

ASAF T. Rowe Price International Equity Fund 0

ASAF Founders Small Capitalization Fund 0

ASAF T. Rowe Price Small Company Value Fund 0

ASAF Janus Capital Growth Fund 0

ASAF INVESCO Equity Income Fund 0

ASAF American Century Strategic Balanced Fund 0

ASAF Federated High Yield Bond Fund 0

ASAF Total Return Bond Fund 0

ASAF JPM Money Market Fund 0</TABLE>

ITEM 27. Indemnification

Section 2-418 of the General Corporation Law of the State of Marylandprovides for indemnification of officers, directors, employees and agents of aMaryland corporation. With respect to indemnification of the officers anddirectors of the Registrant, and of other employees and agents to such extent asshall be authorized by the Board of Directors or the By-laws of the Registrantand be permitted by law, reference is made to Article VIII, Paragraph (a)(5) ofthe Registrant's Articles of Incorporation and Article V of the Registrant'sBy-laws, both filed herewith.



With respect to liability of the Investment Manager to Registrant or toshareholders of Registrant's Funds under the Investment Management Agreements,reference is made to Section 13 of each form of Investment Management Agreementfiled herewith.

With respect to the Sub-Advisers' indemnification under theSub-Advisory Agreements of the Investment Manager, any affiliated person withinthe meaning of Section 2(a)(3) of the Investment Company Act of 1940, as amended(the "ICA"), of the Investment Manager and each person, if any, who controls theInvestment Manager within the meaning of Section 15 of the 1933 Act, as amended(the "1933 Act"), reference is made to Section 14 of each form of Sub-AdvisoryAgreement filed herewith.

With respect to Registrant's indemnification of American SkandiaMarketing, Incorporated (the "Distributor"), its officers and directors and anyperson who controls the Distributor within the meaning of Section 15 of the 1933Act, and the Distributor's indemnification of Registrant, its officers anddirectors and any person who controls Registrant, if any, within the meaning ofthe 1933 Act, reference is made to Section 10 of the form of Underwriting andDistribution Agreement filed herewith.

Insofar as indemnification for liability arising under the 1933 Act maybe permitted to directors, officers and controlling persons of the Registrantpursuant to the foregoing provisions, or otherwise, the Registrant has beenadvised that in the opinion of the Commission such indemnification is againstpublic policy as expressed in the 1933 Act and is, therefore, unenforceable. Inthe event that a claim for indemnification against such liabilities (other thanthe payment by the Registrant or expenses incurred or paid by a director,officer or controlling person of the Registrant in the successful defense of anyaction, suit or proceeding) is asserted by such director, officer or controllingperson in connection with the securities being registered, the Registrant will,unless in the opinion of its counsel the matter has been settled by controllingprecedent, submit to a court of appropriate jurisdiction the question whethersuch indemnification by it is against public policy as expressed in the 1933 Actand will be governed by the final adjudication of such issue.

ITEM 28. Business and Other Connections of Investment Adviser

American Skandia Investment Services, Incorporated ("ASISI"), OneCorporate Drive, Shelton, Connecticut 06484, serves as the investment manager tothe Registrant. Information as to the officers and directors of ASISI isincluded in ASISI's Form ADV (File No. 801-40532), including the amendments tosuch Form ADV filed with the Commission on April 11, 1997, October 22, 1996,March 22, 1996 and April 11, 1995, and is incorporated herein by reference.

ASISI currently engages the following sub-advisors (the "Sub-advisors")to conduct the investment programs of the funds of the Registrant or the masterportfolios in which certain of Registrant's funds invest: (a) Founders AssetManagement, Inc., Founders Financial Center, 2930 East Third Avenue, Denver,Colorado 80206; (b) Rowe Price-Fleming International, Inc., 100 East PrattStreet, Baltimore, Maryland 21209; (c) T. Rowe Price Associates, Inc., 100 EastPratt Street, Baltimore, Maryland 21209; (d) Janus Capital Corporation, 100Fillmore Street, Denver, Colorado 80206-4923; (e) INVESCO Trust Company, 7800East Union Avenue, Denver, Colorado 80217-3706; American Century InvestmentManagement, Inc. (formally named, "Investors Research Corporation"), TwentiethCentury Tower, 4500 Main Street, Kansas City, Missouri 64111; (f) FederatedInvestment Counseling, Federated Investors Tower, Pittsburgh, Pennsylvania15222-3779; (g) Pacific Investment Management Company, 840 Newport Center Drive,Suite 360, Newport Beach, California 92660; and (h) J.P. Morgan InvestmentManagement, Inc., 522 Fifth Avenue, New York, New York, 10036. Information as tothe officers and directors of each of the Sub-advisors is included in eachSub-advisor's current Form ADV, as amended and filed with the Commission, and isincorporated herein by reference.

ITEM 29. Principal Underwriter

American Skandia Marketing, Incorporated (the "Distributor," aspreviously defined), One Corporate Drive, Shelton, Connecticut 06484, serves asthe principal underwriter and distributor for the Registrant. The Distributor isa registered broker-dealer and member of the National Association of SecuritiesDealers, Inc. The Distributor is an "affiliated person" (as defined under theICA) of the Registrant and ASISI, being a wholly-owned subsidiary of AmericanSkandia Investment Holding Corporation.<TABLE><CAPTION>



The following table sets forth information on the current officers anddirectors of the Distributor, all of whom have as their principal businessaddress, One Corporate Drive, Shelton, Connecticut 06484:

Name: Position Held with the Distributor: Position Held with the Registrant:

<S> <C> <C>Gordon C. Boronow Director Vice President & Director

Kimberly A. Bradshaw Vice President & National NoneAccounts Manager

Jan R. Carendi Chief Executive Officer & Director President, Principal Executive Officer& Director

Daniel R. Darst Senior Vice President & NoneNational Marketing Director

Paul DeSimone Vice President, Corporate NoneController & Director

Wade A. Dokken President, Chief Marketing NoneOfficer & Director

Walter G. Kenyon Vice President & NoneNational Accounts Manager

Lawrence Kudlow Senior Vice President & NoneChief Economist

N. David Kuperstock Vice President & Director None

Daniel LaBonte Vice President & Associate Marketing NoneDirector

Thomas M. Mazzaferro Executive Vice President & Treasurer & DirectorChief Financial Officer

Kristen E. Newall Assistant Corporate Secretary None

Brian O'Connor Vice President & National Sales NoneManager (Internal Wholesaling)

M. Priscilla Pannell Corporate Secretary None

Don Thomas Peck Senior Vice President, National NoneSales Manager & Director

Hayward Sawyer Senior Vice President, National NoneSales Manager & Director

Christian Thwaites Vice President, Qualified Plans None

Bayard F. Tracy Senior Vice President, National NoneSales Manager & Director

</TABLE>

ITEM 30. Location of Accounts and Records

Records regarding the Registrant's securities holdings are maintainedat Registrant's Custodians, PNC Bank, Airport Business Center, InternationalCourt 2, 200 Stevens Drive, Philadelphia, Pennsylvania 19113, and Morgan StanleyTrust Company, One Pierrepont Plaza, Brooklyn, New York 11201. Certain recordswith respect to the Registrant's securities transactions are maintained at theoffices of the various sub-advisors to the Registrant. The Registrant'scorporate records are maintained at its offices at One Corporate Drive, Shelton,Connecticut 06484. The Registrant's financial ledgers and similar financialrecords are maintained at the offices of its Administrator, PFPC Inc., 103Bellevue Parkway, Wilmington, DE 19809. Certain records regarding theshareholders of the Registrant are maintained at the offices of the Registrant'stransfer agent, Boston Financial Data Services, Inc., Two Heritage Drive,Quincy, Massachusetts 02171.

All accounts, books and other documents required to be maintained bySection 31(a) of the ICA, and the Rules promulgated thereunder with respect to



American Skandia Master Trust (the "Master Trust") are maintained at the MasterTrust's offices at One Corporate Drive, Shelton, Connecticut 06484, at theoffices of the various sub-advisors, and at the offices of the above-mentionedCustodians and Administrator.

ITEM 31. Management Services

None.

ITEM 32. Undertakings

(a) None.

(b) The Registrant undertakes to file a post-effective amendment tothis Registration Statement, using financial statements which need not becertified, within four to six months from the effective of this RegistrationStatement.

(c) The Registrant undertakes to furnish each person to whom aprospectus is delivered with a copy of Registrant's latest annual report toshareholders upon request and without charge if the Registrant includes theinformation called for by Item 5A of Form N-1A in such annual report.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and theInvestment Company Act of 1940, the Registrant, American Skandia Advisor Funds,Inc., has duly caused this Registration Statement to be signed on its behalf bythe undersigned, thereunto duly authorized, in the City of Shelton, and State ofConnecticut, on the 29th day of May, 1997.


By: /s/ Eric C. FreedEric C. FreedSecretary

Pursuant to the requirements of the Securities Act of 1933, thisRegistration Statement has been signed below by the following persons in thecapacities and on the dates indicated.<TABLE><CAPTION>

Signature Title Date

<S> <C> <C>/s/ Gordon C. Boronow* Vice President & Director 05/29/97Gordon C. Boronow

/s/ Jan R. Carendi* President, Principal Executive 05/29/97Jan R. Carendi Officer & Director

/s/ David E.A. Carson* Director 05/29/97David E.A. Carson

/s/ Richard G. Davy, Jr.* Controller 05/29/97Richard G. Davy, Jr.

/s/ Julian A. Lerner* Director 05/29/97Julian A. Lerner

/s/ Thomas M. Mazzaferro* Treasurer & Director 05/29/97Thomas M. Mazzaferro

/s/ Thomas M. O'Brien* Director 05/29/97Thomas M. O'Brien



/s/ F. Don Schwartz* Director 05/29/97F. Don Schwartz</TABLE>

*By: /s/ Eric C. FreedEric C. Freed

*Pursuant to Powers of Attorney filed herewith.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned trustee ofAmerican Skandia Advisor Funds, Inc. (the "Fund") does hereby make, constituteand appoint Eric Freed, Secretary of the Fund, or Susann Alagna, AssistantSecretary, as his true and lawful attorney-in-fact and agent with all power andauthority on his behalf to sign his name on any and all registration statements,documents, instruments and/or exhibits related thereto and any and allamendments thereto (including any and all pre- and post-effective amendments toany registration statement) on any form or forms for the purpose of registeringthe Fund under the Investment Company Act of 1940 with the Securities andExchange Commission, or amending any such registration, or registering shares inone or more series, to be filed with the Securities and Exchange Commissionpursuant to the Securities Act of 1933, as amended, and under the InvestmentCompany Act of 1940, as amended, and granting unto said attorney-in-fact andagent full power and authority to do and perform each and every act authorizedby the Power of Attorney and the undersigned does hereby ratify all that saidattorney-in-fact and agent may lawfully do or cause to be done by virtuethereof.

IN WITNESS THEREOF, the undersigned has subscribed hereunder this 21stday of May 1997.

/s/ Jan R. CarendiJan R. Carendi

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 23rdday of May 1997.

/s/ Gordon C. BoronowGordon C. Boronow



POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 27th dayof May 1997.

/s/ David E. A. CarsonDavid E. A. Carson

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 23rd dayof May 1997.



/s/ Julian A. LernerJulian A. Lerner

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 22ndday of May 1997.

/s/ Thomas M. O'BrienThomas M. O'Brien

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 22nd dayof May, 1997.



/s/ F. Don SchwartzF. Don Schwartz

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 27th dayof May 1997.

/s/ Thomas M. MazzaferroThomas M. Mazzaferro

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer ofAmerican Skandia Advisor Funds, Inc. (the "Fund") does hereby make, constituteand appoint Eric Freed, Secretary of the Fund, or Susann Alagna, Assistant



Secretary, as his true and lawful attorney-in-fact and agent with all power andauthority on his behalf to sign his name on any and all registration statements,documents, instruments and/or exhibits related thereto and any and allamendments thereto (including any and all pre- and post-effective amendments toany registration statement) on any form or forms for the purpose of registeringthe Fund under the Investment Company Act of 1940 with the Securities andExchange Commission, or amending any such registration, or registering shares inone or more series, to be filed with the Securities and Exchange Commissionpursuant to the Securities Act of 1933, as amended, and under the InvestmentCompany Act of 1940, as amended, and granting unto said attorney-in-fact andagent full power and authority to do and perform each and every act authorizedby the Power of Attorney and the undersigned does hereby ratify all that saidattorney-in-fact and agent may lawfully do or cause to be done by virtuethereof.

IN WITNESS THEREOF, the undersigned has subscribed hereunder this 22ndday of May 1997.

/s/ Richard G. DavyRichard G. Davy

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and theInvestment Company Act of 1940, American Skandia Master Trust has duly causedthis Registration Statement to be signed on its behalf by the undersigned,thereunto duly authorized, in the County of Dublin, Ireland, on the 29th day ofMay, 1997.

AMERICAN SKANDIA MASTER TRUST

By: /s/ J. Fergus McKeonJ. Fergus McKeonAssistant Controller &Assistant Corporate Secretary

Pursuant to the requirements of the Securities Act of 1933, thisRegistration Statement has been signed below by the following persons in thecapacities and on the dates indicated.

<TABLE><CAPTION>Signature Title Date

<S> <C> <C>/s/ Gordon C. Boronow* Vice President & Trustee 05/29/97Gordon C. Boronow

/s/ Jan R. Carendi* Trustee 05/29/97Jan R. Carendi

/s/ David E.A. Carson* Trustee 05/29/97David E.A. Carson

/s/ Richard G. Davy, Jr.* Controller 05/29/97Richard G. Davy, Jr.

/s/ Julian A. Lerner* Trustee 05/29/97Julian A. Lerner

/s/ Thomas M. Mazzaferro* President, Principal Executive 05/29/97Thomas M. Mazzaferro Officer & Trustee

/s/ Thomas M. O'Brien* Trustee 05/29/97Thomas M. O'Brien

/s/ F. Don Schwartz* Trustee 05/29/97F. Don Schwartz



/s/ C. Ake Svensson* Treasurer 05/29/97C. Ake Svensson</TABLE>

*By: /s/ J. Fergus McKeonJ. Fergus McKeon

*Pursuant to Powers of Attorney filed herewith.

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned trustee ofAmerican Skandia Master Trust (the "Trust") does hereby make, constitute andappoint Eric Freed, Secretary of the Trust, or J. Fergus McKeon, AssistantSecretary, as his true and lawful attorney-in-fact and agent with all power andauthority on his behalf to sign his name on any and all registration statements,documents, instruments and/or exhibits related thereto and any and allamendments thereto (including any and all pre- and post-effective amendments toany registration statement) on any form or forms for the purpose of registeringthe Trust and American Skandia Advisor Funds, Inc. under the Investment CompanyAct of 1940 with the Securities and Exchange Commission, or amending any suchregistration, or registering shares in one or more series, to be filed with theSecurities and Exchange Commission pursuant to the Securities Act of 1933, asamended, and under the Investment Company Act of 1940, as amended, and grantingunto said attorney-in-fact and agent full power and authority to do and performeach and every act authorized by the Power of Attorney and the undersigned doeshereby ratify all that said attorney-in-fact and agent may lawfully do or causeto be done by virtue thereof.

IN WITNESS THEREOF, the undersigned has subscribed hereunder this 21stday of May, 1997.

/s/ Jan R. CarendiJan R. Carendi

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 23rdday of May, 1997.

/s/ Gordon C. BoronowGordon C. Boronow



POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 27thday of May, 1997.

/s/ David E. A. CarsonDavid E. A. Carson

POWER OF ATTORNEY





/s/ Julian A. LernerJulian A. Lerner

POWER OF ATTORNEY



/s/ Thomas M. O'BrienThomas M. O'Brien

POWER OF ATTORNEY


IN WITNESS THEREOF, the undersigned has subscribed hereunder this 22ndday of May, 1997.



/s/ F. Don SchwartzF. Don Schwartz

POWER OF ATTORNEY



/s/ Thomas M. MazzaferroThomas M. Mazzaferro

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer ofAmerican Skandia Master Trust (the "Trust") does hereby make, constitute and



appoint Eric Freed, Secretary of the Trust, or J. Fergus McKeon, AssistantSecretary, as his true and lawful attorney-in-fact and agent with all power andauthority on his behalf to sign his name on any and all registration statements,documents, instruments and/or exhibits related thereto and any and allamendments thereto (including any and all pre- and post-effective amendments toany registration statement) on any form or forms for the purpose of registeringthe Trust and American Skandia Advisor Funds, Inc. under the Investment CompanyAct of 1940 with the Securities and Exchange Commission, or amending any suchregistration, or registering shares in one or more series, to be filed with theSecurities and Exchange Commission pursuant to the Securities Act of 1933, asamended, and under the Investment Company Act of 1940, as amended, and grantingunto said attorney-in-fact and agent full power and authority to do and performeach and every act authorized by the Power of Attorney and the undersigned doeshereby ratify all that said attorney-in-fact and agent may lawfully do or causeto be done by virtue thereof.

IN WITNESS THEREOF, the undersigned has subscribed hereunder this 22ndday of May, 1997.

/s/ Richard G. DavyRichard G. Davy

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned officer ofAmerican Skandia Master Trust (the "Trust") does hereby make, constitute andappoint Eric Freed, Secretary of the Trust, or J. Fergus McKeon, AssistantSecretary, as his true and lawful attorney-in-fact and agent with all power andauthority on his behalf to sign his name on any and all registration statements,documents, instruments and/or exhibits related thereto and any and allamendments thereto (including any and all pre- and post-effective amendments toany registration statement) on any form or forms for the purpose of registeringthe Trust and American Skandia Advisor Funds, Inc. under the Investment CompanyAct of 1940 with the Securities and Exchange Commission, or amending any suchregistration, or registering shares in one or more series, to be filed with theSecurities and Exchange Commission pursuant to the Securities Act of 1933, asamended, and under the Investment Company Act of 1940, as amended, and grantingunto said attorney-in-fact and agent full power and authority to do and performeach and every act authorized by the Power of Attorney and the undersigned doeshereby ratify all that said attorney-in-fact and agent may lawfully do or causeto be done by virtue thereof.


/s/ C. Ake SvenssonC. Ake Svensson


Registration Statement UnderThe Securities Act of 1933 and

The Investment Company Act of 1940



INDEX TO EXHIBITS

<TABLE><CAPTION>

Exhibit Number Description

<S> <C>5(a) Form of Investment Management Agreement between Registrant

and American Skandia Investment Services, Incorporated forthe ASAF Founders International Small Capitalization Fund.

5(b) Form of Investment Management Agreement between Registrantand American Skandia Investment Services, Incorporated forthe ASAF Founders Small Capitalization Fund.

5(c) Form of Investment Management Agreement between Registrantand American Skandia Investment Services, Incorporated forthe ASAF T. Rowe Price Small Company Value Fund.

5(d) Form of Investment Management Agreement between Registrantand American Skandia Investment Services, Incorporated forthe ASAF American Century Strategic Balanced Fund.

5(e) Form of Investment Management Agreement between Registrantand American Skandia Investment Services, Incorporated forthe ASAF Federated High Yield Bond Fund.

5(f) Form of Sub-advisory Agreement between American SkandiaInvestment Services, Incorporated and Founders AssetManagement, Inc. for the ASAF Founders International SmallCapitalization Fund.

5(g) Form of Sub-advisory Agreement between American SkandiaInvestment Services, Incorporated and Founders AssetManagement, Inc. for the ASAF Founders Small CapitalizationFund.

5(h) Form of Sub-advisory Agreement between American SkandiaInvestment Services, Incorporated and T. Rowe PriceAssociates, Inc. for the ASAF T. Rowe Price Small CompanyValue Fund.

5(i) Form of Sub-advisory Agreement between American SkandiaInvestment Services, Incorporated and American CenturyInvestment Management, Inc. for the ASAF American CenturyStrategic Balanced Fund.

5(j) Form of Sub-advisory Agreement between American SkandiaInvestment Services, Incorporated and Federated InvestmentCounseling for the ASAF Federated High Yield Bond Fund.

6(a) Form of Underwriting and Distribution Agreement betweenRegistrant and American Skandia Marketing, Incorporated.

6(b) Form of Dealer Sales Agreement with American SkandiaMarketing, Incorporated.

6(c) Form of Financial Institution Sales Agreement with AmericanSkandia Marketing, Incorporated.

8(a) Form of Custody Agreement between Registrant and PNC Bank.

8(b) Form of Custody Agreement between Registrant and MorganStanley Trust Company.

9(a) Form of Administration Agreement between Registrant and PFPCInc.

9(b) Form of Transfer Agency and Service Agreement between Registrant and StateStreet Bank and Trust Company.

10 Opinion and Consent of Counsel to Registrant.

11(a) Consent of Independent Public Accountants of Registrant.

11(b) Consent of Independent Public Accountants of AmericanSkandia Master Trust.



13 Form of Share Purchase Agreement.

15(a) Form of Distribution and Service Plan for Class A Shares.

15(b) Form of Distribution and Service Plan for Class B Shares.

15(c) Form of Distribution and Service Plan for Class C Shares.

15(d) Form of Distribution and Service Plan for Class X Shares.

18 Form of Rule 18f-3 Plan.</TABLE>

18499-1



AMERICAN SKANDIA ADVISOR FUNDS, INC.INVESTMENT MANAGEMENT AGREEMENT

THIS AGREEMENT is made this 1st day of June, 1997 by and between AmericanSkandia Advisor Funds, Inc., a Maryland corporation (the "Company"), andAmerican Skandia Investment Services, Incorporated, a Connecticut corporation(the "Investment Manager").

W I T N E S S E T H

WHEREAS, the Company is registered as an open-end management investment companyunder the Investment Company Act of 1940, as amended (the "ICA"), and the rulesand regulations promulgated thereunder; and

WHEREAS, the Investment Manager is an investment adviser registered under theInvestment Advisers Act of 1940, as amended (the "Advisers Act"); and

WHEREAS, the Company and the Investment Manager desire to enter into anagreement to provide for the management of the assets of the ASAF FoundersInternational Small Capitalization Fund (the "Fund") on the terms and conditionshereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants herein contained andother good and valuable consideration, the receipt whereof is herebyacknowledged, the parties hereto agree as follows:

1. Management. The Investment Manager shall act as investment manager for theFund and shall, in such capacity, manage the investment operations of the Fund,including the purchase, retention, disposition and lending of securities,subject at all times to the policies and control of the Board of Directors ofthe Company (the "Directors"). The Investment Manager shall give the Fund thebenefit of its best judgments, efforts and facilities in rendering its servicesas investment manager.

2. Duties of Investment Manager. In carrying out its obligation underparagraph 1 hereof, the Investment Manager shall:

(a) supervise and manage all aspects of the Fund's operations:

(b) provide the Fund or obtain for it, and thereafter supervise, suchexecutive, administrative, clerical and shareholder servicing services as aredeemed advisable by the Directors;

(c) arrange, but not pay for, the periodic updating of prospectuses andsupplements thereto, proxy material, tax returns, reports to the Fund'sshareholders, reports to and filings with the Securities and ExchangeCommission, state Blue Sky authorities and other applicable regulatoryauthorities;



(d) provide to the Directors on a regular basis, written financialreports and analyses on the Fund's securities transactions and the operations ofcomparable investment companies;

(e) determine what issuers and securities shall be represented in theFund's portfolio and regularly report them in writing to the Directors;

(f) formulate and implement continuing programs for the purchases andsales of the securities of such issuers and regularly report in writing thereonto the Directors; and

(g) take, on behalf of the Fund, all actions which appear to theCompany necessary to carry into effect such purchase and sale programs andsupervisory functions as aforesaid, including the placing of orders for thepurchase and sale of portfolio securities.

3. Broker-Dealer Relationships. The Investment Manager is responsible fordecisions to buy and sell securities for the Fund, broker-dealer selection, andnegotiation of the Fund's brokerage commission rates. The Investment Managershall determine the securities to be purchased or sold by the Fund pursuant toits determinations with or through such persons, brokers or dealers, inconformity with the policy with respect to brokerage as set forth in theCompany's Prospectus and Statement of Additional Information as in effect fromtime to time (together, the "Registration Statement"), or as the Directors maydetermine from time to time. Generally, the Investment Manager's primaryconsideration in placing Fund securities transactions with broker-dealers forexecution will be to obtain, and maintain the availability of, best execution atthe best available price. The Investment Manager may consider sale of the sharesof the Fund in allocating Fund securities transactions, subject to therequirements of best net price available and most favorable execution.

Consistent with this policy, the Investment Manager, in allocating Fundsecurities transactions, will take all relevant factors into consideration,including, but not limited to: the best price available; the reliability,integrity and financial condition of the broker-dealer; the size of anddifficulty in executing the order; and the value of the expected contribution ofthe broker-dealer to the investment performance of the Fund on a continuingbasis. Subject to such policies and procedures as the Directors may determine,the Investment Manager shall have discretion to effect investment transactionsfor the Fund through broker-dealers (including, to the extent permissible underapplicable law, broker-dealers affiliated with the Sub-Adviser) qualified toobtain best execution of such transactions who provide brokerage and/or researchservices, as such services are defined in section 28(e) of the SecuritiesExchange Act of 1934, as amended (the "1934 Act"), and to cause the Fund to payany such broker-dealers an amount of commission for effecting a portfolioinvestment transaction in excess of the amount of commission anotherbroker-dealer would have charged for effecting that transaction, if theInvestment Manager determines in good faith that such amount of commission isreasonable in relation to the value of the brokerage or research servicesprovided by such broker-dealer, viewed in terms of either that particular



investment transaction or the Investment Manager's overall responsibilities withrespect to the Fund and other accounts as to which the Investment Managerexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Investment Manager on behalfof the Fund to such broker-dealers shall be in such amounts and proportions asthe Investment Manager shall determine in good faith in conformity with itsresponsibilities under applicable laws, rules and regulations. The InvestmentManager will report on such allocations to the Directors regularly as requestedby the Directors, indicating the broker-dealers to whom such allocations havebeen made and the basis therefor.

4. Control by the Directors. Any investment program undertaken by the InvestmentManager pursuant to this Agreement, as well as any other activities undertakenby the Investment Manager on behalf of the Company pursuant hereto, shall at alltimes be subject to any directives of the Directors.

5. Compliance with Applicable Requirements. In carrying out its obligationsunder this Agreement, the Investment Manager shall at all times conform to:

(a) all applicable provisions of the ICA and the Advisers Act and any rulesand regulations adopted thereunder; and

(b) the provisions of the Registration Statement, including the investmentobjectives, policies and restrictions, and permissible investments specifiedtherein; and

(c) the provisions of the Articles of Incorporation of the Company, asamended; and

(d) the provisions of the By-laws of the Company, as amended; and

(e) any other applicable provisions of state and federal law.

6. Expenses. The expenses connected with the Company shall be allocablebetween the Company and the Investment Manager as follows:

(a) The Investment Manager shall furnish, at its expense and withoutcost to the Company, the services of a President, Secretary, and one or moreVice Presidents of the Company, to the extent that such additional officers maybe required by the Company for the proper conduct of its affairs.

(b) The Investment Manager shall further maintain, at its expense andwithout cost to the Company, a trading function in order to carry out itsobligations under subparagraphs (e), (f) and (g) of paragraph 2 hereof to placeorders for the purchase and sale of portfolio securities for the Fund.

(c) Nothing in subparagraph (a) hereof shall be construed to require theInvestment Manager to bear:

(i) any of the costs (including applicable office space,facilities and equipment) of the services of a principal



financial officer of the Company whose normal duties consistof maintaining the financial accounts and books and records ofthe Company, including the reviewing of calculations of netasset value and preparing tax returns; or

(ii) any of the costs (including applicable office space,facilities and equipment) of the services of any of thepersonnel operating under the direction of such principalfinancial officer.

Notwithstanding the obligation of the Company to bear the expense ofthe functions referred to in clauses (i) and (ii) of this subparagraph (c), theInvestment Manager may pay the salaries, including any applicable employment orpayroll taxes and other salary costs, of the principal financial officer andother personnel carrying out such functions, and the Company shall reimburse theInvestment Manager therefor upon proper accounting.

(d) All of the ordinary business expenses incurred in the operations ofthe Company and the offering of its shares shall be borne by the Company unlessspecifically provided otherwise in this paragraph 6. These expenses include, butare not limited to: (i) brokerage commissions, legal, auditing, taxes orgovernmental fees; (ii) the cost of preparing share certificates; (iii)custodian, depository, transfer and shareholder service agent costs; (iv)expenses of issue, sale, redemption and repurchase of shares; (v) expenses ofregistering and qualifying shares for sale; (vi) insurance premiums on propertyor personnel (including officers and directors if available) of the Companywhich inure to the Company's benefit; (vii) expenses relating to director andshareholder meetings; (viii) the cost of preparing and distributing reports andnotices to shareholders; (ix) the fees and other expenses incurred by theCompany in connection with membership in investment company organizations; and(x) and the cost of printing copies of prospectuses and statements of additionalinformation, as well as any supplements thereto, distributed to shareholders.

7. Delegation of Responsibilities. Upon the request of the Directors, theInvestment Manager may perform services on behalf of the Company which are notrequired by this Agreement. Such services will be performed on behalf of theCompany and the Investment Manager's cost in rendering such services may bebilled monthly to the Company, subject to examination by the Company'sindependent accountants. Payment or assumption by the Investment Manager of anyCompany expense that the Investment Manager is not required to pay or assumeunder this Agreement shall not relieve the Investment Manager of any of itsobligations to the Company nor obligate the Investment Manager to pay or assumeany similar Company expense on any subsequent occasion.

8. Engagement of Sub-Advisers and Broker-Dealers. The Investment Manager mayengage, subject to approval of the Directors and where required, theshareholders of the Fund, a sub-adviser to provide advisory services in relationto the Fund. Under such sub-advisory agreement, the Investment Manager maydelegate to the sub-adviser the duties outlined in subparagraphs (e), (f) and(g) of paragraph 2 hereof.



9. Compensation. The Company shall pay the Investment Manager in fullcompensation for services rendered hereunder an annual investment advisory fee.The fee shall be payable monthly in arrears, based on the average daily netassets of the Fund for each month, at the annual rate set forth in Exhibit A tothis Agreement.

10. Non-Exclusivity. The services of the Investment Manager to the Fund are notto be deemed to be exclusive, and the Investment Manager shall be free to renderinvestment advisory and corporate administrative or other services to others(including other investment companies) and to engage in other activities. It isunderstood and agreed that officers or directors of the Investment Manager mayserve as officers or directors of the Company, and that officers or directors ofthe Company may serve as officers or directors of the Investment Manager to theextent permitted by law; and that the officers and directors of the InvestmentManager are not prohibited from engaging in any other business activity or fromrendering services to any other person, or from serving as partners, officers ordirectors of any other firm or corporation, including other investmentcompanies.

11. Term and Approval. This Agreement shall become effective on June 1,1997 and by shall continue in force and effect from year to year, provided thatsuch continuance is specifically approved at least annually by:

(a) the Directors or the vote of a majority of the Fund's outstandingvoting securities (as defined in Section 2(a)(42) of the ICA); and

(b) the affirmative vote of a majority of the Directors who are notparties to this Agreement or interested persons of a party to this Agreement(other than as Company directors), by votes cast in person at a meetingspecifically called for such purpose.

12. Termination. This Agreement may be terminated at any time without thepayment of any penalty or prejudice to the completion of any transactionsalready initiated on behalf of the Fund, by vote of the Directors or by vote ofa majority of the Fund's outstanding voting securities, or by the InvestmentManager, on sixty (60) days' written notice to the other party. The noticeprovided for herein may be waived by either party. This Agreement automaticallyterminates in the event of its "assignment," as such term is defined in the ICA.

13. Liability of Investment Manager and Indemnification. In the absence ofwillful misfeasance, bad faith, gross negligence or reckless disregard ofobligations or duties hereunder on the part of the Investment Manager or any ofits officers, directors or employees, it shall not be subject to liability tothe Company or to any shareholder of the Fund for any act or omission in thecourse of, or connected with, rendering services hereunder or for any lossesthat may be sustained in the purchase, holding or sale of any security.

14. Liability of the Directors and Shareholders. A copy of the Articles ofIncorporation of the Company is on file with the Secretary of the State ofMaryland, and notice is hereby given that this instrument is executed on behalfof the Directors as directors and not individually and that the obligations of



this instrument are not binding upon any of the Directors or shareholdersindividually but are binding only upon the assets and property of the Company.Federal and state laws impose responsibilities under certain circumstances onpersons who act in good faith, and therefore, nothing herein shall in any wayconstitute a waiver of limitation of any rights which the Company or theInvestment Manager may have under applicable law.

15. Notices. Any notices under this Agreement shall be in writing, addressed anddelivered or mailed postage paid to the other party at such address as suchother party may designate for the receipt of such notice. Until further notice,it is agreed that the address of the Company and the Investment Manager shall beOne Corporate Drive, Shelton, Connecticut 06484.

16. Questions of Interpretation. Any question of interpretation of any term orprovision of this Agreement having a counterpart in or otherwise derived from aterm or provision of the ICA, shall be resolved by reference to such term orprovision of the ICA and to interpretations thereof, if any, by the UnitedStates courts or, in the absence of any controlling decision of any such court,by rules, regulations or orders of the Securities and Exchange Commission issuedpursuant to the ICA. In addition, where the effect of a requirement of the ICA,reflected in any provision of this Agreement, is released by rules, regulationor order of the Securities and Exchange Commission, such provision shall bedeemed to incorporate the effect of such rule, regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to beexecuted in duplicate by their respective officers on the day and year firstabove written.


Attest: By: ________________________________________Gordon C. Boronow

___________________________________ Vice President

AMERICAN SKANDIA INVESTMENTSERVICES, INCORPORATED

Attest: By: ________________________________________Thomas M. Mazzaferro

___________________________________ President & Chief Financial Officer

American Skandia Advisor Funds, Inc.ASAF Founders International Small Capitalization Fund

Investment Management Agreement



EXHIBIT A

An annual rate of 1.10% of the portion of the average daily net assets ofthe Fund not in excess of $100 million; plus 1.00% of the portion over $100million.

18672-1 (06/97)





W I T N E S S E T H



WHEREAS, the Company and the Investment Manager desire to enter into anagreement to provide for the management of the assets of the ASAF Founders SmallCapitalization Fund (the "Fund") on the terms and conditions hereinafter setforth.






(c) arrange, but not pay for, the periodic updating of prospectuses andsupplements thereto, proxy material, tax returns, reports to the Fund'sshareholders, reports to and filings with the Securities and ExchangeCommission, state Blue Sky authorities and other applicable regulatory



authorities;






Consistent with this policy, the Investment Manager, in allocating Fundsecurities transactions, will take all relevant factors into consideration,including, but not limited to: the best price available; the reliability,integrity and financial condition of the broker-dealer; the size of anddifficulty in executing the order; and the value of the expected contribution ofthe broker-dealer to the investment performance of the Fund on a continuingbasis. Subject to such policies and procedures as the Directors may determine,the Investment Manager shall have discretion to effect investment transactionsfor the Fund through broker-dealers (including, to the extent permissible underapplicable law, broker-dealers affiliated with the Sub-Adviser) qualified toobtain best execution of such transactions who provide brokerage and/or researchservices, as such services are defined in section 28(e) of the SecuritiesExchange Act of 1934, as amended (the "1934 Act"), and to cause the Fund to payany such broker-dealers an amount of commission for effecting a portfolioinvestment transaction in excess of the amount of commission anotherbroker-dealer would have charged for effecting that transaction, if theInvestment Manager determines in good faith that such amount of commission isreasonable in relation to the value of the brokerage or research services



provided by such broker-dealer, viewed in terms of either that particularinvestment transaction or the Investment Manager's overall responsibilities withrespect to the Fund and other accounts as to which the Investment Managerexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Investment Manager on behalfof the Fund to such broker-dealers shall be in such amounts and proportions asthe Investment Manager shall determine in good faith in conformity with itsresponsibilities under applicable laws, rules and regulations. The InvestmentManager will report on such allocations to the Directors regularly as requestedby the Directors, indicating the broker-dealers to whom such allocations havebeen made and the basis therefor.












(i) any of the costs (including applicable office space,



facilities and equipment) of the services of a principalfinancial officer of the Company whose normal duties consistof maintaining the financial accounts and books and records ofthe Company, including the reviewing of calculations of netasset value and preparing tax returns; or















14. Liability of the Directors and Shareholders. A copy of the Articles ofIncorporation of the Company is on file with the Secretary of the State ofMaryland, and notice is hereby given that this instrument is executed on behalf



of the Directors as directors and not individually and that the obligations ofthis instrument are not binding upon any of the Directors or shareholdersindividually but are binding only upon the assets and property of the Company.Federal and state laws impose responsibilities under certain circumstances onpersons who act in good faith, and therefore, nothing herein shall in any wayconstitute a waiver of limitation of any rights which the Company or theInvestment Manager may have under applicable law.






___________________________________ Vice President




American Skandia Advisor Funds, Inc.



ASAF Founders Small Capitalization FundInvestment Management Agreement

EXHIBIT A

An annual rate of .90% of the average daily net assets of the Fund.

18673-1 (06/97)





W I T N E S S E T H



WHEREAS, the Company and the Investment Manager desire to enter into anagreement to provide for the management of the assets of the ASAF T. Rowe PriceSmall Company Value Fund (the "Fund") on the terms and conditions hereinafterset forth.














Consistent with this policy, the Investment Manager, in allocating Fundsecurities transactions, will take all relevant factors into consideration,including, but not limited to: the best price available; the reliability,integrity and financial condition of the broker-dealer; the size of anddifficulty in executing the order; and the value of the expected contribution ofthe broker-dealer to the investment performance of the Fund on a continuingbasis. Subject to such policies and procedures as the Directors may determine,the Investment Manager shall have discretion to effect investment transactionsfor the Fund through broker-dealers (including, to the extent permissible underapplicable law, broker-dealers affiliated with the Sub-Adviser) qualified toobtain best execution of such transactions who provide brokerage and/or researchservices, as such services are defined in section 28(e) of the SecuritiesExchange Act of 1934, as amended (the "1934 Act"), and to cause the Fund to payany such broker-dealers an amount of commission for effecting a portfolioinvestment transaction in excess of the amount of commission anotherbroker-dealer would have charged for effecting that transaction, if theInvestment Manager determines in good faith that such amount of commission isreasonable in relation to the value of the brokerage or research servicesprovided by such broker-dealer, viewed in terms of either that particularinvestment transaction or the Investment Manager's overall responsibilities with



respect to the Fund and other accounts as to which the Investment Managerexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Investment Manager on behalfof the Fund to such broker-dealers shall be in such amounts and proportions asthe Investment Manager shall determine in good faith in conformity with itsresponsibilities under applicable laws, rules and regulations. The InvestmentManager will report on such allocations to the Directors regularly as requestedby the Directors, indicating the broker-dealers to whom such allocations havebeen made and the basis therefor.












(i) any of the costs (including applicable office space,facilities and equipment) of the services of a principalfinancial officer of the Company whose normal duties consist



of maintaining the financial accounts and books and records ofthe Company, including the reviewing of calculations of netasset value and preparing tax returns; or






9. Compensation. The Company shall pay the Investment Manager in full



compensation for services rendered hereunder an annual investment advisory fee.The fee shall be payable monthly in arrears, based on the average daily netassets of the Fund for each month, at the annual rate set forth in Exhibit A tothis Agreement.







14. Liability of the Directors and Shareholders. A copy of the Articles ofIncorporation of the Company is on file with the Secretary of the State ofMaryland, and notice is hereby given that this instrument is executed on behalfof the Directors as directors and not individually and that the obligations ofthis instrument are not binding upon any of the Directors or shareholders



individually but are binding only upon the assets and property of the Company.Federal and state laws impose responsibilities under certain circumstances onpersons who act in good faith, and therefore, nothing herein shall in any wayconstitute a waiver of limitation of any rights which the Company or theInvestment Manager may have under applicable law.






___________________________________ Vice President




American Skandia Advisor Funds, Inc.ASAF T. Rowe Price Small Company Value Fund




EXHIBIT A

An annual rate of 1.00% of the average daily net assets of the Fund.

18675-1 (06/97)





W I T N E S S E T H



WHEREAS, the Company and the Investment Manager desire to enter into anagreement to provide for the management of the assets of the ASAF AmericanCentury Strategic Balanced Fund (the "Fund") on the terms and conditionshereinafter set forth.






(c) arrange, but not pay for, the periodic updating of prospectuses andsupplements thereto, proxy material, tax returns, reports to the Fund'sshareholders, reports to and filings with the Securities and ExchangeCommission, state Blue Sky authorities and other applicable regulatory



authorities;






Consistent with this policy, the Investment Manager, in allocating Fundsecurities transactions, will take all relevant factors into consideration,including, but not limited to: the best price available; the reliability,integrity and financial condition of the broker-dealer; the size of anddifficulty in executing the order; and the value of the expected contribution ofthe broker-dealer to the investment performance of the Fund on a continuingbasis. Subject to such policies and procedures as the Directors may determine,the Investment Manager shall have discretion to effect investment transactionsfor the Fund through broker-dealers (including, to the extent permissible underapplicable law, broker-dealers affiliated with the Sub-Adviser) qualified toobtain best execution of such transactions who provide brokerage and/or researchservices, as such services are defined in section 28(e) of the SecuritiesExchange Act of 1934, as amended (the "1934 Act"), and to cause the Fund to payany such broker-dealers an amount of commission for effecting a portfolioinvestment transaction in excess of the amount of commission anotherbroker-dealer would have charged for effecting that transaction, if theInvestment Manager determines in good faith that such amount of commission isreasonable in relation to the value of the brokerage or research services



provided by such broker-dealer, viewed in terms of either that particularinvestment transaction or the Investment Manager's overall responsibilities withrespect to the Fund and other accounts as to which the Investment Managerexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Investment Manager on behalfof the Fund to such broker-dealers shall be in such amounts and proportions asthe Investment Manager shall determine in good faith in conformity with itsresponsibilities under applicable laws, rules and regulations. The InvestmentManager will report on such allocations to the Directors regularly as requestedby the Directors, indicating the broker-dealers to whom such allocations havebeen made and the basis therefor.












(i) any of the costs (including applicable office space,



facilities and equipment) of the services of a principalfinancial officer of the Company whose normal duties consistof maintaining the financial accounts and books and records ofthe Company, including the reviewing of calculations of netasset value and preparing tax returns; or















14. Liability of the Directors and Shareholders. A copy of the Articles ofIncorporation of the Company is on file with the Secretary of the State ofMaryland, and notice is hereby given that this instrument is executed on behalf



of the Directors as directors and not individually and that the obligations ofthis instrument are not binding upon any of the Directors or shareholdersindividually but are binding only upon the assets and property of the Company.Federal and state laws impose responsibilities under certain circumstances onpersons who act in good faith, and therefore, nothing herein shall in any wayconstitute a waiver of limitation of any rights which the Company or theInvestment Manager may have under applicable law.






___________________________________ Vice President




American Skandia Advisor Funds, Inc.ASAF American Century Strategic Balanced Fund




EXHIBIT A


18676-1 (06/97)





W I T N E S S E T H



WHEREAS, the Company and the Investment Manager desire to enter into anagreement to provide for the management of the assets of the ASAF Federated HighYield Bond Fund (the "Fund") on the terms and conditions hereinafter set forth.














Consistent with this policy, the Investment Manager, in allocating Fundsecurities transactions, will take all relevant factors into consideration,including, but not limited to: the best price available; the reliability,integrity and financial condition of the broker-dealer; the size of anddifficulty in executing the order; and the value of the expected contribution ofthe broker-dealer to the investment performance of the Fund on a continuingbasis. Subject to such policies and procedures as the Directors may determine,the Investment Manager shall have discretion to effect investment transactionsfor the Fund through broker-dealers (including, to the extent permissible underapplicable law, broker-dealers affiliated with the Sub-Adviser) qualified toobtain best execution of such transactions who provide brokerage and/or researchservices, as such services are defined in section 28(e) of the SecuritiesExchange Act of 1934, as amended (the "1934 Act"), and to cause the Fund to payany such broker-dealers an amount of commission for effecting a portfolioinvestment transaction in excess of the amount of commission anotherbroker-dealer would have charged for effecting that transaction, if theInvestment Manager determines in good faith that such amount of commission isreasonable in relation to the value of the brokerage or research servicesprovided by such broker-dealer, viewed in terms of either that particularinvestment transaction or the Investment Manager's overall responsibilities with



respect to the Fund and other accounts as to which the Investment Managerexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Investment Manager on behalfof the Fund to such broker-dealers shall be in such amounts and proportions asthe Investment Manager shall determine in good faith in conformity with itsresponsibilities under applicable laws, rules and regulations. The InvestmentManager will report on such allocations to the Directors regularly as requestedby the Directors, indicating the broker-dealers to whom such allocations havebeen made and the basis therefor.












(i) any of the costs (including applicable office space,facilities and equipment) of the services of a principalfinancial officer of the Company whose normal duties consist



of maintaining the financial accounts and books and records ofthe Company, including the reviewing of calculations of netasset value and preparing tax returns; or






9. Compensation. The Company shall pay the Investment Manager in full



compensation for services rendered hereunder an annual investment advisory fee.The fee shall be payable monthly in arrears, based on the average daily netassets of the Fund for each month, at the annual rate set forth in Exhibit A tothis Agreement.







14. Liability of the Directors and Shareholders. A copy of the Articles ofIncorporation of the Company is on file with the Secretary of the State ofMaryland, and notice is hereby given that this instrument is executed on behalfof the Directors as directors and not individually and that the obligations ofthis instrument are not binding upon any of the Directors or shareholders



individually but are binding only upon the assets and property of the Company.Federal and state laws impose responsibilities under certain circumstances onpersons who act in good faith, and therefore, nothing herein shall in any wayconstitute a waiver of limitation of any rights which the Company or theInvestment Manager may have under applicable law.






___________________________________ Vice President



__________________________________ President & Chief Financial Officer

American Skandia Advisor Funds, Inc.ASAF Federated High Yield Bond Fund




EXHIBIT A


18677-1 (06/97)



AMERICAN SKANDIA ADVISOR FUNDS, INC.SUB-ADVISORY AGREEMENT

THIS AGREEMENT is between American Skandia Investment Services,Incorporated (the "Investment Manager") and Founders Asset Management, Inc. (the"Sub-Adviser").

W I T N E S S E T H

WHEREAS, American Skandia Advisor Funds, Inc. (the "Company") is a Marylandcorporation organized with one or more series of shares and is registered as anopen-end management investment company under the Investment Company Act of 1940,as amended (the "ICA"); and

WHEREAS, the Investment Manager and the Sub-Adviser each is an investmentadviser registered under the Investment Advisers Act of 1940, as amended (the"Advisers Act"); and

WHEREAS, the Board of Directors of the Company (the "Directors") have engagedthe Investment Manager to act as investment manager for the ASAF FoundersInternational Small Capitalization Fund (the "Fund"), one series of the Company,under the terms of a management agreement, dated June 1, 1997, with the Company(the "Management Agreement"); and

WHEREAS, the Investment Manager, acting pursuant to the Management Agreement,wishes to engage the Sub-Adviser, and the Directors have approved the engagementof the Sub-Adviser, to provide investment advice and other investment servicesset forth below.

NOW, THEREFORE, the Investment Manager and the Sub-Adviser agree as follows:

1. Investment Services. The Sub-Adviser will formulate and implement acontinuous investment program for the Fund conforming to the investmentobjective, investment policies and restrictions of the Fund as set forth in theProspectus and Statement of Additional Information of the Company as in effectfrom time to time (together, the "Registration Statement"), the Articles ofIncorporation and By-laws of the Company, and any investment guidelines or otherinstructions received by the Sub-Adviser in writing from the Investment Managerfrom time to time. Any amendments to the foregoing documents will not be deemedeffective with respect to the Sub-Adviser until the Sub-Adviser's receiptthereof. The appropriate officers and employees of the Sub-Adviser will beavailable to consult with the Investment Manager, the Company and the Directorsat reasonable times and upon reasonable notice concerning the business of theCompany, including valuations of securities which are not registered for publicsale, not traded on any securities market or otherwise may be deemed illiquid



for purposes of the ICA; provided it is understood that the Sub-Adviser is notresponsible for daily pricing of the Fund's assets.

Subject to the supervision and control of the Investment Manager, whichin turn is subject to the supervision and control of the Directors, theSub-Adviser in its discretion will determine which issuers and securities willbe purchased, held, sold or exchanged by the Fund or otherwise represented inthe Fund's investment portfolio from time to time and, subject to the provisionsof paragraph 3 of this Agreement, will place orders with and give instructionsto brokers, dealers and others for all such transactions and cause suchtransactions to be executed. Custody of the Fund will be maintained by acustodian bank (the "Custodian") and the Investment Manager will authorize theCustodian to honor orders and instructions by employees of the Sub-Adviserdesignated by the Sub-Adviser to settle transactions in respect of the Fund. Noassets may be withdrawn from the Fund other than for settlement of transactionson behalf of the Fund except upon the written authorization of appropriateofficers of the Company who shall have been certified as such by properauthorities of the Company prior to the withdrawal.

The Sub-Adviser will not be responsible for the provision ofadministrative, bookkeeping or accounting services to the Fund except asspecifically provided herein, as required by the ICA or the Advisers Act or asmay be necessary for the Sub-Adviser to supply to the Investment Manager, theFund or the Fund's shareholders the information required to be provided by theSub-Adviser hereunder. Any records maintained hereunder shall be the property ofthe Fund and surrendered promptly upon request.

In furnishing the services under this Agreement, the Sub-Adviser willcomply with and use its best efforts to enable the Fund to conform to therequirements of: (i) the ICA and the regulations promulgated thereunder; (ii)Subchapter M of the Internal Revenue Code and the regulations promulgatedthereunder; (iii) other applicable provisions of state or federal law; (iv) theArticles of Incorporation and By-laws of the Company; (v) policies anddeterminations of the Company and the Investment Manager provided to theSub-Adviser in writing; (vi) the fundamental and non-fundamental investmentpolicies and restrictions applicable to the Fund, as set out in the RegistrationStatement of the Company in effect, or as such investment policies andrestrictions from time to time may be amended by the Fund's shareholders or theDirectors and communicated to the Sub-Adviser in writing; (vii) the RegistrationStatement; and (viii) investment guidelines or other instructions received inwriting from the Investment Manager. Notwithstanding the foregoing, theSub-Adviser shall have no responsibility to monitor compliance with limitationsor restrictions for which information from the Investment Manager or itsauthorized agents is required to enable the Sub-Adviser to monitor compliancewith such limitations or restrictions unless such information is provided to theSub-adviser in writing. The Sub-Adviser shall supervise and monitor theactivities of its representatives, personnel and agents in connection with theinvestment program of the Fund.

Nothing in this Agreement shall be implied to prevent the InvestmentManager from engaging other sub-advisers to provide investment advice and other



services to the Fund or to series or portfolios of the Company for which theSub-Adviser does not provide such services, or to prevent the Investment Managerfrom providing such services itself in relation to the Fund or such other seriesor portfolios.

The Sub-Adviser shall be responsible for the preparation and filing ofSchedule 13-G and Form 13-F reflecting the Fund's securities holdings. TheSub-Adviser shall not be responsible for the preparation or filing of any otherreports required of the Fund by any governmental or regulatory agency, except asexpressly agreed in writing.

2. Investment Advisory Facilities. The Sub-Adviser, at its expense, willfurnish all necessary investment facilities, including salaries of personnel,required for it to execute its duties hereunder.

3. Execution of Fund Transactions. In connection with the investment andreinvestment of the assets of the Fund, the Sub-Adviser is responsible for theselection of broker-dealers to execute purchase and sale transactions for theFund in conformity with the policy regarding brokerage as set forth in theRegistration Statement, or as the Directors may determine from time to time, aswell as the negotiation of brokerage commission rates with such executingbroker-dealers. Generally, the Sub-Adviser's primary consideration in placingFund investment transactions with broker-dealers for execution will be toobtain, and maintain the availability of, best execution at the best availableprice.

Consistent with this policy, the Sub-Adviser, in selectingbroker-dealers and negotiating brokerage commission rates, will take allrelevant factors into consideration, including, but not limited to: the bestprice available; the reliability, integrity and financial condition of thebroker-dealer; the size of and difficulty in executing the order; and the valueof the expected contribution of the broker-dealer to the investment performanceof the Fund on a continuing basis. Subject to such policies and procedures asthe Directors may determine, the Sub-Adviser shall have discretion to effectinvestment transactions for the Fund through broker-dealers (including, to theextent permissible under applicable law, broker-dealers affiliated with theSub-Adviser) qualified to obtain best execution of such transactions who providebrokerage and/or research services, as such services are defined in section28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), andto cause the Fund to pay any such broker-dealers an amount of commission foreffecting a portfolio investment transaction in excess of the amount ofcommission another broker-dealer would have charged for effecting thattransaction, if the Sub-Adviser determines in good faith that such amount ofcommission is reasonable in relation to the value of the brokerage or researchservices provided by such broker-dealer, viewed in terms of either thatparticular investment transaction or the Sub-Adviser's overall responsibilitieswith respect to the Fund and other accounts as to which the Sub-Adviserexercises investment discretion (as such term is defined in section 3(a)(35) ofthe 1934 Act). Allocation of orders placed by the Sub-Adviser on behalf of theFund to such broker-dealers shall be in such amounts and proportions as theSub-Adviser shall determine in good faith in conformity with its



responsibilities under applicable laws, rules and regulations. The Sub-Adviserwill submit reports on such allocations to the Investment Manager regularly asrequested by the Investment Manager, in such form as may be mutually agreed toby the parties hereto, indicating the broker-dealers to whom such allocationshave been made and the basis therefor.

Subject to the foregoing provisions of this paragraph 3, theSub-Adviser may also consider sales of shares in the Fund, or may consider orfollow recommendations of the Investment Manager that take such sales intoaccount, as factors in the selection of broker-dealers to effect the Fund'sinvestment transactions. Notwithstanding the above, nothing shall require theSub-Adviser to use a broker-dealer which provides research services or to use aparticular broker-dealer which the Investment Manager has recommended.

4. Reports by the Sub-Adviser. The Sub-Adviser shall furnish the InvestmentManager monthly, quarterly and annual reports, in such form as may be mutuallyagreed to by the parties hereto, concerning transactions and performance of theFund, including information required in the Registration Statement orinformation necessary for the Investment Manager to review the Fund or discussthe management of it. The Sub-Adviser shall permit the books and recordsmaintained with respect to the Fund to be inspected and audited by the Company,the Investment Manager or their respective agents at all reasonable times duringnormal business hours upon reasonable notice. The Sub-Adviser shall immediatelynotify both the Investment Manager and the Company of any legal process servedupon it in connection with its activities hereunder, including any legal processserved upon it on behalf of the Investment Manager, the Fund or the Company. TheSub-Adviser shall promptly notify the Investment Manager of any changes in anyinformation regarding the Sub-Adviser or the investment program for the Fund asdescribed in Section 9 of this Agreement.

5. Compensation of the Sub-Adviser. The amount of the compensation to theSub-Adviser is computed at an annual rate. The fee shall be payable monthly inarrears, based on the average daily net assets of the Fund for each month, atthe annual rate set forth in Exhibit A to this Agreement.

In computing the fee to be paid to the Sub-Adviser, the net asset value ofthe Fund shall be valued as set forth in the Registration Statement. If thisAgreement is terminated, the payment described herein shall be prorated to thedate of termination.

The Investment Manager and the Sub-Adviser shall not be considered aspartners or participants in a joint venture. The Sub-Adviser will pay its ownexpenses for the services to be provided pursuant to this Agreement and will notbe obligated to pay any expenses of the Investment Manager, the Fund or theCompany. Except as otherwise specifically provided herein, the InvestmentManager, the Fund and the Company will not be obligated to pay any expenses ofthe Sub-Adviser.

6. Delivery of Documents to the Sub-Adviser. The Investment Manager hasfurnished the Sub-Adviser with true, correct and complete copies of each of thefollowing documents:



(a) The Articles of Incorporation of the Company, as in effect on the datehereof;

(b) The By-laws of the Company, as in effect on the date hereof;

(c) The resolutions of the Directors approving the engagement of theSub-Adviser as portfolio manager of the Fund and approving the form of thisAgreement;

(d) The resolutions of the Directors selecting the Investment Manager asinvestment manager to the Fund and approving the form of the ManagementAgreement;

(e) The Management Agreement;

(f) The Code of Ethics of the Company and of the Investment Manager, as ineffect on the date hereof; and

(g) A list of companies the securities of which are not to be bought orsold for the Fund.

The Investment Manager will furnish the Sub-Adviser from time to timewith copies, properly certified or otherwise authenticated, of all amendments ofor supplements to the foregoing, if any. Such amendments or supplements as toitems (a) through (f) above will be provided within 30 days of the time suchmaterials become available to the Investment Manager. Such amendments orsupplements as to item (g) above will be provided not later than the end of thebusiness day next following the date such amendments or supplements become knownto the Investment Manager. Any amendments or supplements to the foregoing willnot be deemed effective with respect to the Sub-Adviser until the Sub-Adviser'sreceipt thereof. The Investment Manager will provide such additional informationas the Sub-Adviser may reasonably request in connection with the performance ofits duties hereunder.

7. Delivery of Documents to the Investment Manager. The Sub-Adviser hasfurnished the Investment Manager with true, correct and complete copies of eachof the following documents:

(a) The Sub-Adviser's Form ADV as filed with the Securities and ExchangeCommission as of the date hereof;

(b) The Sub-Adviser's most recent balance sheet;

(c) Separate lists of persons who the Sub-Adviser wishes to have authorizedto give written and/or oral instructions to Custodians of Company assets for theFund; and

(d) The Code of Ethics of the Sub-Adviser, as in effect on the date hereof.

The Sub-Adviser will furnish the Investment Manager from time to time



with copies, properly certified or otherwise authenticated, of all amendments ofor supplements to the foregoing, if any. Such amendments or supplements will beprovided within 30 days of the time such materials become available to theSub-Adviser. Any amendments or supplements to the foregoing will not be deemedeffective with respect to the Investment Manager until the Investment Manager'sreceipt thereof. The Sub-Adviser will provide additional information as theInvestment Manager may reasonably request in connection with the Sub-Adviser'sperformance of its duties under this Agreement.

8. Confidential Treatment. The parties hereto understand that anyinformation or recommendation supplied by the Sub-Adviser in connection with theperformance of its obligations hereunder is to be regarded as confidential andfor use only by the Investment Manager, the Company or such persons theInvestment Manager may designate in connection with the Fund. The parties alsounderstand that any information supplied to the Sub-Adviser in connection withthe performance of its obligations hereunder, particularly, but not limited to,any list of securities which may not be bought or sold for the Fund, is to beregarded as confidential and for use only by the Sub-Adviser in connection withits obligation to provide investment advice and other services to the Fund.

9. Representations of the Parties. Each party hereto hereby furtherrepresents and warrants to the other that: (i) it is registered as an investmentadviser under the Advisers Act and is registered or licensed as an investmentadviser under the laws of all jurisdictions in which its activities require itto be so registered or licensed; and (ii) it will use its reasonable bestefforts to maintain each such registration or license in effect at all timesduring the term of this Agreement; and (iii) it will promptly notify the otherif it ceases to be so registered, if its registration is suspended for anyreason, or if it is notified by any regulatory organization or court ofcompetent jurisdiction that it should show cause why its registration should notbe suspended or terminated; and (iv) it is duly authorized to enter into thisAgreement and to perform its obligations hereunder.

The Sub-Adviser further represents that it has adopted a written Codeof Ethics in compliance with Rule 17j-1(b) of the ICA. The Sub-Adviser shall besubject to such Code of Ethics and shall not be subject to any other Code ofEthics, including the Investment Manager's Code of Ethics, unless specificallyadopted by the Sub-Adviser. The Investment Manager further represents andwarrants to the Sub-Adviser that (i) the appointment of the Sub-Adviser by theInvestment Manager has been duly authorized and (ii) it has acted and willcontinue to act in connection with the transactions contemplated hereby, and thetransactions contemplated hereby are, in conformity with the ICA, the Company'sgoverning documents and other applicable law.

10. Liability. In the absence of willful misfeasance, bad faith, grossnegligence or reckless disregard for its obligations hereunder, the Sub-Advisershall not be liable to the Company, the Fund, the Fund's shareholders or theInvestment Manager for any act or omission resulting in any loss suffered by theCompany, the Fund, the Fund's shareholders or the Investment Manager inconnection with any service to be provided herein. The Federal laws imposeresponsibilities under certain circumstances on persons who act in good faith,



and therefore, nothing herein shall in any way constitute a waiver or limitationof any rights which the Company, the Fund or the Investment Manager may haveunder applicable law.

11. Other Activities of the Sub-Adviser. The Investment Manager agrees thatthe Sub-Adviser and any of its partners or employees, and persons affiliatedwith the Sub-Adviser or with any such partner or employee, may render investmentmanagement or advisory services to other investors and institutions, and thatsuch investors and institutions may own, purchase or sell, securities or otherinterests in property that are the same as, similar to, or different from thosewhich are selected for purchase, holding or sale for the Fund. The InvestmentManager further acknowledges that the Sub-Adviser shall be in all respects freeto take action with respect to investments in securities or other interests inproperty that are the same as, similar to, or different from those selected forpurchase, holding or sale for the Fund. The Investment Manager understands thatthe Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients orclass of clients in the allocation of investment opportunities, so that to theextent practical, such opportunities will be allocated among the Sub-Adviser'sclients over a period of time on a fair and equitable basis. Nothing in thisAgreement shall impose upon the Sub-Adviser any obligation (i) to purchase orsell, or recommend for purchase or sale, for the Fund any security which theSub-Adviser, its partners, affiliates or employees may purchase or sell for theSub-Adviser or such partner's, affiliate's or employee's own accounts or for theaccount of any other client of the Sub-Adviser, advisory or otherwise, or (ii)to abstain from the purchase or sale of any security for the Sub-Adviser's otherclients, advisory or otherwise, which the Investment Manager has placed on thelist provided pursuant to paragraph 6(g) of this Agreement.

12. Continuance and Termination. This Agreement shall remain in full forceand effect for one year from the date hereof, and is renewable annuallythereafter by specific approval of the Directors or by vote of a majority of theoutstanding voting securities of the Fund. Any such renewal shall be approved bythe vote of a majority of the Directors who are not interested persons under theICA, cast in person at a meeting called for the purpose of voting on suchrenewal. This Agreement may be terminated without penalty at any time by theInvestment Manager or the Sub-Adviser upon 60 days written notice, and willautomatically terminate in the event of (i) its "assignment" by either party tothis Agreement, as such term is defined in the ICA, subject to such exemptionsas may be granted by the Securities and Exchange Commission by rule, regulationor order, or (ii) upon termination of the Management Agreement, provided theSub-Adviser has received prior written notice thereof.

13. Notification. The Sub-Adviser will notify the Investment Manager withina reasonable time of any change in the personnel of the Sub-Adviser withresponsibility for making investment decisions in relation to the Fund (the"Portfolio Manager(s)") or who have been authorized to give instructions to theCustodian. The Sub-adviser shall be responsible for reasonable out-of-pocketcosts and expenses incurred by the Investment Manager, the Fund or the Companyto amend or supplement the Company's prospectus to reflect a change in PortfolioManager(s) or otherwise to comply with the ICA, the Securities Act of 1933, asamended (the "1933 Act") or any other applicable statute, law, rule or



regulation, as a result of such change; provided, however, that the Sub-Advisershall not be responsible for such costs and expenses where the change inPortfolio Manager(s) reflects the termination of employment of the PortfolioManager(s) with the Sub-Adviser and its affiliates or is the result of a requestby the Investment Manager or is due to other circumstances beyond theSub-Adviser's control.

Any notice, instruction or other communication required or contemplatedby this Agreement shall be in writing. All such communications shall beaddressed to the recipient at the address set forth below, provided that eitherparty may, by notice, designate a different recipient and/or address for suchparty.

Investment Manager: American Skandia Investment Services, IncorporatedOne Corporate DriveShelton, Connecticut 06484Attention: Thomas M. MazzaferroPresident & Chief Operating Officer

Sub-Adviser: Founders Asset Management, Inc.Founders Financial Center2930 East Third AvenueDenver, Colorado 80206Attention: General Counsel

Company: American Skandia Advisor Funds, Inc.One Corporate DriveShelton, Connecticut 06484Attention: Eric C. Freed, Esq.

14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmlessthe Investment Manager, any affiliated person within the meaning of Section2(a)(3) of the ICA ("affiliated person") of the Investment Manager and eachperson, if any who, within the meaning of Section 15 of the 1933 Act, controls("controlling person") the Investment Manager, against any and all losses,claims, damages, liabilities or litigation (including reasonable legal and otherexpenses), to which the Investment Manager or such affiliated person orcontrolling person of the Investment Manager may become subject under the 1933Act, the ICA, the Advisers Act, under any other statute, law, rule or regulationat common law or otherwise, arising out of the Sub-Adviser's responsibilitieshereunder (1) to the extent of and as a result of the willful misconduct, badfaith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser'semployees or representatives or any affiliate of or any person acting on behalfof the Sub-Adviser, or (2) as a result of any untrue statement or alleged untruestatement of a material fact contained in the Registration Statement, includingany amendment thereof or any supplement thereto, or the omission or allegedomission to state therein a material fact required to be stated therein ornecessary to make the statement therein not misleading, if such a statement oromission was made in reliance upon and in conformity with written informationfurnished by the Sub-Adviser to the Investment Manager, the Fund, the Company orany affiliated person of the Investment Manager, the Fund or the Company or upon



verbal information confirmed by the Sub-Adviser in writing, or (3) to the extentof, and as a result of, the failure of the Sub-Adviser to execute, or cause tobe executed, portfolio investment transactions according to the requirements ofthe ICA; provided, however, that in no case is the Sub-Adviser's indemnity infavor of the Investment Manager or any affiliated person or controlling personof the Investment Manager deemed to protect such person against any liability towhich any such person would otherwise be subject by reason of willfulmisconduct, bad faith or gross negligence in the performance of its duties or byreason of its reckless disregard of its obligations and duties under thisAgreement.

The Investment Manager agrees to indemnify and hold harmless theSub-Adviser, any affiliated person of the Sub-Adviser and each controllingperson of the Sub-Adviser, if any, against any and all losses, claims, damages,liabilities or litigation (including reasonable legal and other expenses), towhich the Sub-Adviser or such affiliated person or controlling person of theSub-Adviser may become subject under the 1933 Act, the ICA, the Advisers Act,under any other statute, law, rule or regulation, at common law or otherwise,arising out of the Investment Manager's responsibilities as investment managerof the Fund (1) to the extent of and as a result of the willful misconduct, badfaith, or gross negligence by the Investment Manager, any of the InvestmentManager's employees or representatives or any affiliate of or any person actingon behalf of the Investment Manager, or (2) as a result of any untrue statementor alleged untrue statement of a material fact contained in the RegistrationStatement, including any amendment thereof or any supplement thereto or theomission or alleged omission to state therein a material fact required to bestated therein or necessary to make the statement therein not misleading, ifsuch a statement or omission was made other than in reliance upon and inconformity with written information furnished by the Sub-Adviser, or anyaffiliated person of the Sub-Adviser or other than upon verbal informationconfirmed by the Sub-Adviser in writing; provided, however, that in no case isthe Investment Manager's indemnity in favor of the Sub-Adviser or any affiliatedperson or controlling person of the Sub-Adviser deemed to protect such personagainst any liability to which any such person would otherwise be subject byreason of willful misconduct, bad faith or gross negligence in the performanceof its duties or by reason of its reckless disregard of its obligations andduties under this Agreement. It is agreed that the Investment Manager'sindemnification obligations under this Section 14 will extend to expenses andcosts (including reasonable attorneys fees) incurred by the Sub-Adviser as aresult of any litigation brought by the Investment Manager alleging theSub-Adviser's failure to perform its obligations and duties in the mannerrequired under this Agreement unless judgment is rendered for the InvestmentManager.

15. Conflict of Laws. The provisions of this Agreement shall be subject toall applicable statutes, laws, rules and regulations, including, withoutlimitation, the applicable provisions of the ICA and rules and regulationspromulgated thereunder. To the extent that any provision contained hereinconflicts with any such applicable provision of law or regulation, the lattershall control. The terms and provisions of this Agreement shall be interpretedand defined in a manner consistent with the provisions and definitions of the



ICA. If any provision of this Agreement shall be held or made invalid by a courtdecision, statute, rule or otherwise, the remainder of this Agreement shallcontinue in full force and effect and shall not be affected by such invalidity.

16. Amendments, Waivers, etc. Provisions of this Agreement may be changed,waived, discharged or terminated only by an instrument in writing signed by theparty against which enforcement of the change, waiver, discharge or terminationis sought. This Agreement (including Exhibit A hereto) may be amended at anytime by written mutual consent of the parties, subject to the requirements ofthe ICA and rules and regulations promulgated and orders granted thereunder.

17. Governing State Law. This Agreement is made under, and shall begoverned by and construed in accordance with, the laws of the State ofConnecticut.

18. Severability. Each provision of this Agreement is intended to beseverable. If any provision of this Agreement is held to be illegal or madeinvalid by court decision, statute, rule or otherwise, such illegality orinvalidity will not affect the validity or enforceability of the remainder ofthis Agreement.

The effective date of this agreement is June 1, 1997.

FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISER:

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

Date: ____________________________ Date: ____________________________

Attest: ____________________________ Attest: ____________________________

18612-1 (06/97)

American Skandia Advisor Funds, Inc.ASAF Founders International Small Capitalization Fund

Sub-Advisory Agreement

EXHIBIT A



An annual rate of .60% of the portion of the average daily net assetsof the Fund not in excess of $100 million; plus .50% of the portion over $100million.




THIS AGREEMENT is between American Skandia Investment Services,Incorporated (the "Investment Manager") and Founders Asset Management, Inc. (the"Sub-Adviser").

W I T N E S S E T H



WHEREAS, the Board of Directors of the Company (the "Directors") have engagedthe Investment Manager to act as investment manager for the ASAF Founders SmallCapitalization Fund (the "Fund"), one series of the Company, under the terms ofa management agreement, dated June 1, 1997, with the Company (the "ManagementAgreement"); and










In computing the fee to be paid to the Sub-Adviser, the net asset valueof the Fund shall be valued as set forth in the Registration Statement. If thisAgreement is terminated, the payment described herein shall be prorated to thedate of termination.






8. Confidential Treatment. The parties hereto understand that anyinformation or recommendation supplied by the Sub-Adviser in connection with theperformance of its obligations hereunder is to be regarded as confidential andfor use only by the Investment Manager, the Company or such persons theInvestment Manager may designate in connection with the Fund. The parties alsounderstand that any information supplied to the Sub-Adviser in connection withthe performance of its obligations hereunder, particularly, but not limited to,any list of securities which may not be bought or sold for the Fund, is to beregarded as confidential and for use only by the Sub-Adviser in connection withits obligation to provide investment advice and other services to the Fund.

9. Representations of the Parties. Each party hereto hereby furtherrepresents and warrants to the other that: (i) it is registered as an investmentadviser under the Advisers Act and is registered or licensed as an investmentadviser under the laws of all jurisdictions in which its activities require itto be so registered or licensed; and (ii) it will use its reasonable bestefforts to maintain each such registration or license in effect at all timesduring the term of this Agreement; and (iii) it will promptly notify the otherif it ceases to be so registered, if its registration is suspended for anyreason, or if it is notified by any regulatory organization or court ofcompetent jurisdiction that it should show cause why its registration should notbe suspended or terminated; and (iv) it is duly authorized to enter into thisAgreement and to perform its obligations hereunder.






11. Other Activities of the Sub-Adviser. The Investment Manager agrees thatthe Sub-Adviser and any of its partners or employees, and persons affiliatedwith the Sub-Adviser or with any such partner or employee, may render investmentmanagement or advisory services to other investors and institutions, and thatsuch investors and institutions may own, purchase or sell, securities or otherinterests in property that are the same as, similar to, or different from thosewhich are selected for purchase, holding or sale for the Fund. The InvestmentManager further acknowledges that the Sub-Adviser shall be in all respects freeto take action with respect to investments in securities or other interests inproperty that are the same as, similar to, or different from those selected forpurchase, holding or sale for the Fund. The Investment Manager understands thatthe Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients orclass of clients in the allocation of investment opportunities, so that to theextent practical, such opportunities will be allocated among the Sub-Adviser'sclients over a period of time on a fair and equitable basis. Nothing in thisAgreement shall impose upon the Sub-Adviser any obligation (i) to purchase orsell, or recommend for purchase or sale, for the Fund any security which theSub-Adviser, its partners, affiliates or employees may purchase or sell for theSub-Adviser or such partner's, affiliate's or employee's own accounts or for theaccount of any other client of the Sub-Adviser, advisory or otherwise, or (ii)to abstain from the purchase or sale of any security for the Sub-Adviser's otherclients, advisory or otherwise, which the Investment Manager has placed on thelist provided pursuant to paragraph 6(g) of this Agreement.

12. Continuance and Termination. This Agreement shall remain in full forceand effect for one year from the date hereof, and is renewable annuallythereafter by specific approval of the Directors or by vote of a majority of theoutstanding voting securities of the Fund. Any such renewal shall be approved bythe vote of a majority of the Directors who are not interested persons under theICA, cast in person at a meeting called for the purpose of voting on suchrenewal. This Agreement may be terminated without penalty at any time by theInvestment Manager or the Sub-Adviser upon 60 days written notice, and willautomatically terminate in the event of (i) its "assignment" by either party tothis Agreement, as such term is defined in the ICA, subject to such exemptionsas may be granted by the Securities and Exchange Commission by rule, regulationor order, or (ii) upon termination of the Management Agreement, provided theSub-Adviser has received prior written notice thereof.

13. Notification. The Sub-Adviser will notify the Investment Manager withina reasonable time of any change in the personnel of the Sub-Adviser withresponsibility for making investment decisions in relation to the Fund (the"Portfolio Manager(s)") or who have been authorized to give instructions to theCustodian. The Sub-adviser shall be responsible for reasonable out-of-pocketcosts and expenses incurred by the Investment Manager, the Fund or the Companyto amend or supplement the Company's prospectus to reflect a change in PortfolioManager(s) or otherwise to comply with the ICA, the Securities Act of 1933, asamended (the "1933 Act") or any other applicable statute, law, rule or






Sub-Adviser: Founders Asset Management, Inc.Founders Financial Center2930 East Third AvenueDenver, Colorado 80206Attention: General Counsel


14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmlessthe Investment Manager, any affiliated person within the meaning of Section2(a)(3) of the ICA ("affiliated person") of the Investment Manager and eachperson, if any who, within the meaning of Section 15 of the 1933 Act, controls("controlling person") the Investment Manager, against any and all losses,claims, damages, liabilities or litigation (including reasonable legal and otherexpenses), to which the Investment Manager or such affiliated person orcontrolling person of the Investment Manager may become subject under the 1933Act, the ICA, the Advisers Act, under any other statute, law, rule or regulationat common law or otherwise, arising out of the Sub-Adviser's responsibilitieshereunder (1) to the extent of and as a result of the willful misconduct, badfaith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser'semployees or representatives or any affiliate of or any person acting on behalfof the Sub-Adviser, or (2) as a result of any untrue statement or alleged untruestatement of a material fact contained in the Registration Statement, includingany amendment thereof or any supplement thereto, or the omission or allegedomission to state therein a material fact required to be stated therein ornecessary to make the statement therein not misleading, if such a statement oromission was made in reliance upon and in conformity with written informationfurnished by the Sub-Adviser to the Investment Manager, the Fund, the Company orany affiliated person of the Investment Manager, the Fund or the Company or upon





15. Conflict of Laws. The provisions of this Agreement shall be subject toall applicable statutes, laws, rules and regulations, including, withoutlimitation, the applicable provisions of the ICA and rules and regulationspromulgated thereunder. To the extent that any provision contained hereinconflicts with any such applicable provision of law or regulation, the lattershall control. The terms and provisions of this Agreement shall be interpretedand defined in a manner consistent with the provisions and definitions of the



ICA. If any provision of this Agreement shall be held or made invalid by a courtdecision, statute, rule or otherwise, the remainder of this Agreement shallcontinue in full force and effect and shall not be affected by such invalidity.






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

Date: ____________________________ Date: ____________________________

Attest: ____________________________ Attest: ____________________________

18614-1 (06/97)

American Skandia Advisor Funds, Inc.ASAF Founders Small Capitalization Fund


EXHIBIT A




THIS AGREEMENT is between American Skandia Investment Services,Incorporated (the "Investment Manager") and T. Rowe Price Associates, Inc. (the"Sub-Adviser").

W I T N E S S E T H



WHEREAS, the Board of Directors of the Company (the "Directors") have engagedthe Investment Manager to act as investment manager for the ASAF T. Rowe PriceSmall Company Value Fund (the "Fund"), one series of the Company, under theterms of a management agreement, dated June 1, 1997, with the Company (the"Management Agreement"); and







8. Confidential Treatment. The parties hereto understand that any information orrecommendation supplied by the Sub-Adviser in connection with the performance ofits obligations hereunder is to be regarded as confidential and for use only bythe Investment Manager, the Company or such persons the Investment Manager maydesignate in connection with the Fund. The parties also understand that anyinformation supplied to the Sub-Adviser in connection with the performance ofits obligations hereunder, particularly, but not limited to, any list ofsecurities which may not be bought or sold for the Fund, is to be regarded asconfidential and for use only by the Sub-Adviser in connection with itsobligation to provide investment advice and other services to the Fund.

9. Representations of the Parties. Each party hereto hereby further representsand warrants to the other that: (i) it is registered as an investment adviserunder the Advisers Act and is registered or licensed as an investment adviserunder the laws of all jurisdictions in which its activities require it to be soregistered or licensed; and (ii) it will use its reasonable best efforts tomaintain each such registration or license in effect at all times during theterm of this Agreement; and (iii) it will promptly notify the other if it ceasesto be so registered, if its registration is suspended for any reason, or if itis notified by any regulatory organization or court of competent jurisdictionthat it should show cause why its registration should not be suspended orterminated; and (iv) it is duly authorized to enter into this Agreement and toperform its obligations hereunder.






11. Other Activities of the Sub-Adviser. The Investment Manager agrees that theSub-Adviser and any of its partners or employees, and persons affiliated withthe Sub-Adviser or with any such partner or employee, may render investmentmanagement or advisory services to other investors and institutions, and thatsuch investors and institutions may own, purchase or sell, securities or otherinterests in property that are the same as, similar to, or different from thosewhich are selected for purchase, holding or sale for the Fund. The InvestmentManager further acknowledges that the Sub-Adviser shall be in all respects freeto take action with respect to investments in securities or other interests inproperty that are the same as, similar to, or different from those selected forpurchase, holding or sale for the Fund. The Investment Manager understands thatthe Sub-Adviser shall not favor or disfavor any of the Sub-Adviser's clients orclass of clients in the allocation of investment opportunities, so that to theextent practical, such opportunities will be allocated among the Sub-Adviser'sclients over a period of time on a fair and equitable basis. Nothing in thisAgreement shall impose upon the Sub-Adviser any obligation (i) to purchase orsell, or recommend for purchase or sale, for the Fund any security which theSub-Adviser, its partners, affiliates or employees may purchase or sell for theSub-Adviser or such partner's, affiliate's or employee's own accounts or for theaccount of any other client of the Sub-Adviser, advisory or otherwise, or (ii)to abstain from the purchase or sale of any security for the Sub-Adviser's otherclients, advisory or otherwise, which the Investment Manager has placed on thelist provided pursuant to paragraph 6(g) of this Agreement.

12. Continuance and Termination. This Agreement shall remain in full force andeffect for one year from the date hereof, and is renewable annually thereafterby specific approval of the Directors or by vote of a majority of theoutstanding voting securities of the Fund. Any such renewal shall be approved bythe vote of a majority of the Directors who are not interested persons under theICA, cast in person at a meeting called for the purpose of voting on suchrenewal. This Agreement may be terminated without penalty at any time by theInvestment Manager or the Sub-Adviser upon 60 days written notice, and willautomatically terminate in the event of (i) its "assignment" by either party tothis Agreement, as such term is defined in the ICA, subject to such exemptionsas may be granted by the Securities and Exchange Commission by rule, regulationor order, or (ii) upon termination of the Management Agreement, provided theSub-Adviser has received prior written notice thereof.

13. Notification. The Sub-Adviser will notify the Investment Manager withina reasonable time of any change in the personnel of the Sub-Adviser withresponsibility for making investment decisions in relation to the Fund or whohave been authorized to give instructions to the Custodian.

Any notice, instruction or other communication required or contemplatedby this Agreement shall be in writing. All such communications shall beaddressed to the recipient at the address set forth below, provided that either



party may, by notice, designate a different recipient and/or address for suchparty.


Sub-Adviser: T. Rowe Price Associates, Inc.100 East Pratt StreetBaltimore, Maryland 21202Attention: Henry H. Hopkins, Esq.


14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless theInvestment Manager, any affiliated person within the meaning of Section 2(a)(3)of the ICA ("affiliated person") of the Investment Manager and each person, ifany who, within the meaning of Section 15 of the Securities Act of 1933, asamended (the "1933 Act"), controls ("controlling person") the InvestmentManager, against any and all losses, claims, damages, liabilities or litigation(including reasonable legal and other expenses), to which the Investment Manageror such affiliated person or controlling person of the Investment Manager maybecome subject under the 1933 Act, the ICA, the Advisers Act, under any otherstatute, law, rule or regulation at common law or otherwise, arising out of theSub-Adviser's responsibilities hereunder (1) to the extent of and as a result ofthe willful misconduct, bad faith, or gross negligence by the Sub-Adviser, anyof the Sub-Adviser's employees or representatives or any affiliate of or anyperson acting on behalf of the Sub-Adviser, or (2) as a result of any untruestatement or alleged untrue statement of a material fact contained in theRegistration Statement, including any amendment thereof or any supplementthereto, or the omission or alleged omission to state therein a material factrequired to be stated therein or necessary to make the statement therein notmisleading, if such a statement or omission was made in reliance upon and inconformity with written information furnished by the Sub-Adviser to theInvestment Manager, the Fund, the Company or any affiliated person of theInvestment Manager, the Fund or the Company or upon verbal information confirmedby the Sub-Adviser in writing, or (3) to the extent of, and as a result of, thefailure of the Sub-Adviser to execute, or cause to be executed, portfolioinvestment transactions according to the requirements of the ICA; provided,however, that in no case is the Sub-Adviser's indemnity in favor of theInvestment Manager or any affiliated person or controlling person of theInvestment Manager deemed to protect such person against any liability to whichany such person would otherwise be subject by reason of willful misconduct, badfaith or gross negligence in the performance of its duties or by reason of itsreckless disregard of its obligations and duties under this Agreement.




15. Conflict of Laws. The provisions of this Agreement shall be subject to allapplicable statutes, laws, rules and regulations, including, without limitation,the applicable provisions of the ICA and rules and regulations promulgatedthereunder. To the extent that any provision contained herein conflicts with anysuch applicable provision of law or regulation, the latter shall control. Theterms and provisions of this Agreement shall be interpreted and defined in amanner consistent with the provisions and definitions of the ICA. If anyprovision of this Agreement shall be held or made invalid by a court decision,statute, rule or otherwise, the remainder of this Agreement shall continue infull force and effect and shall not be affected by such invalidity.








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

Date: ____________________________ Date: ____________________________

Attest: ____________________________ Attest: ____________________________

18623-1 (06/97)

American Skandia Advisor Funds, Inc.ASAF T. Rowe Price Small Company Value Fund


EXHIBIT A





THIS AGREEMENT is between American Skandia Investment Services,Incorporated (the "Investment Manager") and American Century InvestmentManagement, Inc. (the "Sub-Adviser").

W I T N E S S E T H



WHEREAS, the Board of Directors of the Company (the "Directors") have engagedthe Investment Manager to act as investment manager for the ASAF AmericanCentury Strategic Balanced Fund (the "Fund"), one series of the Company, underthe terms of a management agreement, dated June 1, 1997, with the Company (the"Management Agreement"); and












6. Delivery of Documents to the Sub-Adviser. The Investment Manager hasfurnished the Sub-Adviser with true,correct and complete copies of each of the following documents:
















The Sub-Adviser will thereafter furnish the Investment Manager with



copies, properly certified or otherwise authenticated, of all materialamendments of or supplements to items (a), (c) and (d) above within 30 days ofthe time such materials become available to the Sub-Adviser. With respect toitem (b) above, the Sub-Adviser will thereafter timely furnish the InvestmentManager with a copy of the document, properly certified or otherwiseauthenticated, upon request by the Investment Manager.

Any amendments or supplements to the above documents will not be deemedeffective with respect to the Investment Manager until the Investment Manager'sreceipt thereof. The Sub-Adviser will provide additional information as theInvestment Manager may reasonably request in connection with the Sub-Adviser'sperformance of its duties under this Agreement.




10. Liability. In the absence of willful misfeasance, bad faith, grossnegligence or reckless disregard for its obligations hereunder, the Sub-Advisershall not be liable to the Company, the Fund, the Fund's shareholders or the



Investment Manager for any act or omission resulting in any loss suffered by theCompany, the Fund, the Fund's shareholders or the Investment Manager inconnection with any service to be provided herein. The Federal laws imposeresponsibilities under certain circumstances on persons who act in good faith,and therefore, nothing herein shall in any way constitute a waiver or limitationof any rights which the Company, the Fund or the Investment Manager may haveunder applicable law.



13. Notification. The Sub-Adviser will notify the Investment Manager within areasonable time of any change in the personnel of the Sub-Adviser withresponsibility for making investment decisions in relation to the Fund (the"Portfolio Manager(s)") or who have been authorized to give instructions to theCustodian. The Sub-adviser shall be responsible for reasonable out-of-pocket



costs and expenses incurred by the Investment Manager, the Fund or the Companyto amend or supplement the Company's prospectus to reflect a change in PortfolioManager(s) or otherwise to comply with the ICA, the Securities Act of 1933, asamended (the "1933 Act") or any other applicable statute, law, rule orregulation, as a result of such change; provided, however, that the Sub-Advisershall not be responsible for such costs and expenses where the change inPortfolio Manager(s) reflects the termination of employment of the PortfolioManager(s) with the Sub-Adviser and its affiliates or is the result of a requestby the Investment Manager or is due to other circumstances beyond theSub-Adviser's control.



Sub-Adviser: American Century Investment Management, Inc.4500 Main StreetKansas City, Missouri 64111Attention: General Counsel


14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless theInvestment Manager, any affiliated person within the meaning of Section 2(a)(3)of the ICA ("affiliated person") of the Investment Manager and each person, ifany who, within the meaning of Section 15 of the 1933 Act, controls("controlling person") the Investment Manager, against any and all losses,claims, damages, liabilities or litigation (including reasonable legal and otherexpenses), to which the Investment Manager or such affiliated person orcontrolling person of the Investment Manager may become subject under the 1933Act, the ICA, the Advisers Act, under any other statute, law, rule or regulationat common law or otherwise, arising out of the Sub-Adviser's responsibilitieshereunder (1) to the extent of and as a result of the willful misconduct, badfaith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser'semployees or representatives or any affiliate of or any person acting on behalfof the Sub-Adviser, or (2) as a result of any untrue statement or alleged untruestatement of a material fact contained in the Registration Statement, includingany amendment thereof or any supplement thereto, or the omission or allegedomission to state therein a material fact required to be stated therein ornecessary to make the statement therein not misleading, if such a statement or



omission was made in reliance upon and in conformity with written informationfurnished by the Sub-Adviser to the Investment Manager, the Fund, the Company orany affiliated person of the Investment Manager, the Fund or the Company or uponverbal information confirmed by the Sub-Adviser in writing, or (3) to the extentof, and as a result of, the failure of the Sub-Adviser to execute, or cause tobe executed, portfolio investment transactions according to the requirements ofthe ICA; provided, however, that in no case is the Sub-Adviser's indemnity infavor of the Investment Manager or any affiliated person or controlling personof the Investment Manager deemed to protect such person against any liability towhich any such person would otherwise be subject by reason of willfulmisconduct, bad faith or gross negligence in the performance of its duties or byreason of its reckless disregard of its obligations and duties under thisAgreement.


15. Conflict of Laws. The provisions of this Agreement shall be subject to allapplicable statutes, laws, rules and regulations, including, without limitation,the applicable provisions of the ICA and rules and regulations promulgatedthereunder. To the extent that any provision contained herein conflicts with any



such applicable provision of law or regulation, the latter shall control. Theterms and provisions of this Agreement shall be interpreted and defined in amanner consistent with the provisions and definitions of the ICA. If anyprovision of this Agreement shall be held or made invalid by a court decision,statute, rule or otherwise, the remainder of this Agreement shall continue infull force and effect and shall not be affected by such invalidity.






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

Date: ____________________________ Date: ____________________________

Attest: ____________________________ Attest: ____________________________

18615-1 (06/97)

American Skandia Advisor Funds, Inc.ASAF American Century Strategic Balanced Fund




EXHIBIT A





THIS AGREEMENT is between American Skandia Investment Services, Incorporated(the "Investment Manager") and Federated Investment Counseling (the"Sub-Adviser").

W I T N E S S E T H



WHEREAS, the Board of Directors of the Company (the "Directors") have engagedthe Investment Manager to act as investment manager for the ASAF Federated HighYield Bond Fund (the "Fund"), one series of the Company, under the terms of amanagement agreement, dated June 1, 1997, with the Company (the "ManagementAgreement"); and



1. Investment Services. The Sub-Adviser will formulate and implement acontinuous investment program for the Fund conforming to the investmentobjective, investment policies and restrictions of the Fund as set forth in theProspectus and Statement of Additional Information of the Company as in effectfrom time to time (together, the "Registration Statement"), the Articles ofIncorporation and By-laws of the Company, and any investment guidelines or otherinstructions received by the Sub-Adviser in writing from the Investment Managerfrom time to time. Any amendments to the foregoing documents will not be deemedeffective with respect to the Sub-Adviser until the Sub-Adviser's receiptthereof. The appropriate officers and employees of the Sub-Adviser will beavailable to consult with the Investment Manager, the Company and the Directorsat reasonable times and upon reasonable notice concerning the business of theCompany, including valuations of securities for which prices are not readilyavailable; provided it is understood that the Sub-Adviser is not responsible for



daily pricing of the Fund's assets and that the Sub-Adviser will rely on thepricing service selected by the Investment Manager and the Fund's Administrator.










13. Notification. The Sub-Adviser will notify the Investment Manager within areasonable time of any change in the personnel of the Sub-Adviser withresponsibility for making investment decisions in relation to the Fund (the"Portfolio Manager(s)") or who have been authorized to give instructions to theCustodian. The Sub-adviser shall be responsible for reasonable out-of-pocketcosts and expenses incurred by the Investment Manager, the Fund or the Companyto amend or supplement the Company's prospectus to reflect a change in PortfolioManager(s) or otherwise to comply with the ICA, the Securities Act of 1933, asamended (the "1933 Act") or any other applicable statute, law, rule or






Sub-Adviser: Federated Investment CounselingFederated Investors Tower1001 Liberty AvenuePittsburgh, Pennsylvania 15222-3779Attention: Tammy Edwards


14. Indemnification. The Sub-Adviser agrees to indemnify and hold harmless theInvestment Manager, any affiliated person within the meaning of Section 2(a)(3)of the ICA ("affiliated person") of the Investment Manager and each person, ifany who, within the meaning of Section 15 of the 1933 Act, controls("controlling person") the Investment Manager, against any and all losses,claims, damages, liabilities or litigation (including reasonable legal and otherexpenses), to which the Investment Manager or such affiliated person orcontrolling person of the Investment Manager may become subject under the 1933Act, the ICA, the Advisers Act, under any other statute, law, rule or regulationat common law or otherwise, arising out of the Sub-Adviser's responsibilitieshereunder (1) to the extent of and as a result of the willful misconduct, badfaith, or gross negligence by the Sub-Adviser, any of the Sub-Adviser'semployees or representatives or any affiliate of or any person acting on behalfof the Sub-Adviser, or (2) as a result of any untrue statement or alleged untruestatement of a material fact contained in the Registration Statement, includingany amendment thereof or any supplement thereto, or the omission or allegedomission to state therein a material fact required to be stated therein ornecessary to make the statement therein not misleading, if such a statement oromission was made in reliance upon and in conformity with written informationfurnished by the Sub-Adviser to the Investment Manager, the Fund, the Company orany affiliated person of the Investment Manager, the Fund or the Company or upon





15. Conflict of Laws. The provisions of this Agreement shall be subject to allapplicable statutes, laws, rules and regulations, including, without limitation,the applicable provisions of the ICA and rules and regulations promulgatedthereunder. To the extent that any provision contained herein conflicts with anysuch applicable provision of law or regulation, the latter shall control. Theterms and provisions of this Agreement shall be interpreted and defined in amanner consistent with the provisions and definitions of the ICA. If any



provision of this Agreement shall be held or made invalid by a court decision,statute, rule or otherwise, the remainder of this Agreement shall continue infull force and effect and shall not be affected by such invalidity.






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

Date: ____________________________ Date: ____________________________

Attest: ____________________________ Attest: ____________________________

18617-1 (06/97)

American Skandia Advisor Funds, Inc.ASAF Federated High Yield Bond Fund


EXHIBIT A



AMERICAN SKANDIA ADVISOR FUNDS, INC.Underwriting and Distribution Agreement

This Agreement is made as of _____________, 1997 betweenAmerican Skandia Advisor Funds, Inc. (the "Company"), a Maryland corporation,and American Skandia Marketing, Incorporated ("ASM" or the "Distributor"), aDelaware corporation.

W I T N E S S E T H

WHEREAS, the Company is registered under the InvestmentCompany Act of 1940, as amended (the "Investment Company Act"), as an open-endmanagement investment company; and

WHEREAS, shares of the Company may be divided into one or moreseries (each a "Fund," and together, the "Funds") and the shares of each Fundmay be divided into one or more classes; and

WHEREAS, each Fund currently is authorized to offer Class A,Class B, Class C and Class X shares (respectively, the "Class A Shares," the"Class B Shares," the "Class C Shares," and the "Class X Shares") and may offershares of one or more additional classes of shares in the future; and

WHEREAS, the term "Shares" where used in this Agreementpertains collectively to Class A, Class B, Class C and Class X shares of a Fund;and

WHEREAS, from time to time, the Company may enter into salesagreements with brokers-dealers, banks or other financial intermediariesproviding for the sale of Shares to eligible investors; and

WHEREAS, ASM is a broker-dealer registered under theSecurities Exchange Act of 1934, as amended, and is engaged in the business ofselling shares of registered investment companies either directly or throughother broker-dealers; and

WHEREAS, the Company and ASM wish to enter into an agreementwith each other, with respect to the continuous offering of Shares from andafter the date hereof in order to promote the growth of the Company andfacilitate the distribution of Shares; and

WHEREAS, each Fund has adopted a plan (or plans) ofdistribution pursuant to Rule 12b-1 under the Investment Company Act withrespect to the Class A, Class B, Class C and Class X shares authorizing payments



to the Distributor with respect to the distribution of such classes and themaintenance of related shareholder accounts (collectively, the "Plans").

NOW, THEREFORE, the parties hereto agree as follows:

Section 1. Appointment of the Principal Underwriter

The Company proposes to issue and sell Shares as permitted byapplicable law. The Company hereby appoints ASM as the principal underwriter andgeneral distributor of the Shares to sell Shares on behalf of the Company, andASM hereby accepts such appointment and agrees to act hereunder. In the eventthat the Company from time to time designates one or more Funds in addition tothe current Funds or one or more classes of Shares in addition to the Class A,Class B, Class C and Class X Shares, the Company and the Distributor may enterinto a written supplement to this Agreement, and the additional Funds or classesof Shares thereafter shall be subject to this Agreement. The Company herebyagrees during the term of this Agreement to sell each class of Shares throughASM on the terms and conditions set forth below and as otherwise specified bythe Board of Directors of the Company (the "Board of Directors").

Section 2. Exclusive Nature of Duties

2.1 The exclusive rights granted to ASM to sell Shares shall not applyto Shares issued in connection with the merger or consolidation of any otherinvestment company or personal holding company with the Company or theacquisition by purchase or otherwise of all (or substantially all) the assets orthe outstanding shares of any such company by the Company.

2.2 Such exclusive rights shall not apply to Shares issued pursuant toany reinvestment of dividends or capital gains distributions or through theexercise of any conversion feature or exchange privilege.

2.3 Such exclusive rights shall not apply to Shares issued pursuant toany reinstatement privilege afforded redeeming shareholders.

2.4 Such exclusive rights shall not apply to purchases made through theCompany's transfer and dividend disbursing agent in the manner set forth in thecurrently effective Prospectus of the Company. The term "Prospectus" shall meaneach Prospectus and Statement of Additional Information included as part of theCompany's Registration Statement, as such Prospectus and Statement of AdditionalInformation may be amended or supplemented from time to time; and the term"Registration Statement" shall mean the Registration Statement filed by theCompany with the Securities and Exchange Commission (the "Commission") andeffective under the Securities Act of 1933, as amended (the "Securities Act"),and the Investment Company Act, as such Registration Statement is amended fromtime to time.



Section 3. Purchase of Shares from the Company

3.1 ASM shall have the right to buy from the Company on behalf ofinvestors the Shares needed, but not more than the Shares needed (except forclerical errors in transmission) to fill unconditional orders for Shares placedwith ASM by investors or registered and qualified securities dealers, banks andother qualifying financial institutions ("Dealers").

3.2 Shares shall be sold by ASM on behalf of the Company and deliveredby ASM or Dealers, as described in Section 6.4 hereof, to investors at theapplicable offering price set forth in the Prospectus.

3.3 The Company shall have the right to suspend the sale of any or allclasses and/or series of Shares at times when redemption is suspended pursuantto the conditions in Section 4.3 hereof or at such other times as may bedetermined by the Board of Directors.

3.4 The Company, or any agent of the Company designated in writing bythe Company, shall be promptly advised of all purchase orders for Sharesreceived by ASM. Any order may be rejected by the Company; provided, however,that the Company will not arbitrarily or without reasonable cause refuse toaccept or confirm orders for the purchase of Shares.

3.5 The Company (or its agent) will confirm orders upon their receipt,will make appropriate book entries and upon receipt by the Company (or itsagent) of payment therefor, will deliver deposit receipts for such Sharespursuant to the instructions of ASM. Payment shall be made to the Company in NewYork Clearing House funds or Federal funds or such other method as may be agreedupon in writing by ASM and the Company. ASM agrees to cause such payment andsuch instructions to be delivered promptly to the Company (or its agent).

Section 4. Repurchase or Redemption of Shares by the Company

4.1 Any of the outstanding Shares may be tendered for redemption at anytime, and the Company agrees to repurchase or redeem the Shares so tendered inaccordance with its Articles of Incorporation and By-Laws, as amended from timeto time, and in accordance with the applicable provisions of the Prospectus. Theprice to be paid to redeem or repurchase Shares shall be equal to the net assetvalue determined as set forth in the Prospectus. All payments by the Companyhereunder shall be made in the manner set forth in Section 4.2 below.

4.2 The Company shall pay the total amount of the redemption price asdefined in the above paragraph pursuant to the instructions of ASM on or beforethe seventh day subsequent to its having received the notice of redemption inproper form. The proceeds of any redemption of Shares shall be paid by theCompany as follows: (i) in the case of Shares subject to a contingent deferredsales charge, any applicable contingent deferred sales charge shall be paid to



ASM and the balance shall be paid to or for the account of the redeemingshareholder, in each case in accordance with the applicable provisions of theProspectus; and (ii) in the case of all other Shares, proceeds shall be paid toor for the account of the redeeming shareholder, in each case in accordance withapplicable provisions of the Prospectus.

4.3 Redemption of any Shares or payment may be suspended at times whenthe New York Stock Exchange is closed for other than customary weekends andholidays, when trading on said Exchange is restricted, when an emergency existsas a result of which disposal by the Company of securities owned by it is notreasonably practicable or it is not reasonably practicable for the Companyfairly to determine the value of its net assets, or during any other period whenthe Commission, by order, so permits.

Section 5. Duties of the Company

5.1 Subject to the possible suspension of the sale of Shares asprovided herein, the Company agrees to sell its Shares so long as it has Sharesavailable.

5.2 The Company shall furnish ASM copies of all information, financialstatements and other papers which ASM may reasonable request for use inconnection with the distribution of Shares, and this shall include one certifiedcopy, upon request by ASM, of all financial statements prepared for the Companyby independent public accountants. The Company shall make available to ASM suchnumber of copies of its Prospectus and annual and interim reports as ASM shallreasonable request.

5.3 The Company shall take, from time to time, but subject to thenecessary approval of the Board of Directors and the shareholders of theCompany, all necessary action to fix the number of authorized Shares and suchsteps as may be necessary to register the same under the Securities Act, to theend that there will be available for sale such number of Shares as ASMreasonably may expect to sell. The Company agrees to file from time to time suchamendments, reports and other documents as may be necessary in order that therewill be no untrue statement of a material fact in the Registration Statement, ornecessary in order that there will be no omission to state a material fact inthe Registration Statement which omission would make the statements thereinmisleading.

5.4 The Company shall use its best efforts to qualify and maintain thequalification of any appropriate number of Shares for sale under the securitieslaws of such states as ASM and the Company may approve; provided that theCompany shall not be required to amend its Articles of Incorporation or By-Lawsto comply with the laws of any state, to maintain an office in any state, tochange the terms of the offering of Shares in any state from the terms set forthin its Registration Statement, to qualify as a foreign corporation in any stateor to consent to service of process in any state other than with respect toclaims arising out of the offering of Shares. Any such qualification may be



withheld, terminated or withdrawn by the Company at any time in its discretion.As provided in Section 9 hereof, the expense of qualification and maintenance ofqualification shall be borne by the Company. ASM shall furnish such informationand other material relating to its affairs and activities as may be required bythe Company in connection with such qualifications.

Section 6. Duties of ASM

6.1 ASM shall devote reasonable time and effort to effect sales ofShares to investors, but shall not be obligated to sell any specific number ofShares of any class or in the aggregate. Sales of Shares shall be on the termsdescribed in the then current Prospectus. ASM may enter into like arrangementswith other investment companies. ASM may compensate the Dealers as set forth inthe Prospectus.

6.2 In selling each class of Shares, ASM shall use its best efforts inall respects duly to conform with the requirements of all federal and state lawsrelating to the sale of such securities. Neither ASM nor any Dealer nor anyother person is authorized by the Company to give any information or to make anyrepresentations, other than those contained in the Registration Statement orProspectus and any sales literature approved by appropriate officers of theCompany.

6.3 ASM shall adopt and follow procedures for the confirmation of salesto investors and Dealers, the collection of amounts payable by investors andDealers on such sales and the cancellation of unsettled transactions, as may benecessary to comply with the requirements of the National Association ofSecurities Dealers, Inc. (the "NASD").

6.4 ASM shall have the right to enter into agreements with Dealers ofits choice for the sale of Shares ("Dealer Agreements"), provided that theCompany shall approve the forms of such agreements. Within the United States,ASM shall offer and sell Shares only to such Dealers as are members in goodstanding of the NASD or are not eligible to become members of the NASD. Sharessold to Dealers shall be for resale by such dealers only at the offering pricedetermined as set forth in the Prospectus.

Section 7. Payments to ASM

7.1 ASM shall receive any front-end sales charge which is imposed uponsuch sales of Shares and may retain any portion of such sales charge notreallocated to Dealers as set forth in the Prospectus, subject to thelimitations of Article III, Section 26 of the NASD Rules of Fair Practice.Payment of these amounts to ASM is not contingent upon the adoption orcontinuation of any applicable Plans.

7.2 ASM shall receive and may retain any contingent deferred sales



charge which is imposed on such sales as set forth in the Prospectus, subject tothe limitations of Article III, Section 26 of the NASD Rules of Fair Practice.Payment of these amounts to ASM is not contingent upon the adoption orcontinuation of any applicable Plans.

Section 8. Payment to ASM under the Plans

8.1 The Company shall pay to ASM as sole compensation for servicesunder any Plan and this Agreement distribution and service fees with respect tothe Shares as described in such Plan and this Agreement. To the extent thatdistribution fees are payable to ASM under any Plan in respect of Shares alreadysold by ASM, such fees shall not be paid to any person other than ASM or itsdesignee so long as such Plan is in effect.

8.2 So long as a Plan or any amendment thereto is in effect, ASM shallinform the Board of Directors of the commissions and account servicing fees withrespect to Shares to be paid by ASM to account executives of ASM and to Dealerswhich have Dealer Agreements with ASM. In addition, so long as a Plan or anyamendment thereto is in effect, at the request of the Board of Directors or anyagent or representative of the Company, ASM shall provide such additionalinformation as may reasonably be requested concerning the activities of ASMhereunder and the costs incurred in performing such activities with respect tothe relevant class of Shares and/or Fund.

Section 9. Allocation of Expenses

The Company shall bear all costs and expenses of thecontinuous offering of Shares (except for those costs and expenses borne by ASMpursuant to a Plan and subject to the requirements of Rule 12b-1 under theInvestment Company Act), including fees and disbursements of the Company'scounsel and auditors, in connection with the preparation and filing of anyrequired Registration Statements and/or Prospectuses under the InvestmentCompany Act or the Securities Act, and all amendments and supplements thereto,and preparing and mailing annual and periodic reports and proxy materials toshareholders (including but not limited to the expense of setting in type anysuch Registration Statements, Prospectuses, annual or periodic reports or proxymaterials). The Company shall also bear the cost of expenses of qualification ofShares for sale, and, if necessary or advisable in connection therewith, ofqualifying the Company as a broker or dealer, in such states of the UnitedStates or other jurisdictions as shall be selected by the Company and ASMpursuant to Section 5.4 hereof, and the cost and expense payable to each suchstate for continuing qualification therein until the Company decides todiscontinue such qualification pursuant to Section 5.4 hereof.

Section 10. Indemnification



10.1 The Company agrees to indemnify, defend and hold ASM, its officersand directors and any person who controls ASM within the meaning of Section 15of the Securities Act, free and harmless from and against any and all claims,demands, liabilities and expenses (including the cost of investigating ordefending such claims, demands or liabilities and any reasonable counsel feesincurred in connection therewith) which ASM, its officers, directors or any suchcontrolling person may incur under the Securities Act, or under common law orotherwise, arising out of or based upon any untrue statement of a material factcontained in the Registration Statement or any Prospectus or arising out of orbased upon any alleged omission to state a material fact required to be statedin either thereof or necessary to make the statements in either thereof notmisleading, except insofar as such claims, demand, liabilities or expenses ariseout of or are based upon such untrue statement or omission or alleged untruestatement or omission made in reliance upon and in conformity with informationfurnished in writing by ASM to the Company for use in the Registration Statementor any Prospectus; provided, however, that this indemnity agreement shall notinure to the benefit of any such officer, director or controlling person unlessa court of competent jurisdiction shall determine in a final decision on themerits, that the person to be indemnified was not liable by reason of willfulmisfeasance, bad faith or gross negligence in the performance of its duties, orby reason of its reckless disregard of its obligations under this Agreement(disabling conduct), or, in the absence of such a decision, a reasonabledetermination, based upon a review of the facts, that the indemnified person wasnot liable by reason of disabling conduct, by (a) a vote of a majority of aquorum of those directors (the "Qualified Directors") who are neither"interested persons" of the Company as defined in Section 2(a)(19) of theInvestment Company Act nor parties to the proceeding, or (b) written opinion ofan independent legal counsel. The Company's agreement to indemnify ASM, itsofficers and directors and any such controlling person as aforesaid is expresslyconditioned upon the Company's being promptly notified of any action broughtagainst ASM, its officers or directors or any such controlling person, suchnotification to be given by letter or telegram addressed to the Company at itsprincipal business office. The Company agrees promptly to notify ASM ofcommencement of any litigation or proceedings against it or any of its officersor directors in connection with the issue and sale of any Shares.

10.2 ASM agrees to indemnify, defend and hold the Company, its officersand Directors and any person who controls the Company, if any, within themeaning of Section 15 of the Securities Act, free and harmless from and againstany and all claims, demands, liabilities and expenses (including the cost ofinvestigating or defending against such claims, demands or liabilities and anyreasonable counsel fees incurred in connection therewith) which the Company, itsofficers and directors or any such controlling person may incur under theSecurities Act or under common law or otherwise, but only to the extent thatsuch liability or expense incurred by the Company, its directors or officers orsuch controlling person resulting from such claims or demands shall arise out ofor be based upon any alleged untrue statement of a material fact contained ininformation furnished in writing by ASM to the Company for use in theRegistration Statement or any Prospectus or shall arise out of or be based uponany alleged omission to state a material fact in connection with such



information required to be stated in the Registration Statement or anyProspectus or necessary to make such information not misleading. ASM's agreementto indemnify the Company, its officers and directors and any such controllingperson as aforesaid, is expressly conditioned upon ASM's being promptly notifiedof any action brought against the Company, its officers and directors or anysuch controlling person, such notification being given to ASM at its principalbusiness office.

Section 11. Duration and Termination of this Agreement

11.1 This Agreement shall become effective as of the date first abovewritten and shall remain in force for a period of more than one year after ittakes effect only so long as such continuance is specifically approved at leastannually by (a) the Board of Directors, or by the vote of a majority of theoutstanding voting securities of the applicable class of Shares and/or Fund asrequired by the Investment Company Act, and (b) by the vote of a majority of theQualified Directors cast in person at a meeting called for the purpose of votingupon such approval.

11.2 This Agreement may be terminated with respect to any class ofShares offered by any Fund or to any Fund at any time, without the payment ofany penalty, by vote of a majority of the Qualified Directors or by vote of amajority of the outstanding voting securities of the applicable class of Sharesand/or Fund as required by the Investment Company Act, or by ASM, on sixty (60)days' written notice to the other party. This Agreement shall automaticallyterminate in the event of its assignment.

11.3 The terms "affiliated person," "assignment," "interested person"and "vote of a majority of the outstanding voting securities," when used in thisAgreement, shall have the respective meanings specified in the InvestmentCompany Act and the rules and regulations thereunder, subject to such exemptionsas may be granted by the Securities and Exchange Commission.

Section 12. Amendments to this Agreement

This Agreement may be amended by the parties only if suchamendment is specifically approved by a vote of (a) the Board of Directors, orby the vote of a majority of the outstanding voting securities of the applicableclass of Shares and/or Fund as required by the Investment Company Act, and (b)the vote of a Qualified Directors cast in person at a meeting called for thepurpose of voting on such amendment.

Section 13. Separate Agreement as to Each Class of Shares and Fund

The amendment or termination of this Agreement with respect to



any class of Shares or any Fund shall not result in the amendment or terminationof this Agreement with respect to any other class of Shares or Fund unlessexplicitly so provided.

Section 14. Governing Law

The provisions of this Agreement shall be construed andinterpreted in accordance with the laws of the State of Connecticut as at thetime in effect and the applicable provisions of the Investment Company Act. Tothe extent that the applicable law of the State of Connecticut, or any of theprovisions herein, conflict with the applicable provisions of the InvestmentCompany Act, the latter shall control.

IN WITNESS WHEREOF, the parties hereto have executed thisAgreement as of the day and year above written.

American Skandia Advisor Funds, Inc.

By: _______________________________

American Skandia Marketing, Incorporated

By: _______________________________

11803-1



American Skandia

Mutual Fund Sales Agreement

This Mutual Fund Sales Agreement ("Agreement") is made by and between AmericanSkandia Marketing, Incorporated ("ASM, Inc.", "Principal Underwriter", "us" or"we"), a broker-dealer registered with the Securities and Exchange Commission("SEC") under the Securities and Exchange Act of 1934 ("1934 Act"), as amended,and a member of the National Association of Securities Dealers, Inc. ("NASD")and ___________________________, who is also a broker-dealer registered with theSEC under the 1934 Act and a member of the NASD ("Broker-Dealer").

WHEREAS, each company, as listed in a schedule hereto (each a "Company") isregistered as an investment company under the Investment Company Act of 1940, asamended (the "1940 Act") and has entered into an agreement naming ASM, Inc. asthe Principal Underwriter and general Distributor for the shares each Companycomprised of the separate classes and portfolios listed on a schedule hereto (asthe same me be amended from time to time by us to add or delete portfoliosand/or classes of portfolios) and referred to collectively as the "Funds" orindividually as the "Fund,"; and

WHEREAS, ASM, Inc. wishes to enter into agreements with Broker-Dealers wherebyregistered representatives who are associated with Broker-Dealer, and who areNASD registered and are duly licensed under applicable state law, solicit salesof shares of the Funds; and

WHEREAS, Broker-Dealer, which is a member in good standing of the NASD, wishesto enter into an agreement to distribute shares of the Funds; and

WHEREAS, ASM, Inc. acknowledges and Broker-Dealer agrees to provide certainsupervisory and administrative services to registered representatives who areassociated with the Broker-Dealer in connection with the solicitation, serviceand sale of the Funds.

NOW THEREFORE, in consideration of the mutual covenants contained in thisAgreement, the parties agree to the following:

1. Regulation: You agree to comply with all applicable provisions of the1940 Act, the Securities Act of 1933 (the "1933 Act"), as amended, the1934 Act, and all the rules and regulations of the SEC, statesecurities laws and the NASD. The NASD Rules of Fair Practice areincorporated herein as if set forth in full.

2. Orders: An order for shares of any class and any Fund received from youwill be confirmed only at the appropriate offering price applicable to thatorder, as described in each Company's then current Prospectus. The procedurerelating to orders and the handling thereof will be subject to instructionsreleased by us from time to time. Orders should be transmitted to the Fund'sshareholder servicing agent ("Transfer Agent"). Broker-Dealer or his customermay, however, mail a completed application with a check payable to the Funddirectly to the Transfer Agent as listed in a schedule attached hereto or bysuch other method as may be described in each Company's then current Prospectus.All orders are subject to acceptance at the Transfer Agent's office. We, asagent for the Funds, reserve the right in our sole discretion to reject anyorder. The minimum initial investment for each Fund is set forth in eachCompany's then current Prospectus.

You shall not purchase any Shares as agent for any customer, unless youdeliver or cause to be delivered to such customer, at or prior to thetime of such purchase, a copy of the Prospectus or unless such customerhas acknowledged receipt of the Prospectus. You hereby represent thatyou understand your obligation to deliver the Prospectus to customerswho purchase Shares pursuant to federal securities laws and you havetaken all necessary steps to comply with such Prospectus deliveryrequirements. The minimum initial investment for each Fund is set forthin each Company's then current Prospectus.

3. Suitability and Multiple Classes of Shares: The Funds may be offered in



more than one class of shares in accordance with the Prospectus. Purchases of aclass of shares or Funds are subject to our compliance standards. You areresponsible for determining whether a Fund, and which class of the Fund'sshares, is suitable for your client. Certain investors that are affiliated withus and with you (and their families) may have special purchase rights. Certainclasses of Fund shares may be available only in connection with purchases for orby specific types of qualified retirement plans, or may be available only togroups of purchasers, or to retirement plans purchasing on behalf of a group ofretirement plan participants that meet each Company's requirements as to thesize of such groups or the number of retirement plan participants Refer to thecurrently effective Prospectus for each Company.

4. Sales Commissions

(a) Any sales charges and commissions will be as set forth in thecurrent Prospectus of each Company and on a schedule attachedhereto.

(b) Where payment is due hereunder, we agree to send payment forcommissions and payments made in accordance with a Fund's Planof Distribution pursuant to Rule 12b-1 under the 1940 Act, asamended, to your address as it appears on our records. Youmust notify us of address changes and promptly negotiate suchpayments. Any such payments that remain outstanding for 12months shall be void and the obligation represented therebyshall be extinguished.

(c) With respect to shares of Funds which impose a ContingentDeferred Sales Charge ("CDSC"), we agree to compensate sellingfirms at a specified rate as disclosed in the applicableschedule only on purchase payments for those shares which aresubject to a CDSC at the time of investment. You understandthat any CDSC deducted from redemption proceeds shall be theproperty of ASM, Inc.

(d) We reserve the right to reclaim any commission payment from aBroker-Dealer if we later determine a CDSC waiver applied atthe time of investment.

(e) We reserve the right to modify all CDSC waivers at any time. ASM, Inc.will promptly notify Broker-Dealer of any modification thereto.

(f) You are responsible for applying the correct sales charge toyour customers, as detailed in the current Prospectus and inthe applicable schedule hereto or as might otherwise be agreedto in writing by the parties.

(g) There are no sales charges or commissions payable on the reinvestmentof dividends and distributions.

5. Service Fee: ASM, Inc. will also pay you, if and to the extent paid byeach Company, an account service fee with respect to a class of Shares, as setforth in the Prospectus and in a schedule attached hereto, subject to yourcompliance with this Agreement and to your providing the following services toFund accounts, including but not limited to: (1) maintaining regular contactwith customers and assist in answering routine inquiries concerning the Funds;(2) assisting in distributing sales and service literature provided by us,particularly to the beneficial owners of street name accounts; (3) assisting usand our agents in establishment and maintenance of shareholder accounts andrecords; (4) assisting shareholders in effecting administrative changes, such aschanging account designations and addresses; (5) assisting in processingpurchase and redemption transactions; and (6) providing any other information orservices as the customers or we may reasonably request. Any such account servicefees shall be subject to and in accordance with applicable laws, rules andregulations and the guidelines and rules of the NASD. We reserve the right toincrease, decrease or terminate any such fees without prior notice to you.

6. Remittance: Remittance of funds by Broker-Dealers should be made bycheck or wire, payable to the appropriate Fund (not to ASM, Inc.) andsent to the Company's Transfer Agent. Payments must be receivedpromptly pursuant to Rule 2830(m) of the NASD Rules of Fair Practice(formerly Article III, Section 26(m)), otherwise the Company and ASM,Inc. reserves the right, without notice, to cancel the sale. In such



event, Broker-Dealer will be responsible for any loss to the Fund, orto ASM, Inc., including the loss of profit resulting from your failureto make payment.

7. Selling Group Activities

(a) Shares of any Fund may be liquidated by sale thereof to suchFund or to us as Agent for such Fund at the applicable netasset value, less any applicable CDSC, determined in themanner described in the then current Prospectus and Statementof Additional Information of the Company. If delivery is notmade within ten (10) days from the date of the transaction,the Company and ASM, Inc. reserves the right, without notice,to cancel the transaction, in which event Broker-Dealer willbe held responsible for any loss to the Fund, or to ASM, Inc.,including loss of profit resulting from your failure to makepayment.

(b) In no event shall you withhold placing orders so as to profit from suchwithholding by a change in the net asset value from that used in determining theprice to your customer, or otherwise. You shall make no purchases except for thepurpose of covering orders received by you and then such purchases must be madeonly at the applicable public offering price described in each Company's thencurrent Prospectus (less your sales concession); provided, however, that theforegoing does not prevent the purchase of shares of a Fund by you for your ownbona fide investment. All sales to your customers shall be at the applicablepublic offering prices determined in accordance with each Company's then currentProspectus and Statement of Additional Information.

(c) In addition to purchasing shares of any Fund through us asSelling Agent, you may purchase such shares from yourcustomers, in which case you shall pay the applicable netasset value determined in accordance with each Company's thencurrent Prospectus and Statement of Additional Information,less any applicable CDSC, if such class of Fund imposes aCDSC.

8. Shareholder Communication: You agree to furnish the followingshareholder communications material to your customers after receipt from us ofsufficient quantities to allow mailing thereof to all of your customers who arebeneficial owners of any Fund's shares:

(a) All proxy or information statements prepared for circulation toshareholders of record;

(b) Annual reports of the Funds;

(c) Semi-annual reports of the Funds; and

(d) All updated prospectus, supplements, and amendments thereto.

9. Refund of Sales Charge: If the shares of any Fund confirmed to youhereunder are repurchased by such Fund, or by us as Agent for suchFund, or are tendered for liquidation to such Fund, within ten (10)business days after such confirmation of your original order, then youshall forthwith repay to such Fund the full dealer sales concessionallowed to you on the sale of such Fund shares. We shall notify you ofsuch repurchase or redemption within ten (10) days from the day onwhich the redemption order is delivered to us or to such Fund.

10. Statements/Representations: No person is authorized to make anystatements or representations relating to the shares of any Fund,except those contained in its then current Prospectus and Statement ofAdditional Information which you agree to deliver to investors inaccordance with applicable SEC and NASD regulations and in suchadditional information as we may supply or authorize as SupplementalInformation to such Prospectus and Statement of Additional Information(i.e., advertisements and supplemental sales literature).



You shall not allow unauthorized statements or information designatedby us as "Not For Use With The Public" or "For Broker-Dealer Use Only"to be distributed directly or indirectly to an investor. You shalldeliver to us for prior approval any Supplemental Information preparedby you related to the Funds for use with the public.

In ordering shares of any Fund you shall rely solely and conclusivelyon the representations contained in its then current Prospectus,Statement of Additional Information, and Supplemental Information, ifany, additional copies of which are and will be available on request.In no transaction shall you have any authority whatever to act as agentfor any Fund, or for us, or for any other distributor. Nothing in thisAgreement shall constitute either of us as an agent of the other, orshall constitute you or any Fund the agent of the other.

No person is authorized to make any statement or representationsregarding benefits or services offered by any affiliate of anapplicable Fund or any other benefit or service provider to investorsor to persons for whom investments are made in a Fund that state,indicate or imply that such benefits are offered or endorsed by theFund and any directors, trustees or officers of the Fund, or by ASM,Inc., its officer or directors. This excludes those benefits orservices provided to shareholders by the Fund or on behalf of the Fundin its normal course of business.

11. Warranties: You represent and warrant that:

(a) you are registered as a broker-dealer under the 1934 Act, andare licensed and qualified as a broker-dealer or otherwiseauthorized to offer and sell shares of the Funds under thelaws of the jurisdictions in which the shares of the Fundswill be offered and sold by you;

(b) you are a member in good standing with the NASD and agree to maintainsuch membership in good standing;

(c) in selling shares of the Funds you will comply with allapplicable laws, rules and regulations, including theapplicable provisions of the 1933 Act, 1934 Act and 1940 Act,as amended, the applicable rules and regulations of the NASD,and the applicable rules and regulations of the jurisdictionsin which you sell, directly or indirectly, any shares of theFunds;

(d) you will offer to sell shares of the Funds only to purchasers meetingthe applicable eligibility requirements set forth in the Prospectus; and

(e) you agree not to offer for sale or sell shares of the Funds inany jurisdictions in which shares of the Funds are notqualified for sale or in which you are not qualified as abroker dealer (we will, upon request, inform you as to thestates in which shares of the Funds have been qualified forsale under, or are exempt from the requirements of, applicablestate securities laws).

You agree to indemnify and hold ASM, Inc. and each Company harmlessagainst every loss, cost, damage or expense (including reasonableattorney's fees and expenses) incurred by us as a result of your breachof the foregoing representations and warranties if we notify youpromptly after commencement of any action brought against us for whichwe may seek indemnity.

12. Pricing Errors: With respect to any pricing errors relating totransactions entered into by you on behalf of your customers, you agreeto use your best efforts in cooperating with us to resolve and remedysuch errors upon receipt of notice from us. We will adjust transactionsin accordance with procedures established by each Company and we willnotify you of such adjustments.



13. Modification and Termination: We reserve the right, in our discretionand without notice to you or to any distributor, to suspend sales, to withdrawany offering, to change the offering prices or to modify or cancel thisAgreement for any reason (including the termination of Plan payments pursuant toa Plan of Distribution described in Section 4). This Agreement may be canceledat any time by you upon thirty (30) days written notice. We may terminate thisAgreement for failure to comply with its terms upon mailing notice to you. Inaddition, this Agreement may be terminated with respect to any Fund or class ofshares of a Company by the directors of such Company and by the holders of theoutstanding voting securities entitled to vote on such termination as providedin Rule 12b-1 under the 1940 Act. This Agreement shall terminate automaticallyif you are expelled or suspended from the NASD, or there is an assignment ofthis Agreement or ASM Inc. otherwise ceases to be the general distributor forthe Company (the term "assignment" shall have the meaning specified in the 1940Act and the rules and regulations thereunder, subject to such exemptions as mybe granted by the Securities and Exchange Commission).

14. Investors Account Instructions: If any investor's account isestablished without the investor signing the application form, theBroker-Dealer represents that the instructions relating to theregistration (including the investor's tax identification number) andselected options furnished to the Fund (whether on the application formor in some other document) are in accordance with the investor'sinstructions. Broker-Dealer agrees to indemnify the Company and/or theFund(s), its Transfer Agent, and ASM, Inc. for any loss or liabilityresulting from acting upon such instructions. We agree to hold harmlessand indemnify you for any loss or liability arising out of ournegligence in processing such instructions.

15. Liability: Nothing contained herein shall be deemed to protect youagainst any liability to us, the Company or the Company's shareholdersto which you would otherwise be subject by reason of negligence,willful misfeasance, or bad faith in the performance of your dutieshereunder, or by reason of your reckless disregard of your obligationsand duties hereunder.

16. Non-Waiver Provision: Failure of any party to terminate the Agreementfor any of the causes set forth in this Agreement will not constitute a waiverof that party's right to terminate this Agreement at a later time for any ofthese causes.

17. Severability: Should any provision of this Agreement to be heldunenforceable, those provisions not affected by the determination ofunenforceability shall remain in full force and effect.

18. Governing Law: This Agreement will be construed in accordance with thelaws of the State of Connecticut.

If the foregoing completely expresses the terms of the Agreement between us,please so signify by executing, in the space provided, the annexed duplicate ofthis Agreement and return it to us, retaining the original copy for your ownfiles. This Agreement shall become effective upon the earliest of our receipt ofa signed copy hereof or the first order placed by you for any of the Funds'shares after the date below, which order shall constitute acceptance of thisAgreement. This Agreement shall supersede all prior Mutual Fund Sales Agreementsrelating to the shares of any of the Funds. All amendments to this Agreement,including any changes made pursuant to schedules to the Agreement, shall takeeffect as of the date of the first order placed by you for any of the Fund'sshares after the date set forth in the notice of amendment sent to you by theundersigned.

IN WITNESS WHEREOF, the undersigned parties have executed this Agreement to beeffective as set forth above, upon the Effective Date below.

AMERICAN SKANDIA MARKETING, INCORPORATED

BY: __________________________________



Name: __________________________________

Title: __________________________________

Date: __________________________________

Please execute this Selling Group Agreement below and return it to us at theaddress set forth above.

---------------------------------------(Broker-Dealer's Name)

----------------------------------------(Street Address)------------------------------------------------------------------------(City) (State) (Zip Code)

------------------------------(Telephone No.)

BY: ___________________________________________(Authorized Signature)

-------------------------------------------(Name and Title)

SCHEDULE: PORTFOLIOS


Date: July 1, 1997

The following portfolios of American Skandia Advisor Funds, Inc. aresubject to this Agreement:

ASAF Founders International Small Capitalization FundASAF T. Rowe-Price International Equity Fund

ASAF Founders Small Capitalization FundASAF T. Rowe Price Small Company Value Fund

ASAF Janus Capital Growth FundASAF INVESCO Equity Income Fund

ASAF American Century Strategic Balanced FundASAF Federated High Yield Bond Fund

ASAF Total Return Bond FundASAF JPM Money Market Fund

The Company may add additional portfolios and/or classes ofportfolios from time to time.

Transfer Agent

Mail Address:American Skandia Advisor Funds, Inc.

PO Box 8012Boston, Massachusetts 02266-8012

Overnight Address:American Skandia Advisor Funds, Inc.

Two Heritage DriveNorth Quincy, Massachusetts 02171-2138

Electronic Transfer:State Street Bank & Trust Company

Boston, Massachusetts



DDA #99052995FBO: American Skandia Advisor Funds, Inc.

[Fund name and Class of Shares]Shareholder Name and Account Number

SCHEDULE: SALES CONCESSIONS


Date: July 1, 1997

Class A Shares<TABLE><CAPTION>

All Portfolios except ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund

Amount of Purchase Standard Sales Concession Promotional Sales Commission*<S> <C> <C>less than $50,000 4.25% 5.00%$50,000 - $100,000 3.50% 4.25%$100,000 - $250,000 2.50% 3.25%$250,000 - $500,000 1.75% 2.25%$500,000 - $1,000,000 1.25% 1.50%greater than $1,000,000 and other Class A Purchasessubject to a CDSC as set forth in thecurrent Prospectus .50% .50%

</TABLE><TABLE><CAPTION>

ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund Only

Amount of Purchase Standard Sales Commission Promotional Sales Commission*<S> <C> <C>less than $50,000 3.50% 4.25%$50,000 - $100,000 3.00% 3.75%$100,000 - $250,000 2.50% 3.25%$250,000 - $500,000 1.75% 2.25%$500,000 - $1,000,000 1.25% 1.50%greater than $1,000,000 and other Class A Purchasessubject to a CDSC as set forth in thecurrent Prospectus .50% .50%

</TABLE>

For Purchases greater than $1,000,000 and other Class A Purchases subjectto a CDSC:<TABLE><CAPTION>

<S> <C>Service Fees: 0.25% per annum based on the daily net assets of such shares

beginning in the first quarter of year 2 after such sharepurchase.

Trail Commissions: 0.25% per annum based on the daily net assets of suchshares beginning in the first quarter of year 2 after suchshare purchase.

For all other Purchases:

Service Fees: 0.25% per annum based on the daily net assets of such sharesbeginning in the first quarter of year 1 after such sharepurchase.

Trail Commissions: 0.25% per annum based on the daily net assets of such sharesbeginning in the first quarter of year 1 after such sharepurchase.



Class B Shares

Standard Sales Commission Promotional Sales Commission*

5.50% of the Amount of Purchase 6.00% of the Amount of Purchase



Class X Shares





</TABLE>

* The Promotional Sales Commission will be payable instead of the Standard SalesCommission for purchases placed on or before December 31, 1998. The PromotionalSales Commission may be eliminated at the sole discretion of ASM, Inc. at anytime prior to December 31, 1998. For purchases received after December 31, 1998,(unless the Promotional Sales Commission has been previously eliminated) theStandard Sales Commission will apply

Class C Shares

1.00% of the Amount of Purchase<TABLE><CAPTION>




</TABLE>



American Skandia

Financial InstitutionMutual Fund Sales Agreement

This Mutual Fund Sales Agreement ("Agreement") is made by and between AmericanSkandia Marketing, Incorporated ("ASM, Inc.", "Principal Underwriter", "us" or"we"), a broker-dealer registered with the Securities and Exchange Commission("SEC") under the Securities and Exchange Act of 1934, as amended (the "1934Act") and a member of the National Association of Securities Dealers, Inc.("NASD") and ________________________, who is also a broker-dealer registeredwith the SEC under the 1934 Act and a member of the NASD or is a "bank" asdefined in Section 3(a)(6) of the 1934 Act, and at the time of each transactionsubject to this Agreement, are not required to register as a broker-dealer underthe 1934 Act (both referred to herein as a "Broker-Dealer").

WHEREAS, each company, as listed in a schedule hereto (each a "Company") isregistered as an investment company under the Investment Company Act of 1940, asamended (the "1940 Act") has entered into an agreement naming ASM, Inc. as thePrincipal Underwriter and general Distributor for the shares each Companycomprised of the separate classes and portfolios listed on a schedule hereto (asthe same may be amended from time to time by us to add or delete portfoliosand/or classes of shares) and referred to collectively as the "Funds" orindividually as the "Fund,"; and

WHEREAS, ASM, Inc. wishes to enter into agreements with broker-dealers wherebyregistered representatives who are associated with Broker-Dealer, and who areNASD registered, or are exempt from such regulation, and are duly licensed underapplicable state law, solicit sales of shares of the Funds; and

WHEREAS, Broker-Dealer, which is a member in good standing of the NASD or isexempt from such regulation, wishes to enter into an agreement to distributeshares of the Funds; and

WHEREAS, ASM, Inc. acknowledges and Broker-Dealer agrees to provide certainsupervisory and administrative services to registered representatives who areassociated with the Broker-Dealer in connection with the solicitation, serviceand sale of the Funds.

NOW THEREFORE, in consideration of the mutual covenants contained in thisAgreement, the parties agree to the following:

1. Regulation: You agree to comply with all applicable provisions of the1940 Act the Securities Act of 1933, as amended (the "1933 Act"), the1934 Act, and all the rules and regulations of the SEC, NASD, statesecurities laws, applicable banking laws, rules and regulations,fiduciary obligations under state law, each as applicable. To theextent that a Broker-Dealer is NASD registered, the NASD Rules of FairPractice are incorporated herein as if set forth in full.

2. Orders: An order for shares of any class and any Fund received from youwill be confirmed only at the appropriate offering price applicable to thatorder, as described in each Company's then current Prospectus. The procedurerelating to orders and the handling thereof will be subject to instructionsreleased by us from time to time. Orders should be transmitted to the Fund'sshareholder servicing agent ("Transfer Agent"). Broker-Dealer or his customermay, however, mail a completed application with a check payable to the Funddirectly to the Transfer Agent as listed in a schedule attached hereto or bysuch other method as may be described in each Company's then current Prospectus.All orders are subject to acceptance at the Transfer Agent's office. We, asagent for the Funds, reserve the right in our sole discretion to reject anyorder. The minimum investment for each Fund is set forth in each Company's thencurrent Prospectus.

You shall not purchase any Shares as agent for any customer, unless youdeliver or cause to be delivered to such customer, at or prior to thetime of such purchase, a copy of the Prospectus or unless such customer



has acknowledged receipt of the Prospectus. You hereby represent thatyou understand your obligation to deliver the Prospectus to customerswho purchase Shares pursuant to federal securities laws and you havetaken all necessary steps to comply with such Prospectus deliveryrequirements. The minimum initial investment for each Fund is set forthin each Company's then current Prospectus.

With respect to any and all transactions in Shares of the Fundspursuant to this Agreement, it is understood and agreed in each casethat: (a) you shall be acting solely as agent for the account of yourcustomer; (b) each transaction shall be initiated solely upon the orderof your customer; (c) we shall execute transactions only upon receivinginstructions from you acting as agent for your customer; (d) as betweenyou and your customer, your customer will have full beneficialownership of all Shares; (e) each transaction shall be for the accountof your customer and not for your account; and (f) unless otherwiseagreed in writing, we will serve as a clearing broker for you on afully disclosed basis, and you shall serve as the introducing agent foryour customers' accounts.

3. Suitability and Multiple Classes of Shares: The Funds may be offered inmore than one class of shares in accordance with the Prospectus. Purchases of aclass of shares or Funds are subject to our compliance standards. You areresponsible for determining whether a Fund, and which class of the Fund'sshares, is suitable for your client. Certain investors that are affiliated withus and with you (and their families) may have special purchase rights. Certainclasses of Fund shares may be available only in connection with purchases for orby specific types of qualified retirement plans, or may be available only togroups of purchasers, or to retirement plans purchasing on behalf of a group ofretirement plan participants that meet each Company's requirements as to thesize of such groups or the number of retirement plan participants Refer to thecurrently effective Prospectus for each Company. Additional portfolios and/orclasses of shares may be added at a later date.

If you are a bank not required to register as a broker-dealer under the1943 Act, you further represent and warrant to us that with respect toany sales in the United States, you will use your best efforts toensure that any purchase of Shares by our customers constitutes asuitable investment for such customers. You shall not effect anytransaction in, or induce any purchase or sale of, any Shares by meansof any manipulative, deceptive or other fraudulent device orcontrivance and shall otherwise deal equitably and fairly with yourcustomers with respect to transactions in Shares.

4. Sales/Agency Commissions

(a) Any sales charges and commissions (sales and/or agencycommissions) will be as set forth in the current Prospectus ofeach Company and on a schedule attached hereto or as mightotherwise be agreed to in writing by the parties.

(b) Where payment is due hereunder, we agree to send payment forcommissions and payments made in accordance with a Fund's Planof Distribution pursuant to Rule 12b-1 under the 1940 Act, asamended, to your address as it appears on our records. Youmust notify us of address changes and promptly negotiate suchpayments. Any such payments that remain outstanding for 12months shall be void and the obligation represented therebyshall be extinguished.

(c) With respect to shares of Funds which impose a ContingentDeferred Sales? ? Charge ("CDSC"), we agree to compensateselling firms at a specified rate as disclosed in theapplicable schedule only on purchase payments for those shareswhich are subject to a CDSC at the time of investment. Youunderstand that any CDSC deducted from redemption proceedsshall be the property of ASM, Inc.

(d) We reserve the right to reclaim any commission payment from aBroker-Dealer if we later determine a CDSC waiver applied atthe time of investment.

(e) We reserve the right to modify all CDSC waivers at any time. ASM, Inc.



will promptly notify Broker-Dealer of any modification thereto.

(f) You are responsible for applying the correct sales charge toyour customers, as detailed in the current Prospectus and inthe applicable schedule hereto or as might otherwise be agreedto in writing by the parties.

(g) There are no sales charges or commissions payable on the reinvestmentof dividends and distributions.

5. Service Fee: ASM, Inc. will also pay you, if and to the extent paid byeach Company, an account service fee with respect to a class of Shares, as setforth in the Prospectus and in a schedule attached hereto, subject to yourcompliance with this Agreement and to your providing the following services toFund accounts, including but not limited to: (1) maintaining regular contactwith customers and assist in answering routine inquiries concerning the Funds;(2) assisting in distributing sales and service literature provided by us,particularly to the beneficial owners of street name accounts; (3) assisting usand our agents in establishment and maintenance of shareholder accounts andrecords; (4) assisting shareholders in effecting administrative changes, such aschanging account designations and addresses; (5) assisting in processingpurchase and redemption transactions; and (6) providing any other information orservices as the customers or we may reasonably request. Any such account servicefees shall be subject to and in accordance with applicable laws, rules andregulations and the guidelines and rules of the NASD. We reserve the right toincrease, decrease or terminate any such fees without prior notice to you.

6. Remittance: Remittance of funds by Broker-Dealers should be made bycheck or wire, payable to the appropriate Fund (not to ASM, Inc.) andsent to the Company's Transfer Agent. Payments must be receivedpromptly pursuant to Rule 2830(m) of the NASD Rules of Fair Practice(formerly Article III, Section 26(m)), otherwise the Company and ASM,Inc. reserves the right, without notice, to cancel the sale. In suchevent, Broker-Dealer will be responsible for any loss to the Fund, orto ASM, Inc., including the loss of profit resulting from your failureto make payment.

7. Selling Group Activities

(a) Shares of any Fund may be liquidated by sale thereof to suchFund or to us as Agent for such Fund at the applicable netasset value, less any applicable CDSC, determined in themanner described in the then current Prospectus and Statementof Additional Information of the Company. If delivery is notmade within ten (10) days from the date of the transaction,the Company and ASM, Inc. reserves the right, without notice,to cancel the transaction, in which event Broker-Dealer willbe held responsible for any loss to the Fund, or to ASM, Inc.,including loss of profit resulting from your failure to makepayment.

(b) In no event shall you withhold placing orders so as to profit from suchwithholding by a change in the net asset value from that used in determining theprice to your customer, or otherwise. You shall make no purchases except for thepurpose of covering orders received by you and then such purchases must be madeonly at the applicable public offering price described in each Company's thencurrent Prospectus (less your sales concession); provided, however, that theforegoing does not prevent the purchase of shares of a Fund by you for your ownbona fide investment. All sales to your customers shall be at the applicablepublic offering prices determined in accordance with each Company's then currentProspectus and Statement of Additional Information.

(c) In addition to purchasing shares of any Fund through us asSelling Agent, you may purchase such shares from yourcustomers, in which case you shall pay the applicable netasset value determined in accordance with each Company's thencurrent Prospectus and Statement of Additional Information,less any applicable CDSC, if such class of Fund imposes aCDSC.

8. Shareholder Communication: You agree to furnish the followingshareholder communications material to your customers after receipt from us ofsufficient quantities to allow mailing thereof to all of your customers who are



beneficial owners of any Fund's shares:

(a) All proxy or information statements prepared for circulation toshareholders of record;

(b) Annual reports of the Funds;

(c) Semi-annual reports of the Funds; and

(d) All updated prospectus, supplements, and amendments thereto.

It shall be your obligation to ensure that all such information andmaterials are distributed to your customers who purchase or own Shares,in accordance with securities and/or banking laws, rules andregulations and any other applicable regulations.

9. Refund of Sales Charge: If the shares of any Fund confirmed to youhereunder are repurchased by such Fund, or by us as Agent for suchFund, or are tendered for liquidation to such Fund, within ten (10)business days after such confirmation of your original order, then youshall forthwith repay to such Fund the full dealer sales concessionallowed to you on the sale of such Fund shares. We shall notify you ofsuch repurchase or redemption within ten (10) days from the day onwhich the redemption order is delivered to us or to such Fund.

10. Statements/Representations: No person is authorized to make anystatements or representations relating to the shares of any Fund,except those contained in its then current Prospectus and Statement ofAdditional Information which you agree to deliver to investors inaccordance with applicable SEC and NASD regulations and in suchadditional information as we may supply or authorize as SupplementalInformation to such Prospectus and Statement of Additional Information(i.e., advertisements and supplemental sales literature).

You shall not allow unauthorized statements or information designatedby us as "Not For Use With The Public" or "For Broker-Dealer Use Only"to be distributed directly or indirectly to an investor. You shalldeliver to us for prior approval any Supplemental Information preparedby you related to the Funds for use with the public.

In ordering shares of any Fund you shall rely solely and conclusivelyon the representations contained in its then current Prospectus,Statement of Additional Information, and Supplemental Information, ifany, additional copies of which are and will be available on request.In no transaction shall you have any authority whatever to act as agentfor any Fund, or for us, or for any other distributor. Nothing in thisAgreement shall constitute either of us as an agent of the other, orshall constitute you or any Fund the agent of the other.

No person is authorized to make any statement or representationsregarding benefits or services offered by any affiliate of anapplicable Fund or any other benefit or service provider to investorsor to persons for whom investments are made in a Fund that state,indicate or imply that such benefits are offered or endorsed by theFund and any directors, trustees or officers of the Fund, or by ASM,Inc., its officer or directors. This excludes those benefits orservices provided to shareholders by the Fund or on behalf of the Fundin its normal course of business.

11. Warranties: You represent and warrant that:

(a) you are either (1) registered as a broker-dealer under the1934 Act, and are licensed and qualified as a broker-dealer orotherwise authorized to offer and sell shares of the Fundsunder the laws of the jurisdictions in which the shares of theFunds will be offered and sold by you or (2) you are a "bank"as defined in Section 3(a)(6) of the 1934 Act;

(b) if you are registered as a broker-dealer under the 1934 Act, you are a



member in good standing with the NASD and agree to maintain such membership ingood standing;

(c) in selling shares of the Funds you will comply with allapplicable laws, rules and regulations, including theapplicable provisions of the 1933 Act, 1934 Act and 1940 Act,as amended, the applicable rules and regulations of the NASD,banking laws, rules and regulations, and the applicable rulesand regulations of the jurisdictions in which you sell,directly or indirectly, any shares of the Funds;

(d) you will offer to sell shares of the Funds only to purchasers meetingthe applicable eligibility requirements set forth in the Prospectus;

(e) you agree not to offer for sale or sell shares of the Funds inany jurisdictions in which shares of the Funds are notqualified for sale or in which you are not qualified as abroker dealer (we will, upon request, inform you as to thestates in which shares of the Funds have been qualified forsale under, or are exempt from the requirements of, applicablestate securities laws);

(f) you are not in violation of any banking law, rule orregulations as to which you are subject and that thetransactions contemplated by this Agreement will not result inany violations of any banking law, rule or regulation; and

(g) you will not make Shares of any Fund available to yourcustomers, including your fiduciary customers, except incompliance with all federal and state laws, rules andregulations of regulatory agencies or authorities applicableto you, or any of your affiliates engaging in such activity,including without limitation ERISA and related rules,regulations and interpretations, which may affect yourbusiness practices.

You agree to indemnify and hold ASM, Inc. and each Company harmlessagainst every loss, cost, damage or expense (including reasonableattorney's fees and expenses) incurred by us as a result of your breachof the foregoing representations and warranties if we notify youpromptly after commencement of any action brought against us for whichwe may seek indemnity.

12. Pricing Errors: With respect to any pricing errors relating totransactions entered into by you on behalf of your customers, you agreeto use your best efforts in cooperating with us to resolve and remedysuch errors upon receipt of notice from us. We will adjust transactionsin accordance with procedures established by each Company and we willnotify you of such adjustments.

13. Modification and Termination: We reserve the right, in our discretionand without notice to you or to any distributor, to suspend sales, to withdrawany offering, to change the offering prices or to modify or cancel thisAgreement for any reason (including the termination of Plan payments pursuant toa Plan of Distribution described in Section 4). This Agreement may be canceledat any time by you upon thirty (30) days written notice. We may terminate thisAgreement for failure to comply with its terms upon mailing notice to you. Inaddition, this Agreement may be terminated with respect to any Fund or class ofshares of a Company by the directors of such Company and by the holders of theoutstanding voting securities entitled to vote on such termination as providedin Rule 12b-1 under the 1940 Act. This Agreement shall terminate automaticallyif you are expelled or suspended from the NASD, or there is an assignment ofthis Agreement or ASM Inc. otherwise ceases to be the general distributor forthe Company (the term "assignment" shall have the meaning specified in the 1940Act and the rules and regulations thereunder, subject to such exemptions as mybe granted by the Securities and Exchange Commission).

14. Investors Account Instructions: If any investor's account isestablished without the investor signing the application form, theBroker-Dealer represents that the instructions relating to theregistration (including the investor's tax identification number) andselected options furnished to the Fund (whether on the applicationform, or in some other document) are in accordance with the investor's



instructions. Broker-Dealer agrees to indemnify the Company and/or theFund(s), its Transfer Agent, and ASM, Inc. for any loss or liabilityresulting from acting upon such instructions. We agree to hold harmlessand indemnify you for any loss or liability arising out of ournegligence in processing such instructions.

15. Liability: Nothing contained herein shall be deemed to protect youagainst any liability to us, the Company or the Company's shareholdersto which you would otherwise be subject by reason of negligence,willful misfeasance, or bad faith in the performance of your dutieshereunder, or by reason of your reckless disregard of your obligationsand duties hereunder.

16. Non-Waiver Provision: Failure of any party to terminate the Agreementfor any of the causes set forth in this Agreement will not constitute a waiverof that party's right to terminate this Agreement at a later time for any ofthese causes.

17. Severability: Should any provision of this Agreement to be heldunenforceable, those provisions not affected by the determination ofunenforceability shall remain in full force and effect.

18. Governing Law: This Agreement will be construed in accordance with thelaws of the State of Connecticut.

If the foregoing completely expresses the terms of the Agreement between us,please so signify by executing, in the space provided, the annexed duplicate ofthis Agreement and return it to us, retaining the original copy for your ownfiles. This Agreement shall become effective upon the earliest of our receipt ofa signed copy hereof or the first order placed by you for any of the Funds'shares after the date below, which order shall constitute acceptance of thisAgreement. This Agreement shall supersede all prior Mutual Fund Sales Agreementsrelating to the shares of any of the Funds. All amendments to this Agreement,including any changes made pursuant to schedules to the Agreement, shall takeeffect as of the date of the first order placed by you for any of the Fund'sshares after the date set forth in the notice of amendment sent to you by theundersigned.

IN WITNESS WHEREOF, the undersigned parties have executed this Agreement to beeffective as set forth above, upon the Effective Date below.

AMERICAN SKANDIA MARKETING, INCORPORATED

BY: __________________________________

Name: __________________________________

Title: __________________________________

Date: __________________________________

Please execute this Selling Group Agreement below and return it to us at theaddress set forth above.

---------------------------------------(Broker-Dealer's Name)

----------------------------------------(Street Address)------------------------------------------------------------------------(City) (State) (Zip Code)

------------------------------(Telephone No.)

BY: ___________________________________________



(Authorized Signature)

-------------------------------------------(Name and Title)

SCHEDULE: PORTFOLIOS


Date: July 1, 1997

The following portfolios of American Skandia Advisor Funds, Inc. aresubject to this Agreement:

ASAF Founders International Small Capitalization FundASAF T. Rowe-Price International Equity Fund

ASAF Founders Small Capitalization FundASAF T. Rowe Price Small Company Value Fund

ASAF Janus Capital Growth FundASAF INVESCO Equity Income Fund

ASAF American Century Strategic Balanced FundASAF Federated High Yield Bond Fund

ASAF Total Return Bond FundASAF JPM Money Market Fund

The Company may add additional portfolios and/or classes ofportfolios from time to time.

Transfer Agent

American Skandia Advisor Funds, Inc. Mail Address:PO Box 8012

Boston, Massachusetts 02266-8012

Overnight Address:American Skandia Advisor Funds, Inc.

Two Heritage DriveNorth Quincy, Massachusetts 02171-2138

Electronic Transfer:State Street Bank & Trust Company

Boston, MassachusettsDDA #99052995

FBO: American Skandia Advisor Funds, Inc.[Fund name and Class of Shares]

Shareholder Name and Account Number

SCHEDULE: SALES CONCESSIONS/AGENCY COMMISSIONS


Date: July 1, 1997

Class A Shares<TABLE><CAPTION>

All Portfolios except ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund

Amount of Purchase Standard Sales Concession Promotional Sales Commission*



<S> <C> <C>less than $50,000 4.25% 5.00%$50,000 - $100,000 3.50% 4.25%$100,000 - $250,000 2.50% 3.25%$250,000 - $500,000 1.75% 2.25%$500,000 - $1,000,000 1.25% 1.50%greater than $1,000,000 and other Class A Purchasessubject to a CDSC as set forth in thecurrent Prospectus .50% .50%

</TABLE><TABLE><CAPTION>

ASAF Total Return Bond Fund and ASAF Federated High Yield Bond Fund Only

Amount of Purchase Standard Sales Commission Promotional Sales Commission*<S> <C> <C>less than $50,000 3.50% 4.25%$50,000 - $100,000 3.00% 3.75%$100,000 - $250,000 2.50% 3.25%$250,000 - $500,000 1.75% 2.25%$500,000 - $1,000,000 1.25% 1.50%greater than $1,000,000 and other Class A Purchasessubject to a CDSC as set forth in thecurrent Prospectus .50% .50%

</TABLE>

<TABLE><CAPTION>

For Purchases greater than $1,000,000 and other Class A Purchases subject to a CDSC:



Trail Commissions: 0.25% per annum based on the daily net assets of suchshares beginning in the first quarter of year 2 after suchshare purchase.

For all other Purchases:



Class B Shares





Class X Shares







</TABLE>

* The Promotional Sales Commission will be payable instead of the Standard SalesCommission for purchases placed on or before December 31, 1998. The PromotionalSales Commission may be eliminated at the sole discretion of ASM, Inc. at anytime prior to December 31, 1998. For purchases received after December 31, 1998,(unless the Promotional Sales Commission has been previously eliminated) theStandard Sales Commission will apply

<TABLE><CAPTION>

Class C Shares

1.00% of the Amount of Purchase




</TABLE>



ameron.cus

CUSTODIAN SERVICES AGREEMENT

THIS AGREEMENT is made as of May __, 1997 by and between PNC BANK,NATIONAL ASSOCIATION, a national banking association ("PNC Bank"), and AMERICANSKANDIA ADVISOR FUNDS, INC., a Maryland corporation (the "Fund").

W I T N E S S E T H:WHEREAS, the Fund is registered as an open-end management investment

company under the Investment Company Act of 1940, as amended (the "1940 Act");and

WHEREAS, the Fund wishes to retain PNC Bank to provide custodianservices to its investment portfolios listed on Exhibit A attached hereto andmade a part hereof, as such Exhibit A may be amended from time to time (each a"Portfolio"), and PNC Bank wishes to furnish domestic custodian services, eitherdirectly or through an affiliate or affiliates, as more fully described herein.

NOW, THEREFORE, In consideration of the premises and mutual covenantsherein contained, and intending to be legally bound hereby, the parties heretoagree as follows:

1. Definitions. As Used in This Agreement:(a) "1933 Act" means the Securities Act of 1933, as amended.

(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.

17(c) "Authorized Person" means any officer of the Fund and any

other person duly authorized by the Fund's Board of Directors to give OralInstructions and Written Instructions on behalf of the Fund and listed on theAuthorized Persons Appendix attached hereto and made a part hereof or anyamendment thereto as may be received by PNC Bank. An Authorized Person's scopeof authority may be limited by the Fund by setting forth such limitation in theAuthorized Persons Appendix.

(d) "Book-Entry System" means Federal Reserve Treasurybook-entry system for United States and federal agency securities, its successoror successors, and its nominee or nominees and any book-entry system maintainedby an exchange registered with the SEC or otherwise under the 1934 Act.

(e) "CEA" means the Commodities Exchange Act, as amended.(f) "Oral Instructions" mean oral instructions received by PNC

Bank from an Authorized Person or from a person reasonably believed by PNC Bankto be an Authorized Person. (g) "PNC Bank" means PNC Bank, National Associationor a subsidiary or affiliate of PNC Bank, National Association.

(h) "SEC" means the Securities and Exchange Commission.



(i) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and theCEA.

(j) "Shares" mean the shares of beneficial interest of any series or classof the Fund.

(k) "Property" means:(i) any and all domestic securities and other

investment items which the Fund may fromtime to time deposit, or cause to bedeposited, with PNC Bank or which PNC Bankmay from time to time hold for the Fund;

(ii) all income in respect of any of such securities or other investmentitems;

(iii) all proceeds of the sale of any of such securities or investmentitems; and

(iv) all proceeds of the sale of securitiesissued by the Fund, which are received byPNC Bank from time to time, from or onbehalf of the Fund.

(k) "Written Instructions" mean written instructions signed bytwo Authorized Persons and received by PNC Bank. The instructions may bedelivered by hand, mail, tested telegram, cable, telex or facsimile sendingdevice.

2. Appointment. The Fund hereby appoints PNC Bank to provide domesticcustodian services to the Fund, on behalf of each Portfolio, and PNC Bankaccepts such appointment and agrees to furnish such services.

3. Delivery of Documents. The Fund has provided or, where applicable, willprovide PNC Bank with the following:

(a) certified or authenticated copies of the resolutions of the Fund'sBoard of Directors, approving the appointment of PNC Bank or its affiliates toprovide services;

(b) a copy of the Fund's most recent effective registration statement;

(c) a copy of each Portfolio's advisory agreement;



(d) a copy of the distribution agreement with respect to each class ofShares;

(e) a copy of each Portfolio's administration agreement if PNC Bank is notproviding the Portfolio with such services;

(f) copies of any shareholder servicing agreements made in respect of theFund or a Portfolio; and

(g) certified or authenticated copies of any and all amendments orsupplements to the foregoing.

4. Compliance with Laws.PNC Bank undertakes to comply with all applicable requirements of the

Securities Laws and any laws, rules and regulations of governmental authoritieshaving jurisdiction with respect to the duties to be performed by PNC Bankhereunder. Except as specifically set forth herein, PNC Bank assumes noresponsibility for such compliance by the Fund or any Portfolio.

5. Instructions.(a) Unless otherwise provided in this Agreement, PNC Bank

shall act only upon Oral Instructions and Written Instructions.(b) PNC Bank shall be entitled to rely upon any Oral

Instructions and Written Instructions it receives from an Authorized Person (orfrom a person reasonably believed by PNC Bank to be an Authorized Person)pursuant to this Agreement. PNC Bank may assume that any Oral Instructions orWritten Instructions received hereunder are not in any way inconsistent with theprovisions of organizational documents of the Fund or of any vote, resolution orproceeding of the Fund's Board of Directors or of the Fund's shareholders,unless and until PNC Bank receives Written Instructions to the contrary.

(c) The Fund agrees to forward to PNC Bank WrittenInstructions confirming Oral Instructions (except where such Oral Instructionsare given by PNC Bank or its affiliates) so that PNC Bank receives the WrittenInstructions by the close of business on the same day that such OralInstructions are received. The fact that such confirming Written Instructionsare not received by PNC Bank shall in no way invalidate the transactions orenforceability of the transactions authorized by the Oral Instructions. WhereOral Instructions or Written Instructions reasonably appear to have beenreceived from an Authorized Person, PNC Bank shall incur no liability to the



Fund in acting upon such Oral Instructions or Written Instructions provided thatPNC Bank's actions comply with the other provisions of this Agreement.

6. Right to Receive Advice.(a) Advice of the Fund. If PNC Bank is in doubt as to any

action it should or should not take, PNC Bank may request directions or advice,including Oral Instructions or Written Instructions, from the Fund.

(b) Advice of Counsel. If PNC Bank shall be in doubt as to anyquestion of law pertaining to any action it should or should not take, PNC Bankmay request advice at its own cost from such counsel of its own choosing (whomay be counsel for the Fund, the Fund's investment adviser or PNC Bank, at theoption of PNC Bank).

(c) Conflicting Advice. In the event of a conflict betweendirections, advice or Oral Instructions or Written Instructions PNC Bankreceives from the Fund, and the advice it receives from counsel, PNC Bank shallbe entitled to rely upon and follow the advice of counsel.

(d) Protection of PNC Bank. PNC Bank shall be protected in anyaction it takes or does not take in reliance upon directions, advice or OralInstructions or Written Instructions it receives from the Fund or from counseland which PNC Bank believes, in good faith, to be consistent with thosedirections, advice or Oral Instructions or Written Instructions. Nothing in thissection shall be construed so as to impose an obligation upon PNC Bank (i) toseek such directions, advice or Oral Instructions or Written Instructions, or(ii) to act in accordance with such directions, advice or Oral Instructions orWritten Instructions unless, under the terms of other provisions of thisAgreement, the same is a condition of PNC Bank's properly taking or not takingsuch action. Nothing in this subsection shall excuse PNC Bank when an action oromission on the part of PNC Bank constitutes willful misfeasance, bad faith,gross negligence or reckless disregard by PNC Bank of any duties, obligations orresponsibilities set forth in this Agreement.

7. Records; Visits. The books and records pertaining to the Fund andany Portfolio, which are in the possession or under the control of PNC Bank,shall be the property of the Fund. Such books and records shall be prepared andmaintained as required by the 1940 Act and other applicable securities laws,rules and regulations. The Fund and Authorized Persons shall have access to suchbooks and records at all times during PNC Bank's normal business hours. Upon thereasonable request of the Fund, copies of any such books and records shall beprovided by PNC Bank to the Fund or to an authorized representative of the Fund,at the Fund's expense.

8. Confidentiality. PNC Bank agrees to keep confidential all records ofthe Fund and information relating to the Fund and its shareholders, unless therelease of such records or information is otherwise consented to, in writing, bythe Fund. The Fund agrees that such consent shall not be unreasonably withheldand may not be withheld where PNC Bank may be exposed to civil or criminal



contempt proceedings or when required to divulge such information or records toduly constituted authorities.

9. Cooperation with Accountants. PNC Bank shall cooperate with theFund's independent public accountants and shall take all reasonable action inthe performance of its obligations under this Agreement to ensure that thenecessary information is made available to such accountants for the expressionof their opinion, as required by the Fund.

10. Disaster Recovery. PNC Bank shall enter into and shall maintain ineffect with appropriate parties one or more agreements making reasonableprovisions for emergency use of electronic data processing equipment to theextent appropriate equipment is available. In the event of equipment failures,PNC Bank shall, at no additional expense to the Fund, take reasonable steps tominimize service interruptions. PNC Bank shall have no liability with respect tothe loss of data or service interruptions caused by equipment failure providedsuch loss or interruption is not caused by PNC Bank's own willful misfeasance,bad faith, gross negligence or reckless disregard of its duties or obligationsunder this Agreement.

11. Compensation. As compensation for custody services rendered by PNCBank during the term of this Agreement, the Fund, on behalf of each of thePortfolios, will pay to PNC Bank a fee or fees as may be agreed to in writingfrom time to time by the Fund and PNC Bank.

12. Indemnification. The Fund, on behalf of each Portfolio, agrees toindemnify and hold harmless PNC Bank and its affiliates from all taxes, charges,expenses, assessments, claims and liabilities (including, without limitation,liabilities arising under the Securities Laws and any state and foreignsecurities and blue sky laws, and amendments thereto, and expenses, including(without limitation) attorneys' fees and disbursements, arising directly orindirectly from any action or omission to act which PNC Bank takes (i) at therequest or on the direction of or in reliance on the advice of the Fund or (ii)upon Oral Instructions or Written Instructions. Neither PNC Bank, nor any of itsaffiliates, shall be indemnified against any liability (or any expenses incidentto such liability) arising out of PNC Bank's or its affiliates' own willfulmisfeasance, bad faith, gross negligence or

reckless disregard of its duties under this Agreement.13. Responsibility of PNC Bank.

(a) PNC Bank shall be under no duty to take any action onbehalf of the Fund or any Portfolio except as specifically set forth herein oras may be specifically agreed to by PNC Bank in writing. PNC Bank shall be



obligated to exercise care and diligence in the performance of its dutieshereunder, to act in good faith and to use its best efforts, within reasonablelimits, in performing services provided for under this Agreement. PNC Bank shallbe liable for any damages arising out of PNC Bank's failure to perform itsduties under this agreement to the extent such damages arise out of PNC Bank'swillful misfeasance, bad faith, gross negligence or reckless disregard of itsduties under this Agreement.

(b) Without limiting the generality of the foregoing or of anyother provision of this Agreement, (i) PNC Bank shall not be under any duty orobligation to inquire into and shall not be liable for (A) the validity orinvalidity or authority or lack thereof of any Oral Instruction or WrittenInstruction, notice or other instrument which conforms to the applicablerequirements of this Agreement, and which PNC Bank reasonably believes to begenuine; or (B) subject to section 10, delays or errors or loss of dataoccurring by reason of circumstances beyond PNC Bank's control, including actsof civil or military authority, national emergencies, fire, flood, catastrophe,acts of God, insurrection, war, riots or failure of the mails, transportation,communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary,neither PNC Bank nor its affiliates shall be liable to the Fund or to anyPortfolio for any consequential, special or indirect losses or damages which theFund may incur or suffer by or as a consequence of PNC Bank's or its affiliates'performance of the services provided hereunder, whether or not the likelihood ofsuch losses or damages was known by PNC Bank or its affiliates.

14. Description of Services.(a) Delivery of the Property. The Fund will deliver or arrange for

delivery to PNC Bank, all the Property owned by the Portfolios, including cashreceived as a result of the distribution of Shares, during the period that isset forth in this Agreement. PNC Bank will not be responsible for any assetsuntil actual receipt.

(b) Receipt and Disbursement of Money. PNC Bank, acting uponWritten Instructions, shall open and maintain separate accounts in the Fund'sname using all cash received from or for the account of the Fund, subject to theterms of this Agreement. In addition, upon Written Instructions, PNC Bank shallopen separate custodial accounts for each separate Portfolio of the Fund(collectively, the "Accounts") and shall hold in the Accounts all cash receivedfrom or for the Accounts of the Fund specifically designated to each separatePortfolio.

PNC Bank shall make cash payments from or for the Accounts of aPortfolio only for:

(i) purchases of domestic securities in the name of a Portfolio or PNC Bankor PNC Bank's nominee as provided in sub-section (j) and for which PNC Bank hasreceived a copy of the broker's or dealer's confirmation or payee's invoice, as



appropriate;

(ii) purchase or redemption of Shares of the Fund delivered to PNC Bank;

(iii) payment of, subject to Written Instructions,interest, taxes, administration, accounting,distribution, advisory, management fees or similarexpenses which are to be borne by a Portfolio;

(iv) payment to, subject to receipt of WrittenInstructions, the Fund's transfer agent, as agent forthe shareholders, an amount equal to the amount ofdividends and distributions stated in the WrittenInstructions to be distributed in cash by thetransfer agent to shareholders, or, in lieu of payingthe Fund's transfer agent, PNC Bank may arrange forthe direct payment of cash dividends anddistributions to shareholders in accordance withprocedures mutually agreed upon from time to time byand among the Fund, PNC Bank and the Fund's transferagent.

(v) payments, upon receipt Written Instructions, inconnection with the conversion, exchange or surrenderof domestic securities owned or subscribed to by theFund and held by or delivered to PNC Bank;

(vi) payments of the amounts of dividends received with respect to domesticsecurities sold short;

(vii) payments made to a sub-custodian pursuant to provisions insub-section (c) of this Section; and

(viii) payments, upon Written Instructions, made for other proper Fundpurposes.

PNC Bank is hereby authorized to endorse and collect all checks, drafts orother orders for the payment of money received as custodian for the Accounts.

(c) Receipt of Securities; Subcustodians.



(i) PNC Bank shall hold all securities received by it for the Accounts in aseparate account that physically segregates such securities from those of anyother persons, firms or corporations, except for securities held in a Book-EntrySystem. All such securities shall be held or disposed of only upon WrittenInstructions of the Fund pursuant to the terms of this Agreement. PNC Bank shallhave no power or authority to assign, hypothecate, pledge or otherwise disposeof any such securities or investment, except upon the express terms of thisAgreement and upon Written Instructions, accompanied by a certified resolutionof the Fund's Board of Directors, authorizing the transaction. In no case mayany member of the Fund's Board of Directors, or any officer, employee or agentof the Fund withdraw any securities.

At PNC Bank's own expense and for its ownconvenience, PNC Bank may enter intosub-custodian agreements with other UnitedStates banks or trust companies to performduties described in this sub-section (c).Such bank or trust company shall have anaggregate capital, surplus and undividedprofits, according to its last publishedreport, of at least one million dollars($1,000,000), if it is a subsidiary oraffiliate of PNC Bank, or at least twentymillion dollars ($20,000,000) if such bankor trust company is not a subsidiary oraffiliate of PNC Bank. In addition, suchbank or trust company must be qualified toact as custodian and agree to comply withthe relevant provisions of the 1940 Act andother applicable rules and regulations. Anysuch arrangement will not be entered intowithout prior written notice to the Fund.

PNC Bank shall remain responsible for theperformance of all of its duties asdescribed in this Agreement and shall holdthe Fund and each Portfolio harmless fromits own acts or omissions, under thestandards of care provided for herein, orthe acts and omissions of any sub-custodianchosen by PNC Bank under the terms of thissub-section (c).

(d) Transactions Requiring Instructions. Upon receipt of Oral Instructionsor Written Instructions and not otherwise, PNC Bank, directly or through the useof the Book-Entry System, shall:

(i) deliver any domestic securities held for a Portfolio against thereceipt of payment for the sale of such securities;



(ii) execute and deliver to such persons as may bedesignated in such Oral Instructions or WrittenInstructions, proxies, consents, authorizations, andany other instruments whereby the authority of aPortfolio as owner of any domestic securities may beexercised;

(iii) deliver any domestic securities to the issuerthereof, or its agent, when such securities arecalled, redeemed, retired or otherwise becomepayable; provided that, in any such case, the cash orother consideration is to be delivered to PNC Bank;

(iv) deliver any domestic securities held for a Portfolioagainst receipt of other domestic securities or cashissued or paid in connection with the liquidation,reorganization, refinancing, tender offer, merger,consolidation or recapitalization of any corporation,or the exercise of any conversion privilege;

(v) deliver any domestic securities held for a Portfolioto any protective committee, reorganization committeeor other person in connection with thereorganization, refinancing, merger, consolidation,recapitalization or sale of assets of anycorporation, and receive and hold under the terms ofthis Agreement such certificates of deposit, interimreceipts or other instruments or documents as may beissued to it to evidence such delivery;

(vi) make such transfer or exchanges of the assets of thePortfolios and take such other steps as shall bestated in said Oral Instructions or WrittenInstructions to be for the purpose of effectuating aduly authorized plan of liquidation, reorganization,merger, consolidation or recapitalization of theFund;

(vii) release domestic securities belonging to a Portfolio to any bank ortrust company for the purpose of a pledge or hypothecation to secure any loanincurred by the Fund on behalf of that Portfolio; provided, however, that suchsecurities shall be released only upon payment to PNC Bank of the moniesborrowed, except that in cases where additional collateral is required to securea borrowing already made subject to proper prior authorization, further such



securities may be released for that purpose; and repay such loan upon redeliveryto it of the domestic securities pledged or hypothecated therefor and uponsurrender of the note or notes evidencing the loan;

(viii) release and deliver domestic securities owned by aPortfolio in connection with any repurchase agreemententered into on behalf of the Fund, but only onreceipt of payment therefor; and pay out moneys ofthe Fund in connection with such repurchaseagreements, but only upon the delivery of suchsecurities;

(ix) release and deliver or exchange domestic securitiesowned by the Fund in connection with any conversionof such domestic securities, pursuant to their terms,into other domestic securities;

(x) release and deliver domestic securities owned by the Fund for thepurpose of redeeming in kind shares of the Fund upon delivery thereof to PNCBank; and

(xi) release and deliver or exchange domestic securities owned by the Fundfor other corporate purposes.

PNC Bank must also receive a certified resolutiondescribing the nature of the corporate purpose andthe name and address of the person(s) to whomdelivery shall be made when such action is pursuantto sub-paragraph d.

(e) Use of Book-Entry System. The Fund shall deliver to PNCBank certified resolutions of the Fund's Board of Directors approving,authorizing and instructing PNC Bank on a continuous basis, to deposit in theBook-Entry System all domestic securities belonging to the Portfolios eligiblefor deposit therein and to utilize the Book-Entry System to the extent possiblein connection with settlements of purchases and sales of domestic securities bythe Portfolios, and deliveries and returns of domestic securities loaned,subject to repurchase agreements or used as collateral in connection withborrowings. PNC Bank shall continue to perform such duties until it receivesWritten Instructions or Oral Instructions authorizing contrary actions.

PNC Bank shall administer the Book-Entry System as follows:(i) With respect to domestic securities of each Portfolio

which are maintained in the Book-Entry System, therecords of PNC Bank shall identify by Book-Entry or



otherwise those domestic securities belonging to eachPortfolio. PNC Bank shall furnish to the Fund adetailed statement of the Property held for eachPortfolio under this Agreement at least monthly andfrom time to time and upon written request.

(ii) Domestic securities and any cash of each Portfoliodeposited in the Book-Entry System will at all timesbe segregated from any assets and cash controlled byPNC Bank in other than a fiduciary or custodiancapacity but may be commingled with other assets heldin such capacities. PNC Bank and its sub-custodian,if any, will pay out money only upon receipt ofdomestic securities and will deliver domesticsecurities only upon the receipt of money.

(iii) All books and records maintained by PNC Bank whichrelate to the Fund's participation in the Book-EntrySystem will at all times during PNC Bank's regularbusiness hours be open to the inspection ofAuthorized Persons, and PNC Bank will furnish to theFund all information in respect of the servicesrendered as it may require.

PNC Bank will also provide the Fund with such reports on its own systemof internal control as the Fund may reasonably request from time to time.

(f) Registration of Domestic securities. All domesticsecurities held for a Portfolio which are issued or issuable only in bearerform, except such domestic securities held in the Book-Entry System, shall beheld by PNC Bank in bearer form; all other domestic securities held for aPortfolio may be registered in the name of the Fund on behalf of that Portfolio,PNC Bank, the Book-Entry System, a sub-custodian, or any duly appointed nomineesof the Fund, PNC Bank, Book-Entry System or sub-custodian. The Fund reserves theright to instruct PNC Bank as to the method of registration and safekeeping ofthe domestic securities of the Fund. The Fund agrees to furnish to PNC Bankappropriate instruments to enable PNC Bank to hold or deliver in proper form fortransfer, or to register in the name of its nominee or in the name of theBook-Entry System, any domestic securities which it may hold for the Accountsand which may from time to time be registered in the name of the Fund on behalfof a Portfolio.



(g) Voting and Other Action. Neither PNC Bank nor its nomineeshall vote any of the domestic securities held pursuant to this Agreement by orfor the account of a Portfolio, except in accordance with Written Instructions.PNC Bank, directly or through the use of the Book-Entry System, shall execute inblank and promptly deliver all notices, proxies and proxy soliciting materialsto the registered holder of such domestic securities. If the registered holderis not the Fund on behalf of a Portfolio, then Written Instructions or OralInstructions must designate the person who owns such domestic securities.

(h) Transactions Not Requiring Instructions. In the absence of contraryWritten Instructions, PNC Bank is authorized to take the following actions:

(i) Collection of Income and Other Payments.(A) collect and receive for the account

of each Portfolio, all income,dividends, distributions, coupons,option premiums, other payments andsimilar items, included or to beincluded in the Property, and, inaddition, promptly advise eachPortfolio of such receipt and creditsuch income, as collected, to eachPortfolio's custodian account;

(B) endorse and deposit for collection, in the name of the Fund, checks,drafts, or other orders for the payment of money;

(C) receive and hold for the account ofeach Portfolio all domesticsecurities received as adistribution on the Portfolio'sdomestic securities as a result of astock dividend, share split-up orreorganization, recapitalization,readjustment or other rearrangementor distribution of rights or similardomestic securities issued withrespect to any domestic securitiesbelonging to a Portfolio and held byPNC Bank hereunder;

(D) present for payment and collect theamount payable upon all securitiesheld hereunder which may mature orbe called, redeemed, or retired, orotherwise become payable on the datesuch securities become payable; and



(E) take any action which may benecessary and proper in connectionwith the collection and receipt ofsuch income and other payments andthe endorsement for collection ofchecks, drafts, and other negotiableinstruments.

(ii) Miscellaneous Transactions.

(A) PNC Bank is authorized to deliver or causeto be delivered Property against payment orother consideration or written receipttherefor in the following cases:

(1) for examination by a broker or dealer selling for the account of aPortfolio in accordance with street delivery custom;

(2) for the exchange of interim receipts or temporary domestic securitiesfor definitive domestic securities; and

(3) for transfer of domestic securities into the name of the Fund on behalfof a Portfolio or PNC Bank or nominee of either, or for exchange of domesticsecurities for a different number of bonds, certificates, or other evidence,representing the same aggregate face amount or number of units bearing the sameinterest rate, maturity date and call provisions, if any; provided that, in anysuch case, the new domestic securities are to be delivered to PNC Bank.

(B) Unless and until PNC Bank receives Oral Instructions or WrittenInstructions to the contrary, PNC Bank shall: (1) pay all income items held byit which call for payment upon presentation and hold the cash received by itupon such payment for the account of each Portfolio;

(2) collect interest and cash dividends received on Property, with noticeto the Fund, to the account of each Portfolio;

(3) hold for the account of each Portfolio all stock dividends, rights andsimilar domestic securities issued with respect to any domestic securities heldby PNC Bank; and



(4) execute as agent on behalf of the Fund all necessary ownershipcertificates required by the Internal Revenue Code or the Income Tax Regulationsof the United States Treasury Department or under the laws of any state now orhereafter in effect, inserting the Fund's name, on behalf of a Portfolio, onsuch certificate as the owner of the domestic securities covered thereby whichare held hereunder, to the extent it may lawfully do so.

(i) Segregated Accounts.

(i) PNC Bank shall upon receipt of WrittenInstructions or Oral Instructions establishand maintain a segregated accounts on itsrecords for and on behalf of each Portfolio.Such accounts may be used to transfer cashand securities held hereunder, includingsecurities in the Book-Entry System:

(A) for the purposes of compliance bythe Fund with the proceduresrequired by a domestic securities oroption exchange, providing suchprocedures comply with the 1940 Actand any releases of the SEC relatingto the maintenance of segregatedaccounts by registered investmentcompanies; and

(B) Upon receipt of WrittenInstructions, for other propercorporate purposes.

(ii) PNC Bank shall arrange for the establishment of IRAcustodian accounts for such shareholders holdingShares through IRA accounts, in accordance with theFund's prospectuses, the Internal Revenue Code of1986, as amended (including regulations promulgatedthereunder), and with such other procedures as aremutually agreed upon from time to time by and amongthe Fund, PNC Bank and the Fund's transfer agent.

(j) Purchases of Domestic securities. PNC Bank shall settlepurchased domestic securities upon receipt of Oral Instructions or WrittenInstructions from the Fund or its investment advisers that specify:



(i) the name of the issuer and the title of the domestic securities,including CUSIP number if applicable;

(ii) the number of shares or the principal amount purchased and accruedinterest, if any;

(iii) the date of purchase and settlement;

(iv) the purchase price per unit;

(v) the total amount payable upon such purchase;

(vi) the Portfolio involved; and

(vii) the name of the person from whom or thebroker through whom the purchase was made.PNC Bank shall upon receipt of suchsecurities purchased by or for a Portfoliopay out of the moneys held for the accountof the Portfolio the total amount payable tothe person from whom or the broker throughwhom the purchase was made, provided thatthe same conforms to the total amountpayable as set forth in such OralInstructions or Written Instructions.

(k) Sales of Domestic securities. PNC Bank shall settle soldsecurities held hereunder upon receipt of Oral Instructions or WrittenInstructions from the Fund that specify:

(i) the name of the issuer and the title of the security, including CUSIPnumber if applicable;

(ii) the number of shares or principal amountsold, and accrued interest, if any;

(iii) the date of trade and settlement;

(iv) the sale price per unit;

(v) the total amount payable to the Fund upon such sale;

(vi) the name of the broker through whom or the person to whom the sale wasmade; and



(vii) the location to which the security must be delivered and deliverydeadline, if any; and (viii) the Portfolio involved. PNC Bank shall deliver thedomestic securities upon receipt of the total amount payable to the Portfolioupon such sale, provided that the total amount payable is the same as was setforth in the Oral Instructions or Written Instructions. Subject to theforegoing, PNC Bank may accept payment in such form as shall be satisfactory toit, and may deliver domestic securities and arrange for payment in accordancewith the customs prevailing among dealers in domestic securities. (l) Reports;Proxy Materials. (i) PNC Bank shall furnish to the Fund the following reports:(A) such periodic and special reports as the Fund may reasonably request;

(B) a monthly statement summarizing alltransactions and entries for theaccount of each Portfolio, listingthe portfolio securities belongingto each Portfolio with the adjustedaverage cost of each issue and themarket value at the end of suchmonth and stating the cash accountof each Portfolio includingdisbursements;

(C) the reports required to be furnished to the Fund pursuant to Rule17f-4; and

(D) such other information as may beagreed upon from time to timebetween the Fund and PNC Bank.

(ii) PNC Bank shall transmit promptly to the Fundany proxy statement, proxy material, noticeof a call or conversion or similarcommunication received by it as custodian ofthe Property. PNC Bank shall be under noother obligation to inform the Fund as tosuch actions or events.

(m) Collections. All collections of monies or other propertyin respect, or which are to become part, of the Property (but not thesafekeeping thereof upon receipt by PNC Bank) shall be at the sole risk of theFund. If payment is not received by PNC Bank within a reasonable time afterproper demands have been made, PNC Bank shall notify the Fund as promptly asreasonably possible in writing, including copies of all demand letters, anywritten responses and memoranda of all oral responses, and shall awaitinstructions from the Fund. PNC Bank shall not be obliged to take legal action



for collection unless and until reasonably indemnified to its satisfaction. PNCBank shall also notify the Fund as soon as reasonably practicable wheneverincome due on securities held hereunder is not collected in due course and shallprovide the Fund with periodic status reports of such income collected after areasonable time.

15. Duration and Termination. This Agreement shall continue untilterminated by the Fund or by PNC Bank on sixty (60) days' prior written noticeto the other party. In the event this Agreement is terminated (pendingappointment of a successor to PNC Bank or vote of the shareholders of the Fundto dissolve or to function without a custodian of its cash, domestic securitiesor other property), PNC Bank shall not deliver cash, domestic securities orother property of the Portfolios to the Fund. It may deliver them to a bank ortrust company of PNC Bank's choice, having an aggregate capital, surplus andundivided profits, as shown by its last published report, of not less thantwenty million dollars ($20,000,000), as a custodian for the Fund to be heldunder terms similar to those of this Agreement. PNC Bank shall not be requiredto make any such delivery or payment until full payment shall have been made toPNC Bank of all of its fees, compensation, costs and expenses. PNC Bank shallhave a security interest in and shall have a right of setoff against theProperty as security for the payment of such fees, compensation, costs andexpenses.

16. Notices. All notices and other communications, including WrittenInstructions, shall be in writing or by confirming telegram, cable, telex orfacsimile sending device. Notice shall be addressed (a) if to PNC Bank atAirport Business Center, International Court 2, 200 Stevens Drive, Lester,Pennsylvania 19113, marked for the attention of the Custodian ServicesDepartment (or its successor) (b) if to the Fund, at the address of the Fund or(c) if to neither of the foregoing, at such other address as shall have beengiven by like notice to the sender of any such notice or other communication bythe other party. If notice is sent by confirming telegram, cable, telex orfacsimile sending device, it shall be deemed to have been given immediately. Ifnotice is sent by first-class mail, it shall be deemed to have been given fivedays after it has been mailed. If notice is sent by messenger, it shall bedeemed to have been given on the day it is delivered.

17. Amendments. This Agreement, or any term hereof, may be changed orwaived only by a written amendment, signed by the party against whom enforcementof such change or waiver is sought.

18. Delegation; Assignment. PNC Bank may assign its rights and delegate



its duties hereunder to any wholly-owned direct or indirect subsidiary of PNCBank, National Association or PNC Bank Corp., provided that (i) PNC Bank givesthe Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee)agrees with PNC Bank and the Fund to comply with all relevant provisions of the1940 Act; and (iii) PNC Bank and such delegate (or assignee) promptly providesuch information as the Fund may request, and respond to such questions as theFund may ask, relative to the delegation (or assignment), including (withoutlimitation) the capabilities of the delegate (or assignee).

19. Counterparts. This Agreement may be executed in two or morecounterparts, each of which shall be deemed an original, but all of whichtogether shall constitute one and the same instrument.

20. Further Actions. Each party agrees to perform such further acts andexecute such further documents as are necessary to effectuate the purposeshereof.

21. Miscellaneous.(a) Entire Agreement. This Agreement embodies the entire

agreement and understanding between the parties and supersedes all prioragreements and understandings relating to the subject matter hereof, providedthat the parties may embody in one or more separate documents their agreement,if any, with respect to delegated duties and Oral Instructions.

(b) Captions. The captions in this Agreement are included forconvenience of reference only and in no way define or delimit any of theprovisions hereof or otherwise affect their construction or effect.

(c) Governing Law. This Agreement shall be deemed to be a contract made inPennsylvania and governed by Pennsylvania law, without regard to principles ofconflicts of law.

(d) Partial Invalidity. If any provision of this Agreementshall be held or made invalid by a court decision, statute, rule or otherwise,the remainder of this Agreement shall not be affected thereby.

(e) Successors and Assigns. This Agreement shall be bindingupon and shall inure to the benefit of the parties hereto and their respectivesuccessors and permitted assigns.

(f) Facsimile Signatures. The facsimile signature of any party to thisAgreement shall constitute the valid and binding execution hereof by such party.



IN WITNESS WHEREOF, the parties hereto have caused this Agreement to beexecuted as of the day and year first above written.

PNC BANK, NATIONAL ASSOCIATION

By:

Title:


By:Title:

EXHIBIT A

THIS EXHIBIT A, dated as of May __, 1997, is Exhibit A to that certainCustodian Services Agreement dated as of May __, 1997 between PNC Bank, NationalAssociation and American Skandia Advisor Funds, Inc.

PORTFOLIOS

International Small Capitalization FundInternational Equity FundSmall Capitalization FundSmall Company Value Fund

Large Capitalization Growth FundValue Growth & Income Fund

Strategic Balanced FundHigh Yield Bond Fund

Total Return Bond FundMoney Market Fund



AUTHORIZED PERSONS APPENDIX

NAME (Type) SIGNATURE



CUSTODY AGREEMENT

This Custody Agreement is dated May __, 1997 between MORGANSTANLEY TRUST COMPANY, a New York State chartered trust company (the"Custodian"), and AMERICAN SKANDIA ADVISOR FUNDS, INC., a Maryland corporationon behalf of each of the Funds listed on Appendix 1, as may be amended from timeto time (the "Client").

1. Appointment and Acceptance; Accounts. (a) The Client herebyappoints the Custodian as a custodian of Property (as defined below) owned orunder the control of the Client that are delivered to the Custodian, or anySubcustodian as appointed below, from time to time to be held in custody for thebenefit of the Client. The Custodian agrees to act as such custodian upon theterms and conditions hereinafter provided.

(b) Prior to the delivery of any Property by the Client to theCustodian, the Client shall deliver to the Custodian each document and otheritem listed in Appendix 2. In addition, the Client shall deliver to theCustodian any additional documents or items as the Custodian may deem necessaryfor the performance of its duties under this Agreement.

(c) The Client instructs the Custodian to establish on thebooks and records of the Custodian the accounts listed in Appendix 3 (the"Accounts") in the name of the Client. Upon receipt of Authorized Instructions(as defined below) and appropriate documentation, the Custodian shall openadditional Accounts for the Client. Upon the Custodian's confirmation to theClient of the opening of such additional Accounts, or of the closing ofAccounts, Appendix 3 shall be deemed automatically amended or supplementedaccordingly. The Custodian shall record in the Accounts and shall have generalresponsibility for the safekeeping of all securities ("Securities"), cash, cashequivalents and other property (all such Securities, cash, cash equivalents andother property being collectively the "Property") of the Client that aredelivered to the Custodian for custody.

(d) The procedures the Custodian and the Client will use inperforming activities in connection with this Agreement are set forth in aclient services guide provided to the Client by the Custodian, as such guide maybe amended from time to time by the Custodian by written notice to the Client(the "Client Services Guide").

2. Subcustodians. The Property may be held in custody anddeposit accounts that have been established by the Custodian with one or moredomestic or foreign banks or other institutions as listed on Exhibit A (the"Subcustodians"), as such Exhibit may be amended from time to time by theCustodian by 60 days prior written notice to the Client, or through thefacilities of one or more securities depositories or clearing agencies, as maybe changed by prior written notice forwarded by the Custodian as soon asreasonably practicable upon the Custodian's receipt and verification of suchchange. The Custodian shall hold Property through a Subcustodian, securitiesdepository or clearing agency only if (a) such Subcustodian and any securitiesdepository or clearing agency in which such Subcustodian or the Custodian holdsProperty, or any of their creditors, may not assert any right, charge, securityinterest, lien, encumbrance or other claim of any kind to the Securities excepta claim of payment for its safe custody or administration and (b) beneficialownership of such Property may be freely transferred without the payment ofmoney or value other than for safe custody or administration. Any Subcustodianmay hold Property in a securities depository and may utilize a clearing agency.

3. Records. With respect to Property held by a Subcustodian:



(a) The Custodian may hold Property for all of its customerswith a Subcustodian in a single account identified as belonging to theCustodian for the benefit of its customers;

(b) The Custodian shall identify on its books as belonging to the Clientany Property held by a Subcustodian for the Custodian's account;

(c) The Custodian shall require that Property held by theSubcustodian for the Custodian's account be identified on theSubcustodian's books as separate from any other property held by theSubcustodian other than property of the Custodian's customers heldsolely for the benefit of customers of the Custodian; and

(d) In the event the Subcustodian holds Property in asecurities depository or clearing agency, such Subcustodian shall berequired by its agreement with the Custodian to identify on its bookssuch Property as being held for the account of the Custodian ascustodian for its customers or in such other manner as is required bylocal law or market practice.

4. Access to Records. The Custodian shall allow the Client'saccountants reasonable access to the Custodian's records relating to theProperty held by the Custodian as such accountants may reasonably require inconnection with their examination of the Client's affairs. The Custodian shallalso obtain from any Subcustodian (and shall require each Subcustodian to usereasonable efforts to obtain from any securities depository or clearing agencyin which it deposits Property) an undertaking, to the extent consistent withlocal practice and the laws of the jurisdiction or jurisdictions to which suchSubcustodian, securities depository or clearing agency is subject, to permitindependent public accountants such reasonable access to the records of suchSubcustodian, securities depository or clearing agency as may be reasonablyrequired in connection with the examination of the Client's affairs or to takesuch other action as the Custodian in its judgment may deem sufficient to ensuresuch reasonable access.

5. Reports. The Custodian shall provide such reports and other informationto the Client and to such persons as the Client directs as the Custodian and theClient may agree from time to time.

6. Payment of Monies. The Custodian shall make, or cause anySubcustodian to make, payments from monies being held in the Accounts only inaccordance with Authorized Instructions or as provided in Sections 9, 13 and 17.

The Custodian may act as the Client's agent or act as aprincipal in foreign exchange transactions at such rates as are agreed from timeto time between the Client and the Custodian.

7. Transfer of Securities. The Custodian shall make, or cause anySubcustodian to make, transfers, exchanges or deliveries of Securities only inaccordance with Authorized Instructions or as provided in Sections 9, 13 and 17.

8. Corporate Action. (a) The Custodian shall notify the Client of detailsof all corporate actions affecting the Client's Securities promptly upon itsreceipt of such information.

(b) The Custodian shall take, or cause any Subcustodian totake, such corporate action only in accordance with Authorized Instructions oras provided in this Section 8 or Section 9.

(c) In the event the Client does not provide timely AuthorizedInstructions to the Custodian, the Custodian shall act in accordance with thedefault option provided by local market practice and/or the issuer of theSecurities.



(d) Fractional shares resulting from corporate action activityshall be treated in accordance with local market practices.

9. General Authority. In the absence of Authorized Instructions to thecontrary, the Custodian may, and may authorize any Subcustodian to:

(a) make payments to itself or others for expenses of handlingProperty or other similar items relating to its duties under thisAgreement, provided that all such payments shall be accounted for tothe Client;

(b) receive and collect all income and principal with respect to Securitiesand to credit cash receipts to the Accounts;

(c) exchange Securities when the exchange is purelyministerial (including, without limitation, the exchange of interimreceipts or temporary securities for securities in definitive form andthe exchange of warrants, or other documents of entitlement tosecurities, for the securities themselves);

(d) surrender Securities at maturity or when called for redemption uponreceiving payment therefor;

(e) execute in the Client's name such ownership and other certificates asmay be required to obtain the payment of income from Securities;

(f) pay or cause to be paid, from the Accounts, any and alltaxes and levies in the nature of taxes imposed on Property by anygovernmental authority in connection with custody of and transactionsin such Property;

(g) endorse for collection, in the name of the Client, checks, drafts andother negotiable instruments;

(h) take non-discretionary action on mandatory corporate actions; and

(i) in general, attend to all nondiscretionary details inconnection with the custody, sale, purchase, transfer and otherdealings with the Property.

10. Authorized Instructions; Authorized Persons. (a) Except asotherwise provided in Sections 6 through 9, 13 and 17, all payments of monies,all transfers, exchanges or deliveries of Property and all responses tocorporate actions shall be made or taken only upon receipt by the Custodian ofAuthorized Instructions; provided that such Authorized Instructions are timelyreceived by the Custodian. "Authorized Instructions" of the Client meansinstructions from an Authorized Person received by telecopy, tested telex,electronic link or other electronic means or by such other means as may beagreed in writing between the Client and the Custodian.

(b) "Authorized Person" means each of the persons or entitiesidentified on Appendix 4 as amended from time to time by written notice from theClient to the Custodian. The Client represents and warrants to the Custodianthat each Authorized Person listed in Appendix 4, as amended from time to time,is authorized to issue Authorized Instructions on behalf of the Client. Prior tothe delivery of the Property to the Custodian, the Custodian shall provide alist of designated system user ID numbers and passwords that the Client shall beresponsible for assigning to Authorized Persons. The Custodian shall assume thatan electronic transmission received and identified by a system user ID numberand password was sent by an Authorized Person. The Custodian agrees to provideadditional designated system user ID numbers and passwords as needed by theClient. The Client authorizes the Custodian to issue new system user ID numbersupon the request of a previously existing Authorized Person. Upon the issuanceof additional system user ID numbers by the Custodian to the Client, Appendix 4



shall be deemed automatically amended accordingly. The Client authorizes theCustodian to receive, act and rely upon any Authorized Instructions received bythe Custodian which have been issued, or purport to have been issued, by anAuthorized Person.

(c) Any Authorized Person may cancel/correct or otherwiseamend any Authorized Instruction received by the Custodian, but the Clientagrees to indemnify the Custodian for any liability, loss or expense incurred bythe Custodian and its Subcustodians as a result of their having relied upon oracted on any prior Authorized Instruction. An amendment or cancellation of anAuthorized Instruction to deliver or receive any security or funds in connectionwith a trade will not be processed once the trade has settled.

11. Registration of Securities. (a) In the absence ofAuthorized Instructions to the contrary, Securities which must be held inregistered form shall be registered in the name of the Custodian or theCustodian's nominee or, in the case of Securities in the custody of an entityother than the Custodian, in the name of the Custodian, its Subcustodian or anysuch entity's nominee. The Custodian may, without notice to the Client, causeany Securities to be registered or re-registered in the name of the Client.

(b) Where the Custodian has been instructed by the Client tohold any Securities in the name of any person or entity other than theCustodian, its Subcustodian or any such entity's nominee, the Custodian shallnot be responsible for any failure to collect such dividends or other income orparticipate in any such corporate action with respect to such Securities.

12. Deposit Accounts. All cash received by the Custodian forthe Accounts shall be held by the Custodian as a short-term credit balance infavor of the Client and, if the Custodian and the Client have agreed in writingin advance that such credit balances shall bear interest, the Client shall earninterest at the rates and times as agreed between the Custodian and the Client.The Client acknowledges that any such credit balances shall not be accompaniedby the benefit of any governmental insurance.

13. Short-term Credit Extensions. (a) From time to time, theCustodian may extend or arrange short-term credit for the Client which is (i)necessary in connection with payment and clearance of securities and foreignexchange transactions or (ii) pursuant to an agreed schedule, as and if setforth in the Client Services Guide, of credits for dividends and interestpayments on Securities. All such extensions of credit shall be repayable by theClient on demand.

(b) The Custodian shall be entitled to charge the Clientinterest for any such credit extension at rates to be agreed upon from time totime or, if such credit is arranged by the Custodian with a third party onbehalf of the Client, the Client shall reimburse the Custodian for any interestcharge. In addition to any other remedies available, the Custodian shall beentitled to a right of set-off against the Property then held in the Account orAccounts of that Fund to which credit has been extended to satisfy the repaymentof such credit extensions and the payment of, or reimbursement for, accruedinterest thereon.

14. Representations and Warranties. (a) The Client representsand warrants that (i) the execution, delivery and performance of this Agreement(including, without limitation, the ability to obtain the short-term extensionsof credit in accordance with Section 13) are within the Client's power andauthority and have been duly authorized by all requisite action (corporate orotherwise) of the Client and of the beneficial owner of the Property, if otherthan the Client, and (ii) this Agreement and each extension of short-term creditextended to or arranged for the benefit of the Client in accordance with Section13 shall at all times constitute a legal, valid and binding obligation of theClient enforceable against the Client in accordance with their respective terms,except as may be limited by bankruptcy, insolvency or other similar laws



affecting the enforcement of creditors' rights in general and subject to theeffect of general principles of equity (regardless of whether considered in aproceeding in equity or at law).

(b) The Custodian represents and warrants that (i) theexecution, delivery and performance of this Agreement are within the Custodian'spower and authority and have been duly authorized by all requisite action(corporate or otherwise) of the Custodian and (ii) this Agreement constitutesthe legal, valid and binding obligation of the Custodian enforceable against theCustodian in accordance with its terms, except as may be limited by bankruptcy,insolvency or other similar laws affecting the enforcement of creditors' rightsin general and subject to the effect of general principles of equity (regardlessof whether considered in a proceeding in equity or at law).

15. Standard of Care; Indemnification. (a) The Custodian shallbe responsible for the performance of only such duties as are set forth in thisAgreement or contained in Authorized Instructions given to the Custodian whichare not contrary to the provisions of any relevant law or regulation. TheCustodian shall be liable to the Client for any loss, liability or expenseincurred by the Client in connection with this Agreement to the extent that anysuch loss, liability or expense results from the negligence or willfulmisconduct of the Custodian or any Subcustodian; provided, however that neitherthe Custodian nor any Subcustodian shall be liable to the Client for anyindirect, special or consequential damages.

(b) The Client acknowledges that the Property may bephysically held outside the United States. The Custodian shall not be liable forany loss, liability or expense resulting from events beyond the reasonablecontrol of the Custodian, including, but not limited to, force majeure.

(c) In addition, the Client shall indemnify the Custodian andSubcustodians and any nominee for, and hold each of them harmless from, anyliability, loss or expense (including attorneys' fees and disbursements)incurred in connection with this Agreement, including without limitation, (i) asa result of the Custodian having acted or relied upon any AuthorizedInstructions or (ii) arising out of any such person acting as a nominee orholder of record of Securities.

16. Fees; Liens. (a) The Client shall pay to the Custodianfrom time to time such compensation for its services pursuant to this Agreementas may be mutually agreed upon as well as the Custodian's out-of-pocket andincidental expenses. The Client shall hold the Custodian harmless from anyliability or loss resulting from any taxes or other governmental charges, andany expenses related thereto, which may be imposed or assessed with respect tothe Accounts or any Property held therein. The Custodian is, and anySubcustodians are, authorized to charge the Accounts for such items. TheCustodian and each Subcustodian shall notify the Client of any such chargesmade.

(b) The Custodian shall have a lien, charge and securityinterest on any and all Property held in an Account or Accounts by a Fund forany amount owing to the Custodian in respect of such Account from time to timeunder this Agreement.

17. Termination. This Agreement may be terminated by theClient or the Custodian by 90 days written notice to the other, sent byregistered mail. If notice of termination is given, the Client shall, within 60days following the giving of such notice, deliver to the Custodian a statementin writing specifying the successor custodian or other person to whom theCustodian shall transfer the Property. In either event, the Custodian, subjectto the satisfaction of any lien it may have, shall transfer the Property to theperson so specified. If the Custodian does not receive such statement theCustodian, at its election, may transfer the Property to a bank or trust companyestablished under the laws of the United States or any state thereof to be held



and disposed of pursuant to the provisions of this Agreement or may continue tohold the Property until such a statement is delivered to the Custodian. In suchevent the Custodian shall be entitled to fair compensation for its servicesduring such period as the Custodian remains in possession of any Property andthe provisions of this Agreement relating to the duties and obligations of theCustodian shall remain in full force and effect; provided, however, that theCustodian shall have no obligation to settle any transactions in Securities forthe Accounts. The provisions of Sections 15 and 16 shall survive termination ofthis Agreement.

18. Investment Advice. The Custodian shall not supervise, recommend oradvise the Client relative to the investment, purchase, sale, retention or otherdisposition of any Property held under this Agreement.

19. Confidentiality. (a) The Custodian, its agents andemployees shall maintain the confidentiality of information concerning theProperty held in the Client's account, including in dealings with affiliates ofthe Custodian. In the event the Custodian or any Subcustodian is requested orrequired to disclose any confidential information concerning the Property, theCustodian shall, to the extent practicable and legally permissible, promptlynotify the Client of such request or requirement so that the Client may seek aprotective order or waive any objection to the Custodian's or suchSubcustodian's compliance with this Section 19. In the absence of such a waiver,if the Custodian or such Subcustodian is compelled, in the opinion of itscounsel, to disclose any confidential information, the Custodian or suchSubcustodian may disclose such information to such persons as, in the opinion ofcounsel, is so required.

(b) The Client shall maintain the confidentiality of, and notprovide to any third parties absent the written permission of the Custodian, anycomputer software, hardware or communications facilities made available to theClient or its agents by the Custodian.

20. Notices. Any notice or other communication from the Clientto the Custodian, unless otherwise provided by this Agreement or the ClientServices Guide, shall be sent by certified or registered mail to Morgan StanleyTrust Company, One Pierrepont Plaza, Brooklyn, New York, 11201, Attention:President, and any notice from the Custodian to the Client is to be mailedpostage prepaid, addressed to the Client at the address appearing below, or asit may hereafter be changed on the Custodian's records in accordance withwritten notice from the Client.

21. Assignment. This contract may not be assigned by either party withoutthe prior written approval of the other.

22. Miscellaneous. (a) This Agreement shall bind the successors and assignsof the Client and the Custodian.

(b) This Agreement shall be governed by and construed inaccordance with the internal laws of the State of New York without regard to itsconflicts of law rules and to the extent not preempted by federal law. TheCustodian and the Client hereby irrevocably submit to the exclusive jurisdictionof any New York State court or any United States District Court located in theState of New York in any action or proceeding arising out of this Agreement andhereby irrevocably waive any objection to the venue of any such action orproceeding brought in any such court or any defense of an inconvenient forum.

In witness whereof, the parties hereto have set their hands asof the date first above written.

AMERICAN SKANDIA ADVISORFUNDS, INC., on behalf ofeach of the Funds



By______________________Name:

Title:

Address for record: _________________________

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

-------------------------Accepted:

MORGAN STANLEY TRUST COMPANY

By___________________________Authorized Signature

APPENDIX 1

List of Funds

APPENDIX 2

Account Documentation

REQUIRED DOCUMENTATION FOR CORE CUSTODIAL SERVICES (INCLUDING TAX RECLAIMS):

CUSTODY AGREEMENT

CLIENT SERVICES GUIDE (INCLUDING APPENDICES)

FEE SCHEDULE / BILLING GUIDE

GENERAL ACCOUNT INFORMATION

US TAX AUTHORITY DOCUMENTATION

LOCAL TAX OFFICE LETTER / APPLICATION LETTER(NON-UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)

FORM 6166 / REQUEST FOR FOREIGN CERTIFICATION FORM(UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)

CERTIFICATION OF BENEFICIAL OWNERSHIP, LEGAL NAME, LEGAL RESIDENCY, TAXSTATUS AND TAX IDS

TAX RECLAIM POWER OF ATTORNEY

PREVIOUS TAX RECLAIM FILING INFORMATION(PREVIOUS FILERS, ONLY)

UK TAX AUTHORITY DOCUMENTATION



SOPHISTICATED INVESTOR (ACCREDITED INVESTOR) LETTER(UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)

DOCUMENTATION THAT IS REQUIRED FROM AN ENTITY CLASSIFIED AS TAX-EXEMPTBY ITS LOCAL TAX AUTHORITY:

UK FORM 4338(EXEMPT NON-UNITED KINGDOM-RESIDENT BENEFICIAL OWNERS, ONLY)

UK FORM 309A(EXEMPT UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)

FOREIGN EXEMPTION LETTERS / APPLICATION FOR AUSTRALIAN EXEMPTION LETTER(EXEMPT BENEFICIAL OWNERS, ONLY)

DOCUMENTATION THAT IS REQUIRED ONLY IF YOU WILL USE THE PROXY VOTINGSERVICE:

VOTING POWER OF ATTORNEY

DOCUMENTATION THAT IS REQUIRED ONLY IF YOU WILL DEAL IN CERTAIN SECURITIES:

JGB INDEMNIFICATION LETTER

KOREAN SECURITIES POWER OF ATTORNEY

NEW ZEALAND 'APPROVED ISSUER LEVY' LETTER

SPANISH POWER OF ATTORNEY WITH APOSTILE

APPENDIX 3

Client Accounts

Account Name Account Number Account Mnemonic

1.

2.

3.

4.

5.

6.

7.

8.

9.



10.

APPENDIX 4

Part I - Authorized Signatures

The Custodian is directed to accept and act upon Authorized Instructionsreceived from any of the following persons or entities:<TABLE><CAPTION>

<S> <C> <C> <C> <C>Telephone/ Authorized

Name Organization Title FaxSignature

</TABLE>

Authorized by: ___________________________

Part II - System User ID numbers

The Custodian is directed to accept and act upon Authorized Instructionstransmitted electronically and identified with the following mnemonics andsystem user ID numbers for the following activities:



<TABLE><CAPTION>

Work Station Account Workstation Sessions

<S> <C> <C> <C> <C> <C> <C> <C> <C>User I.D. Mnemonic Number TE TCC SL FE CM MA TD--------- -------- ------ -- --- -- -- -- -- --

</TABLE>

Workstation Session Codes

TE Trade EntryTCC Trade Cancel/CorrectSL Securities LendingFE Foreign ExchangeCM Cash MovementMA Mass AuthorizationTD Time Deposit

EXHIBIT A

Subcustodians



ameron.adm

ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT

THIS AGREEMENT is made as of May __, 1997 by and between AMERICANSKANDIA ADVISOR FUNDS, INC., a Maryland corporation (the "Fund"), and PFPC INC.,a Delaware corporation ("PFPC"), which is an indirect wholly owned subsidiary ofPNC Bank Corp.

W I T N E S S E T H :WHEREAS, the Fund is registered as an open-end management investment

company under the Investment Company Act of 1940, as amended (the "1940 Act");and

WHEREAS, the Fund wishes to retain PFPC to provide administration andaccounting services to its investment portfolios listed on Exhibit A attachedhereto and made a part hereof, as such Exhibit A may be amended from time totime (each a "Portfolio"), and PFPC wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and the mutualcovenants herein contained, and intending to be legally bound hereby the partieshereto agree as follows:

1. Definitions. As Used in this Agreement:(a) "1933 Act" means the Securities Act of 1933, as amended.

(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.

16(c) "Authorized Person" means any officer of the Fund and any

other person duly authorized by the Fund's Board of Directors to give OralInstructions and Written Instructions on behalf of the Fund and listed on theAuthorized Persons Appendix attached hereto and made a part hereof or anyamendment thereto as may be received by PFPC. An Authorized Person's scope ofauthority may be limited by the Fund by setting forth such limitation in theAuthorized Persons Appendix.

(d) "CEA" means the Commodities Exchange Act, as amended.(e) "Oral Instructions" mean oral instructions received by

PFPC from an Authorized Person or from a person reasonably believed by PFPC tobe an Authorized Person.

(f) "SEC" means the Securities and Exchange Commission.

(g) "Securities Laws" means the 1933 Act, the 1934 Act, the 1940 Act andthe CEA.

(h) "Shares" mean the shares of beneficial interest of any series or classof the Fund.



(i) "Written Instructions" mean written instructions signed by anAuthorized Person and received by PFPC. The instructions may be delivered byhand, mail, tested telegram, cable, telex or facsimile sending device.

2. Appointment. The Fund hereby appoints PFPC to provide administration andaccounting services to the each of the Portfolios, in accordance with the termsset forth in this Agreement. PFPC accepts such appointment and agrees to furnishsuch services.

3. Delivery of Documents. The Fund has provided or, where applicable, willprovide PFPC with the following: (a) certified or authenticated copies of theresolutions of the Fund's Board of Directors, approving the appointment of PFPCor its affiliates to provide services to each Portfolio and approving thisAgreement;

(b) a copy of Fund's most recent effective registration statement;

(c) a copy of each Portfolio's advisory agreement or agreements;

(d) a copy of the distribution agreement with respect to each class ofShares representing an interest in a Portfolio;

(e) a copy of any additional administration agreement with respect to aPortfolio;

(f) a copy of any shareholder servicing agreementmade in respect of the Fund or a Portfolio; and

(f) copies (certified or authenticated, where applicable) of any and allamendments or supplements to the foregoing.

4. Compliance with Rules and Regulations.PFPC undertakes to comply with all applicable requirements of the

Securities Laws, and any laws, rules and regulations of governmental authoritieshaving jurisdiction with respect to the duties to be performed by PFPChereunder. Except as specifically set forth herein, PFPC assumes noresponsibility for such compliance by the Fund or any Portfolio.

5. Instructions.(a) Unless otherwise provided in this Agreement, PFPC shall

act only upon Oral Instructions and Written Instructions.(b) PFPC shall be entitled to rely upon any Oral Instructions

and Written Instructions it receives from an Authorized Person (or from a personreasonably believed by PFPC to be an Authorized Person) pursuant to thisAgreement. PFPC may assume that any Oral Instruction or Written Instruction



received hereunder is not in any way inconsistent with the provisions oforganizational documents or this Agreement or of any vote, resolution orproceeding of the Fund's Board of Directors or of the Fund's shareholders,unless and until PFPC receives Written Instructions to the contrary.

(c) The Fund agrees to forward to PFPC Written Instructionsconfirming Oral Instructions (except where such Oral Instructions are given byPFPC or its affiliates) so that PFPC receives the Written Instructions by theclose of business on the same day that such Oral Instructions are received. Thefact that such confirming Written Instructions are not received by PFPC shall inno way invalidate the transactions or enforceability of the transactionsauthorized by the Oral Instructions. Where Oral Instructions or WrittenInstructions reasonably appear to have been received from an Authorized Person,PFPC shall incur no liability to the Fund in acting upon such Oral Instructionsor Written Instructions provided that PFPC's actions comply with the otherprovisions of this Agreement.

6. Right to Receive Advice.(a) Advice of the Fund. If PFPC is in doubt as to any

action it should or should not take, PFPC may request directions or advice,including Oral Instructions or Written Instructions, from the Fund.

(b) Advice of Counsel. If PFPC shall be in doubt as to anyquestion of law pertaining to any action it should or should not take, PFPC mayrequest advice at its own cost from such counsel of its own choosing (who may becounsel for the Fund, the Fund's investment adviser or PFPC, at the option ofPFPC).

(c) Conflicting Advice. In the event of a conflictbetween directions, advice or Oral Instructions or Written Instructions PFPCreceives from the Fund and the advice PFPC receives from counsel, PFPC may relyupon and follow the advice of counsel.

(d) Protection of PFPC. PFPC shall be protected in any actionit takes or does not take in reliance upon directions, advice or OralInstructions or Written Instructions it receives from the Fund or from counseland which PFPC believes, in good faith, to be consistent with those directions,advice and Oral Instructions or Written Instructions. Nothing in this sectionshall be construed so as to impose an obligation upon PFPC (i) to seek suchdirections, advice or Oral Instructions or Written Instructions, or (ii) to actin accordance with such directions, advice or Oral Instructions or WrittenInstructions unless, under the terms of other provisions of this Agreement, thesame is a condition of PFPC's properly taking or not taking such action. Nothingin this subsection shall excuse PFPC when an action or omission on the part of



PFPC constitutes willful misfeasance, bad faith, gross negligence or recklessdisregard by PFPC of any duties, obligations or responsibilities set forth inthis Agreement.

7. Records; Visits.(a) The books and records pertaining to the Fund and the

Portfolios which are in the possession or under the control of PFPC shall be theproperty of the Fund. Such books and records shall be prepared and maintained asrequired by the 1940 Act and other applicable securities laws, rules andregulations. The Fund and Authorized Persons shall have access to such books andrecords at all times during PFPC's normal business hours. Upon the reasonablerequest of the Fund, copies of any such books and records shall be provided byPFPC to the Fund or to an Authorized Person, at the Fund's expense.

(b) PFPC shall keep the following records:

(i) all books and records with respect to each Portfolio's books ofaccount;

(ii) records of each Portfolio's securities transactions; and

(iii) all other books and records as PFPC isrequired to maintain pursuant to Rule 31a-1of the 1940 Act in connection with theservices provided hereunder.

8. Confidentiality. PFPC agrees to keep confidential all records of theFund and information relating to the Fund and its shareholders, unless therelease of such records or information is otherwise consented to, in writing, bythe Fund. The Fund agrees that such consent shall not be unreasonably withheldand may not be withheld where PFPC may be exposed to civil or criminal contemptproceedings or when required to divulge such information or records to dulyconstituted authorities.

9. Liaison with Accountants. PFPC shall act as liaison with the Fund'sindependent public accountants and shall provide account analyses, fiscal yearsummaries, and other audit-related schedules with respect to each Portfolio.PFPC shall take all reasonable action in the performance of its duties underthis Agreement to assure that the necessary information is made available tosuch accountants for the expression of their opinion, as required by the Fund.

10. Disaster Recovery. PFPC shall enter into and shall maintain ineffect with appropriate parties one or more agreements making reasonable



provisions for emergency use of electronic data processing equipment to theextent appropriate equipment is available. In the event of equipment failures,PFPC shall, at no additional expense to the Fund, take reasonable steps tominimize service interruptions. PFPC shall have no liability with respect to theloss of data or service interruptions caused by equipment failure, provided suchloss or interruption is not caused by PFPC's own willful misfeasance, bad faith,gross negligence or reckless disregard of its duties or obligations under thisAgreement.

11. Compensation. As compensation for services rendered by PFPC during theterm of this Agreement, the Fund, on behalf of each Portfolio, will pay to PFPCa fee or fees as may be agreed to in writing by the Fund and PFPC.

12. Indemnification. The Fund, on behalf of each Portfolio, agrees toindemnify and hold harmless PFPC and its affiliates from all taxes, charges,expenses, assessments, claims and liabilities (including, without limitation,liabilities arising under the Securities Laws and any state or foreignsecurities and blue sky laws, and amendments thereto), and expenses, including(without limitation) attorneys' fees and disbursements arising directly orindirectly from any action which PFPC takes or does not take (i) at the requestor on the direction of or in reliance on the advice of the Fund or (ii) uponOral Instructions or Written Instructions. Neither PFPC, nor any of itsaffiliates, shall be indemnified against any liability (or any expenses incidentto such liability) arising out of PFPC's or its affiliates' own willfulmisfeasance, bad faith, gross negligence or reckless disregard of its duties andobligations under this Agreement. Any amounts payable by the Fund hereundershall be satisfied only against the relevant Portfolio's assets and not againstthe assets of any other investment portfolio of the Fund.

13. Responsibility of PFPC.

(a) PFPC shall be under no duty to take any action on behalfof the Fund or any Portfolio except as specifically set forth herein or as maybe specifically agreed to by PFPC in writing. PFPC shall be obligated toexercise care and diligence in the performance of its duties hereunder, to actin good faith and to use its best efforts, within reasonable limits, inperforming services provided for under this Agreement. PFPC shall be liable forany damages arising out of PFPC's failure to perform its duties under thisAgreement to the extent such damages arise out of PFPC's willful misfeasance,bad faith, gross negligence or reckless disregard of such duties.

(b) Without limiting the generality of the foregoing or of anyother provision of this Agreement, (i) PFPC shall not be liable for lossesbeyond its control, provided that PFPC has acted in accordance with the standardof care set forth above; and (ii) PFPC shall not be liable for (A) the validityor invalidity or authority or lack thereof of any Oral Instruction or WrittenInstruction, notice or other instrument which conforms to the applicable



requirements of this Agreement, and which PFPC reasonably believes to begenuine; or (B) subject to Section 10, delays or errors or loss of dataoccurring by reason of circumstances beyond PFPC's control, including acts ofcivil or military authority, national emergencies, labor difficulties, fire,flood, catastrophe, acts of God, insurrection, war, riots or failure of themails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to thecontrary, neither PFPC nor its affiliates shall be liable to the Fund or to anyPortfolio for any consequential, special or indirect losses or damages which theFund or any Portfolio may incur or suffer by or as a consequence of PFPC's orany affiliates' performance of the services provided hereunder, whether or notthe likelihood of such losses or damages was known by PFPC or its affiliates.

14. Description of Accounting Services on a Continuous Basis. PFPC willperform the following accounting services with respect to each Portfolio:

(i) Journalize investment, capital share and income and expense activities;

(ii) Verify investment buy/sell trade ticketswhen received from the investment adviserfor a Portfolio (the "Adviser") and transmittrades to the Fund's custodian (the"Custodian") with respect to transactions indomestic securities for proper settlement;

(iii) Maintain individual ledgers for investment securities;

(iv) Maintain historical tax lots for each security;

(v) Reconcile cash and investment balances with the Custodian, and providethe Adviser with the beginning cash balance available for investment purposes;

(vi) Update the cash availability throughout the day as required by theAdviser;

(vii) Post to and prepare the Statement of Assets and Liabilities and theStatement of Operations;

(viii) Calculate various contractual expenses (e.g., advisory and custodyfees);

(ix) Monitor the expense accruals and notify an officer of the Fund of anyproposed adjustments;

(x) Control all disbursements and authorize such disbursements upon Written



Instructions;

(xi) Calculate capital gains and losses;

(xii) Determine net income;

(xiii) Obtain security market quotes fromindependent pricing services approved by theAdviser, or if such quotes are unavailable,then obtain such prices from the Adviser,and in either case calculate the marketvalue of the Portfolio's investments;

(xiv) Transmit or mail a copy of the daily portfolio valuation to theAdviser;

(xv) Compute net asset value;

(xvi) As appropriate, compute yields, totalreturn, expense ratios, portfolio turnoverrate, and, if required, portfolio averagedollar-weighted maturity; and

(xvii) Prepare a monthly financial statement, whichwill include the following items:

Schedule of InvestmentsStatement of Assets andLiabilities Statement ofOperations Statement ofChanges in Net Assets CashStatement Schedule ofCapital Gains and Losses.

15. Description of Administration Services on a Continuous Basis. PFPC willperform the following administration services with respect to each Portfolio:

(i) Prepare quarterly broker security transactions summaries;

(ii) Prepare monthly security transaction listings;

(iii) Supply various normal and customary Portfolio and Fund statisticaldata as requested on an ongoing basis;

(iv) Prepare for execution and file the Fund's Federal and state tax



returns;

(v) Prepare and file the Fund's Semi-Annual Reports with the SEC on FormN-SAR;

(vi) Prepare and file with the SEC the Fund's annual, semi-annual, andquarterly shareholder reports;

(vii) Assist in the preparation of registration statements and otherfilings relating to the registration of Shares;

(viii) Monitor the Portfolio's status as aregulated investment company underSub-chapter M of the Internal Revenue Codeof 1986, as amended;

(ix) Coordinate contractual relationships and communications between theFund and its contractual service providers; and

(x) Monitor the Fund's compliance with the amounts and conditions of eachstate qualification.

(xi) Provide such information and reports to the Adviser as shall bemutually agreed upon by PFPC and the Adviser with respect to this Agreement toassist the Adviser in monitoring the Fund for compliance with the terms of itsDeclaration of Trust, By-Laws and resolutions, and any amendments thereto, andwith any representations made to regulatory authorities, and any amendmentsthereto, and in monitoring each Portfolio for compliance with the investmentrestrictions and policies set out in the most recent prospectus and Statement ofAdditional Information as filed with the SEC, and any amendments thereto.

16. Duration and Termination. This Agreement shall continue untilterminated by either party on sixty (60) days' prior written notice to the otherparty.

17. Notices. All notices and other communications, including WrittenInstructions, shall be in writing or by confirming telegram, cable, telex orfacsimile sending device. If notice is sent by confirming telegram, cable, telexor facsimile sending device, it shall be deemed to have been given immediately.If notice is sent by first-class mail, it shall be deemed to have been giventhree days after it has been mailed. If notice is sent by messenger, it shall bedeemed to have been given on the day it is delivered. Notices shall be addressed(a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if tothe Fund, at the address of the Fund or (c) if to neither of the foregoing, at



such other address as shall have been provided by like notice to the sender ofany such notice or other communication by the other party.

18. Amendments. This Agreement, or any term thereof, may be changed orwaived only by written amendment, signed by the party against whom enforcementof such change or waiver is sought.

19. Delegation; Assignment. PFPC may assign its rights and delegate itsduties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,National Association or PNC Bank Corp., provided that (i) PFPC gives the Fundthirty (30) days' prior written notice; (ii) the delegate (or assignee) agreeswith PFPC and the Fund to comply with all relevant provisions of the 1940 Act;and (iii) PFPC and such delegate (or assignee) promptly provide such informationas the Fund may request, and respond to such questions as the Fund may ask,relative to the delegation (or assignment), including (without limitation) thecapabilities of the delegate (or assignee).

20. Counterparts. This Agreement may be executed in two or morecounterparts, each of which shall be deemed an original, but all of whichtogether shall constitute one and the same instrument.

21. Further Actions. Each party agrees to perform such further acts andexecute such further documents as are necessary to effectuate the purposeshereof.

22. Miscellaneous.(a) Entire Agreement. This Agreement embodies the entire

agreement and understanding between the parties and supersedes all prioragreements and understandings relating to the subject matter hereof, providedthat the parties may embody in one or more separate documents their agreement,if any, with respect to delegated duties and Oral Instructions.

(b) Captions. The captions in this Agreement are included forconvenience of reference only and in no way define or delimit any of theprovisions hereof or otherwise affect their construction or effect.

(c) Governing Law. This Agreement shall be deemed to be a contract made inDelaware and governed by Delaware law, without regard to principles of conflictsof law.

(d) Partial Invalidity. If any provision of this Agreementshall be held or made invalid by a court decision, statute, rule or otherwise,



the remainder of this Agreement shall not be affected thereby.

(e) Successors and Assigns. This Agreement shall be bindingupon and shall inure to the benefit of the parties hereto and their respectivesuccessors and permitted assigns.

(f) Facsimile Signatures. The facsimile signature of any party to thisAgreement shall constitute the valid and binding execution hereof by such party.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to beexecuted as of the day and year first above written.

PFPC INC.

By:Title:


By:

Title:

EXHIBIT A

THIS EXHIBIT A, dated as of May __, 1997, is Exhibit A to that certainAdministration and Accounting Services Agreement dated as of May __, 1997between PFPC Inc. and American Skandia Advisor Funds, Inc.

PORTFOLIOS

International Small Capitalization Fund



International Equity FundSmall Capitalization FundSmall Company Value Fund

Large Capitalization Growth FundValue Growth & Income Fund

Strategic Balanced FundHigh Yield Bond Fund

Total Return Bond FundMoney Market Fund

AUTHORIZED PERSONS APPENDIX

NAME (Type) SIGNATURE



1

TRANSFER AGENCY AND SERVICE AGREEMENT

between


and

STATE STREET BANK AND TRUST COMPANY

1C-Domestic Trust/Series

<TABLE><CAPTION>

TABLE OF CONTENTS

Page

<S> <C> <C>1. Terms of Appointment; Duties of the Bank........................................................1

2. Fees and Expenses...............................................................................3

3. Representations and Warranties of the Bank......................................................4

4. Representations and Warranties of the Fund......................................................4

5. Wire Transfer Operating Guidelines..............................................................5

6. Data Access and Proprietary Information.........................................................6

7. Indemnification.................................................................................8

8. Standard of Care................................................................................9

9. Covenants of the Fund and the Bank..............................................................9

10. Termination of Agreement.......................................................................10

11. Additional Funds...............................................................................10

12. Assignment.....................................................................................10

13. Amendment......................................................................................11

14. Massachusetts Law to Apply.....................................................................11

15. Force Majeure..................................................................................11



16. Consequential Damages..........................................................................11

17. Merger of Agreement............................................................................11

18. Counterparts...................................................................................11

19. Reproduction of Documents......................................................................12</TABLE>

TRANSFER AGENCY AND SERVICE AGREEMENT

AGREEMENT made as of the day of , 1997, by and between AMERICAN SKANDIA ADVISORFUNDS, INC., a Maryland Corporation, having its principal office and place ofbusiness at One Corporate Drive, Shelton, Connecticut 06484 (the "Fund"), andSTATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having itsprincipal office and place of business at 225 Franklin Street, Boston,Massachusetts 02110 (the "Bank").

WHEREAS, the Fund is authorized to issue shares in separate series, with eachsuch series representing interests in a separate portfolio of securities andother assets; and

WHEREAS, the Fund intends to initially offer shares in ten (10) series, (eachsuch series, together with all other series subsequently established by the Fundand made subject to this Agreement in accordance with Article 11, being hereinreferred to as a "Portfolio", and collectively as the "Portfolios");

WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as itstransfer agent, dividend disbursing agent and agent in connection with certainother activities, and the Bank desires to accept such appointment;

NOW, THEREFORE, in consideration of the mutual covenants herein contained, theparties hereto agree as follows:

l. Terms of Appointment; Duties of the Bank

1.1 Subject to the terms and conditions set forth in this Agreement, theFund, on behalf of the Portfolios, hereby employs and appoints theBank to act as, and the Bank agrees to act as its transfer agent forthe Fund's authorized and issued shares of its beneficial interest,$.001 par value, ("Shares"), dividend disbursing agent in respect ofthe shares and agent in connection with any accumulation,open-account or similar plans provided to the shareholders of each ofthe respective Portfolios of the Fund ("Shareholders") and set out inthe currently effective prospectus and statement of additionalinformation ("prospectus") of the Fund on behalf of the applicablePortfolio, including without limitation any periodic investment planor periodic withdrawal program.

1.2 The Bank agrees that it will perform the following services:

(a) In accordance with procedures established from time to timeby agreement between the Fund on behalf of each of thePortfolios, as applicable and the Bank, the Bank shall:

(i) Receive for acceptance, orders for the purchase ofShares, and promptly deliver payment andappropriate documentation thereof to the Custodianof the Fund authorized pursuant to the Articles ofIncorporation and By-Laws of the Fund (the"Custodian");

(ii) Pursuant to purchase orders, issue the appropriate number of Sharesand hold such Shares in the appropriate Shareholder account;

(iii) Receive for acceptance redemption requests and redemption directionsand deliver the appropriate documentation thereof to the Custodian;

(iv) In respect to the transactions in items (i), (ii)and (iii) above, the Bank shall execute



transactions directly with broker-dealersauthorized by the Fund who shall thereby be deemedto be acting on behalf of the Fund;

(v) At the appropriate time as and when it receivesmonies paid to it by the Custodian with respect toany redemption, pay over or cause to be paid overin the appropriate manner such monies as instructedby the redeeming Shareholders;

(vi) Effect transfers of Shares by the registered owners thereof uponreceipt of appropriate instructions;

(vii) Prepare and transmit payments for dividends and distributionsdeclared by the Fund on behalf of the applicable Portfolio;

(viii) Issue replacement certificates for thosecertificates alleged to have been lost, stolen ordestroyed upon receipt by the Bank ofindemnification satisfactory to the Bank andprotecting the Bank and the Fund, and the Bank atits option, may issue replacement certificates inplace of mutilated stock certificates uponpresentation thereof and without such indemnity;

(ix) Maintain records of account for and advise the Fund and itsShareholders as to the foregoing; and

(x) Record the issuance of shares of the Fund and maintain pursuant to SECRule 17Ad-10(e) a record of the total number of shares of the Fund which areauthorized, based upon data provided to it by the Fund, and issued andoutstanding. The Bank shall also provide the Fund on a regular basis with thetotal number of shares which are authorized and issued and outstanding and shallhave no obligation, when recording the issuance of shares, to monitor theissuance of such shares or to take cognizance of any laws relating to the issueor sale of such Shares, which functions shall be the sole responsibility of theFund.

(b) In addition to and neither in lieu nor in contravention of the servicesset forth in the above paragraph (a), the Bank shall: (i) perform the customaryservices of a transfer agent, dividend disbursing agent, custodian of certainretirement plans and, as relevant, agent in connection with accumulation,open-account or similar plans (including without limitation any periodicinvestment plan or periodic withdrawal program), including but not limited to:maintaining all Shareholder accounts, preparing Shareholder meeting lists,mailing proxies, receiving and tabulating proxies, mailing Shareholder reportsand prospectuses to current Shareholders, withholding taxes on U.S. resident andnon-resident alien accounts, preparing and filing U.S. Treasury Department Forms1099 and other appropriate forms required with respect to dividends anddistributions by federal authorities for all Shareholders, preparing and mailingconfirmation forms and statements of account to Shareholders for all purchasesand redemptions of Shares and other confirmable transactions in Shareholderaccounts, preparing and mailing activity statements for Shareholders, andproviding Shareholder account information and (ii) provide a system which willenable the Fund to monitor the total number of Shares sold in each State.

(c) In addition, the Fund shall (i) identify to the Bank inwriting those transactions and assets to be treated asexempt from blue sky reporting for each State and (ii)verify the establishment of transactions for each State onthe system prior to activation and thereafter monitor thedaily activity for each State. The responsibility of theBank for the Fund's blue sky State registration status issolely limited to the initial establishment of transactionssubject to blue sky compliance by the Fund and the reportingof such transactions to the Fund as provided above.

(d) Procedures as to who shall provide certain of these servicesin Section 1 may be established from time to time byagreement between the Fund on behalf of each Portfolio andthe Bank per the attached service responsibility schedule.The Bank may at times perform only a portion of theseservices and the Fund or its agent may perform theseservices on the Fund's behalf.



(e) The Bank shall provide additional services on behalf of theFund (i.e., escheatment services) which may be agreed uponin writing between the Fund and the Bank.

2. Fees and Expenses

2.1 For the performance by the Bank pursuant to this Agreement, the Fundagrees on behalf of each of the Portfolios to pay the Bank such feesas set out in the initial fee schedule attached hereto. Such fees andout-of-pocket expenses and advances identified under Section 2.2below may be changed from time to time subject to mutual writtenagreement between the Fund and the Bank.

2.2 In addition to the fee paid under Section 2.1 above, the Fund agreeson behalf of each of the Portfolios to reimburse the Bank forout-of-pocket expenses, including but not limited to confirmationproduction, postage, forms, telephone, microfilm, microfiche,tabulating proxies, records storage, or advances incurred by the Bankfor the items set out in the fee schedule attached hereto. Inaddition, any other expenses incurred by the Bank at the request orwith the consent of the Fund, will be reimbursed by the Fund onbehalf of the applicable Portfolio.

2.3 The Fund agrees on behalf of each of the Portfolios to pay all feesand reimbursable expenses within five days following the receipt ofthe respective billing notice. Postage for mailing of dividends,proxies, Fund reports and other mailings to all shareholder accountsshall be advanced to the Bank by the Fund at least seven (7) daysprior to the mailing date of such materials.

3. Representations and Warranties of the Bank

The Bank represents and warrants to the Fund that:

3.1 It is a trust company duly organized and existing and in goodstanding under the laws of The Commonwealth of Massachusetts.

3.2 It is duly qualified to carry on its business in The Commonwealth ofMassachusetts.

3.3 It is empowered under applicable laws and by its Charter and By-Laws toenter into and perform this Agreement.

3.4 All requisite corporate proceedings have been taken to authorize it toenter into and perform this Agreement.

3.5 It has and will continue to have access to the necessary facilities,equipment and personnel to perform its duties and obligations underthis Agreement.

4. Representations and Warranties of the Fund

The Fund represents and warrants to the Bank that:

4.1 It is a corporation duly organized and existing and in good standingunder the laws of the State of Maryland

4.2 It is empowered under applicable laws and by its Articles ofIncorporation and By-Laws to enter into and perform this Agreement.

4.3 All corporate proceedings required by said Articles of Incorporationand By-Laws have been taken to authorize it to enter into and performthis Agreement.

4.4 It is an open-end management investment company registered under theInvestment Company Act of 1940, as amended.

4.5 A registration statement under the Securities Act of 1933, as amendedon behalf of each of the Portfolios is currently effective and willremain effective, and appropriate state securities law filings havebeen made and will continue to be made, with respect to all Shares ofthe Fund being offered for sale.

5. Wire Transfer Operating Guidelines/Articles 4A of the Uniform CommercialCode



5.1 The Bank is authorized to promptly debit the appropriateFund account(s) upon the receipt of a payment order incompliance with the selected security procedure (the"Security Procedure") chosen for funds transfer and in theamount of money that the Bank has been instructed totransfer. The Bank shall execute payment orders incompliance with the Security Procedure and with the Fundinstructions on the execution date provided that suchpayment order is received by the customary deadline forprocessing such a request, unless the payment orderspecifies a later time. All payment orders andcommunications received after this the customary deadlinewill be deemed to have been received the next business day.

5.2 The Fund acknowledges that the Security Procedure it hasdesignated on the Fund Selection Form was selected by theFund from security procedures offered by the Bank. The Fundshall restrict access to confidential information relatingto the Security Procedure to authorized persons ascommunicated to the Bank in writing. The Fund must notifythe Bank immediately if it has reason to believeunauthorized persons may have obtained access to suchinformation or of any change in the Fund's authorizedpersonnel. The Bank shall verify the authenticity of allFund instructions according to the Security Procedure.

5.3 The Bank shall process all payment orders on the basis ofthe account number contained in the payment order. In theevent of a discrepancy between any name indicated on thepayment order and the account number, the account numbershall take precedence and govern.

5.4 The Bank reserves the right to decline to process or delaythe processing of a payment order which (a) is in excess ofthe collected balance in the account to be charged at thetime of the Bank's receipt of such payment order; (b) ifinitiating such payment order would cause the Bank, in theBank's sole judgement, to exceed any volume, aggregatedollar, network, time, credit or similar limits which areapplicable to the Bank; or (c) if the Bank, in good faith,is unable to satisfy itself that the transaction has beenproperly authorized.

5.5 The Bank shall use reasonable efforts to act on allauthorized requests to cancel or amend payment ordersreceived in compliance with the Security Procedure providedthat such requests are received in a timely manner affordingthe Bank reasonable opportunity to act. However, the Bankassumes no liability if the request for amendment orcancellation cannot be satisfied.

5.6 The Bank shall assume no responsibility for failure todetect any erroneous payment order provided that the Bankcomplies with the payment order instructions as received andthe Bank complies with the Security Procedure. The SecurityProcedure is established for the purpose of authenticatingpayment orders only and not for the detection of errors inpayment orders.

5.7 The Bank shall assume no responsibility for lost interestwith respect to the refundable amount of any unauthorizedpayment order, unless the Bank is notified of theunauthorized payment order within thirty (30) days ornotification by the Bank of the acceptance of such paymentorder. In no event (including failure to execute a paymentorder) shall the Bank be liable for special, indirect orconsequential damages, even if advised of the possibility ofsuch damages.

5.8 When the Fund initiates or receives Automated Clearing Housecredit and debit entries pursuant to these guidelines andthe rules of the National Automated Clearing HouseAssociation and the New England Clearing House Association,the Bank will act as an Originating Depository FinancialInstitution and/or receiving depository Financial



Institution, as the case may be, with respect to suchentries. Credits given by the Bank with respect to an ACHcredit entry are provisional until the Bank receives finalsettlement for such entry from the Federal Reserve Bank. Ifthe Bank does not receive such final settlement, the Fundagrees that the Bank shall receive a refund of the amountcredited to the Fund in connection with such entry, and theparty making payment to the Fund via such entry shall not bedeemed to have paid the amount of the entry.

5.9 Confirmation of Bank's execution of payment orders shallordinarily be provided within twenty four (24) hours noticeof which may be delivered through the Bank's proprietaryinformation systems, or by facsimile or call-back. Fund mustreport any objections to the execution of an order withinthirty (30) days.

6. Data Access and Proprietary Information

6.1 The Fund acknowledges and Bank hereby represents that the data bases,computer programs, screen formats, report formats, interactive designtechniques, and documentation manuals furnished to the Fund by theBank as part of the Fund's ability to access certain Fund-relateddata ("Customer Data") maintained by the Bank on data bases under thecontrol and ownership of the Bank or other third party ("Data AccessServices") constitute copyrighted, trade secret, or other proprietaryinformation (collectively, "Proprietary Information") of substantialvalue to the Bank or other third party. In no event shall ProprietaryInformation be deemed Customer Data. The Fund agrees to treat allProprietary Information as proprietary to the Bank and further agreesthat it shall not voluntarily divulge any Proprietary Information toany person or organization except as may be provided hereunder or asmay be required by law. Without limiting the foregoing, the Fundagrees for itself and its employees and agents:

(a) to access Customer Data solely from locations as may be designated inwriting by the Bank and solely in accordance with the Bank's applicable userdocumentation;

(b) to refrain from copying or duplicating in any way the ProprietaryInformation;

(c) to refrain from obtaining unauthorized access to any portionof the Proprietary Information, and if such access isinadvertently obtained, to inform in a timely manner of suchfact and dispose of such information in accordance with theBank's instructions;

(d) to refrain from causing or allowing the data acquiredhereunder from being retransmitted to any other computerfacility or other location, except with the prior writtenconsent of the Bank;

(e) that the Fund shall have access only to those authorized transactionsagreed upon by the parties;

(f) to honor all reasonable written requests made by the Bank toprotect at the Bank's expense the rights of the Bank inProprietary Information at common law, under federalcopyright law and under other federal or state law.

Each party shall take reasonable efforts to advise its employees of theirobligations pursuant to this Section 6. The obligations of this Section shallsurvive any earlier termination of this Agreement.

6.2 If the Fund notifies the Bank that any of the Data Access Services donot operate in material compliance with the most recently issued userdocumentation for such services, the Bank shall endeavor in a timelymanner to correct such failure. Organizations from which the Bank mayobtain certain data included in the Data Access Services are solelyresponsible for the contents of such data and the Fund agrees to makeno claim against the Bank arising out of the contents of suchthird-party data, including, but not limited to, the accuracythereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARESPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,



AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIESEXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR APARTICULAR PURPOSE.

6.3 If the transactions available to the Fund include the ability tooriginate electronic instructions to the Bank in order to (i) effectthe transfer or movement of cash or Shares or (ii) transmitShareholder information or other information, then in such event theBank shall be entitled to rely on the validity and authenticity ofsuch instruction without undertaking any further inquiry as long assuch instruction is undertaken in conformity with security proceduresestablished by the Bank from time to time.

7. Indemnification

7.1 The Bank shall not be responsible for, and the Fund shall on behalfof the applicable Portfolio indemnify and hold the Bank harmless fromand against, any and all losses, damages, costs, charges, counselfees, payments, expenses and liability arising out of or attributableto:

(a) All actions of the Bank or its agents or subcontractorsrequired to be taken pursuant to this Agreement, providedthat such actions are taken in good faith and withoutnegligence or willful misconduct.

(b) The Fund's lack of good faith, negligence or willfulmisconduct which arise out of the breach of anyrepresentation or warranty of the Fund hereunder.

(c) The reliance on or use by the Bank or its agents orsubcontractors of information, records, documents orservices which (i) are received by the Bank or its agents orsubcontractors, and (ii) have been prepared, maintained orperformed by the Fund or any other person or firm on behalfof the Fund including but not limited to any previoustransfer agent or registrar.

(d) The reliance on, or the carrying out by the Bank or its agents orsubcontractors of any instructions or requests of the Fund on behalf of theapplicable Portfolio.

(e) The offer or sale of Shares in violation of any requirementunder the federal securities laws or regulations or thesecurities laws or regulations of any state that such Sharesbe registered in such state or in violation of any stoporder or other determination or ruling by any federal agencyor any state with respect to the offer or sale of suchShares in such state.

(f) The negotiations and processing of checks made payable toprospective or existing Shareholders tendered to the Bankfor the purchase of Shares, such checks are commonly knownas Athird party checks.@

7.2 At any time the Bank may apply to any officer of the Fund forinstructions, and may consult with legal counsel with respect to anymatter arising in connection with the services to be performed by theBank under this Agreement, and the Bank and its agents orsubcontractors shall not be liable and shall be indemnified by theFund on behalf of the applicable Portfolio for any action taken oromitted by it in reliance upon such instructions or upon the opinionof such counsel. The Bank, its agents and subcontractors shall beprotected and indemnified in acting upon any paper or document,reasonably believed to be genuine and to have been signed by theproper person or persons, or upon any instruction, information, data,records or documents provided the Bank or its agents orsubcontractors by machine readable input, telex, CRT data entry orother similar means authorized by the Fund, and shall not be held tohave notice of any change of authority of any person, until receiptof written notice thereof from the Fund. The Bank, its agents andsubcontractors shall also be protected and indemnified in recognizingstock certificates which are reasonably believed to bear the propermanual or facsimile signatures of the officers of the Fund, and the



proper countersignature of any former transfer agent or formerregistrar, or of a co-transfer agent or co-registrar.

7.3 In order that the indemnification provisions contained in thisSection 7 shall apply, upon the assertion of a claim for which theFund may be required to indemnify the Bank, the Bank shall promptlynotify the Fund of such assertion, and shall keep the Fund advisedwith respect to all developments concerning such claim. The Fundshall have the option to participate with the Bank in the defense ofsuch claim or to defend against said claim in its own name or in thename of the Bank. The Bank shall in no case confess any claim or makeany compromise in any case in which the Fund may be required toindemnify the Bank except with the Fund's prior written consent.

8. Standard of Care

8.1 The Bank shall at all times act in good faith and agrees to use itsbest efforts within reasonable limits to insure the accuracy of allservices performed under this Agreement, but shall be liable for lossor damage due to errors only if said errors are caused by itsnegligence, bad faith, or willful misconduct or that of its employeesand otherwise shall not be held responsible or liable.

8.2 If the Fund suffers a loss for which the Bank is liable under section8.1 hereunder the Bank's obligation to the Fund shall include theFund's counsel fees and expenses directly arising out of orattributable to such liability.

9. Covenants of the Fund and the Bank

9.1 The Fund shall on behalf of each of the Portfolios promptly furnish tothe Bank the following:

(a) A certified copy of the resolution of the Board of Trusteesof the Fund authorizing the appointment of the Bank and theexecution and delivery of this Agreement.

(b) A copy of the Articles of Incorporation and By-Laws of the Fund and allamendments thereto.

9.2 The Bank hereby agrees to establish and maintain facilities andprocedures reasonably acceptable to the Fund for safekeeping of stockcertificates, check forms and facsimile signature imprinting devices,if any; and for the preparation or use, and for keeping account of,such certificates, forms and devices.

9.3 The Bank shall keep records relating to the services to be performedhereunder, in the form and manner as it may deem advisable. To theextent required by Section 31 of the Investment Fund Act of 1940, asamended, and the Rules thereunder, the Bank agrees that all suchrecords prepared or maintained by the Bank relating to the servicesto be performed by the Bank hereunder are the property of the Fundand will be preserved, maintained and made available in accordancewith such Section and Rules, and will be surrendered promptly to theFund on and in accordance with its request.

9.4 The Bank and the Fund agree that all books, records, information anddata pertaining to the business of the other party which areexchanged or received pursuant to the negotiation or the carrying outof this Agreement shall remain confidential, and shall not bevoluntarily disclosed to any other person, except as may be requiredby law.

9.5 In case of any requests or demands for the inspection of theShareholder records of the Fund, the Bank will endeavor to notify theFund and to secure instructions from an authorized officer of theFund as to such inspection. The Bank reserves the right, however, toexhibit the Shareholder records to any person whenever it is advisedby its counsel that it may be held liable for the failure to exhibitthe Shareholder records to such person.

10. Termination of Agreement

10.1 This Agreement may be terminated by either party upon one hundredtwenty (120) days written notice to the other.



10.2 Should the Fund exercise its right to terminate, all out-of-pocketexpenses associated with the movement of records and material will beborne by the Fund on behalf of the applicable Portfolio(s).Additionally, the Bank reserves the right to charge for any otherreasonable expenses associated with such termination.

11. Additional Funds

In the event that the Fund establishes one or more series of Sharesin addition to the Portfolios with respect to which it desires tohave the Bank render services as transfer agent under the termshereof, it shall so notify the Bank in writing, and if the Bankagrees in writing to provide such services, such series of Sharesshall become a Portfolio hereunder.

12. Assignment

12.1 Except as provided in Section 12.3 below, neither this Agreement norany rights or obligations hereunder may be assigned by either partywithout the written consent of the other party.

12.2 This Agreement shall inure to the benefit of and be binding upon theparties and their respective permitted successors and assigns.

12.3 The Bank may, without further consent on the part of the Fund,subcontract for the performance hereof with (i) Boston Financial DataServices, Inc., a Massachusetts corporation ("BFDS") which is dulyregistered as a transfer agent pursuant to Section 17A(c)(2) of theSecurities Exchange Act of 1934, as amended ("Section 17A(c)(2)"),(ii) a BFDS subsidiary duly registered as a transfer agent pursuantto Section 17A(c)(2) or (iii) a BFDS affiliate; provided, however,that the Bank shall be as fully responsible to the Fund for the actsand omissions of any subcontractor as it is for its own acts andomissions.

13. Amendment

This Agreement may be amended or modified by a written agreementexecuted by both parties and authorized or approved by a resolutionof the Board of Trustees of the Fund.

14. Massachusetts Law to Apply

This Agreement shall be construed and the provisions thereofinterpreted under and in accordance with the laws of The Commonwealthof Massachusetts.

15. Force Majeure

In the event either party is unable to perform its obligations underthe terms of this Agreement because of acts of God, strikes,equipment or transmission failure or damage reasonably beyond itscontrol, or other causes reasonably beyond its control, such partyshall not be liable for damages to the other for any damagesresulting from such failure to perform or otherwise from such causes.

16. Consequential Damages

Neither party to this Agreement shall be liable to the other partyfor consequential damages under any provision of this Agreement orfor any consequential damages arising out of any act or failure toact hereunder.

17. Merger of Agreement

This Agreement constitutes the entire agreement between the partieshereto and supersedes any prior agreement with respect to the subjectmatter hereof whether oral or written.

18. Counterparts

This Agreement may be executed by the parties hereto on any number ofcounterparts, and all of said counterparts taken together shall bedeemed to constitute one and the same instrument.



19. Reproduction of Documents

This Agreement and all schedules, exhibits, attachments andamendments hereto may be reproduced by any photographic, photostatic,microfilm, micro-card, miniature photographic or other similarprocess. The parties hereto each agree that any such reproductionshall be admissible in evidence as the original itself in anyjudicial or administrative proceeding, whether or not the original isin existence and whether or not such reproduction was made by a partyin the regular course of business, and that any enlargement,facsimile or further reproduction shall likewise be admissible inevidence.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executedin their names and on their behalf by and through their duly authorizedofficers, as of the day and year first above written.


BY:

ATTEST:


BY:Executive Vice President

ATTEST:

STATE STREET BANK & TRUST COMPANYFUND SERVICE RESPONSIBILITIES*

Service Performed ResponsibilityBank Fund

1. Receives orders for the purchaseof Shares.

2. Issue Shares and hold Shares inShareholders accounts.

3. Receive redemption requests.

4. Effect transactions 1-3 abovedirectly with broker-dealers.

5. Pay over monies to redeemingShareholders.

6. Effect transfers of Shares.

7. Prepare and transmit dividends



and distributions.

8. Issue Replacement Certificates.

9. Reporting of abandoned property.

10. Maintain records of account.

11. Maintain and keep a current andaccurate control book for eachissue of securities.

12. Mail proxies.

13. Mail Shareholder reports.

14. Mail prospectuses to currentShareholders.

Service Performed ResponsibilityBank Fund

15. Withhold taxes on U.S. residentand non-resident alien accounts.

16. Prepare and file U.S. TreasuryDepartment forms.

17. Prepare and mail account andconfirmation statements forShareholders.

18. Provide Shareholder accountinformation.

19. Blue sky reporting.

* Such services are more fully described in Section 1.2 (a), (b) and (c) ofthe Agreement.


BY:

ATTEST:


BY:Executive Vice President

ATTEST:



WERNER & KENNEDY1633 Broadway

New York, NY 10019---------

EMAIL: [email protected] (212) 408-6900FACSIMILE (212) 408-6950

WRITER'S DIRECT DIAL NUMBER(212) 408-6900

June 4, 1997

American Skandia Advisor Funds, Inc.One Corporate DriveShelton, Connecticut 06484

Re: Pre-Effective Amendment No. 2 to the Registration Statementof American Skandia Advisor Funds, Inc. filed on Form N-1ASecurities Act Registration No: 333-23017Investment Company Act No: 811-08085Our File No. 74876-00-114

Dear Mesdames and Messrs.:

You have requested us, as counsel to American Skandia Advisor Funds,Inc. (the "Company"), to furnish you with this opinion in connection with theabove-referenced registration statement (the "Registration Statement") filed bythe Company under the Securities Act of 1933, as amended (the "1933 Act"), andthe Investment Company Act of 1940, as amended (the "1940 Act").

We have made such examination of the statutes, authorities, and recordsof the Company and other documents as in our judgment are necessary to form abasis for opinions hereinafter expressed. In our examination, we have assumedthe genuineness of all signatures on, and authenticity of, and the conformity tooriginal documents of all copies submitted to us. As to various questions offact material to our opinion, we have relied upon statements and certificates ofofficers and representatives of the Company and others.

Based upon the foregoing, we are of the opinion that the Company is aMaryland corporation organized with one or more series of shares and isregistered as an open-end management investment company under the 1940 Act, andthat the shares, when issued and sold in accordance with the laws of applicablejurisdictions, and with the terms of the Prospectus and Statement of AdditionalInformation included as part of the Registration Statement, will be valid,legally issued, fully paid, and non-assessable.



We hereby consent to the use of this opinion as an exhibit to theRegistration Statement on Form N-1A under the 1933 Act and the 1940 Act, and tothe reference to our name under the heading "Legal Counsel and IndependentAccountants" included in the Registration Statement.

Very truly yours,

/s/ Werner & KennedyWerner & Kennedy



CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion of our report dated May 28, 1997 on our audit of theStatements of Assets and Liabilities of the American Skandia Advisor Funds, Inc.as of May 28, 1997 with respect to this Pre-Effective Amendment No. 2 to theRegistration Statement (No. 333-23017) under the Securities Act of 1933 on FormN-1A. We also consent to the reference to our Firm under the heading "LegalCounsel and Independent Accountants" in the Prospectus and under the headings"Independent Accountants" and "Financial Statements" in the Statement ofAdditional Information.

/s/ Coopers & Lybrand L.L.P.Coopers & Lybrand L.L.P.

2400 Eleven Penn CenterPhiladelphia, PennsylvaniaJune 3, 1997



CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion of our report dated May 28, 1997 on our auditof the Statement of Assets and Liabilities of American Skandia Master Trust asof May 28, 1997 with respect to this Pre-Effective Amendment No. 2 to theRegistration Statement (No. 333-23017) under the Securities Act of 1933 on FormN-1A.

/s/ Coopers & LybrandCoopers & Lybrand

Dublin, Republic of IrelandJune 3, 1997



[LETTERHEAD OF AMERICAN SKANDIA INVESTMENT SERVICES, INCORPORATED]

May __, 1997

American Skandia Marketing, IncorporatedOne Corporate DriveShelton, Connecticut 06484

Ladies & Gentlemen:

With respect to our purchase from you, for the account ofAmerican Skandia Investment Services, Incorporated, a Connecticut corporation,at the purchase price of $100,000, representing 1000 shares of each of the tenseries of American Skandia Advisor Funds, Inc. (the "Company"), we hereby adviseyou that we are purchasing such shares for investment purposes without anypresent intention of withdrawing or reselling.

The amount paid by the Company on any decrease or withdrawalby us of any portion of such shares will be reduced by a portion of anyunamortized organization expenses, determined by the portion of the amount ofsuch shares withdrawn to the aggregate shares of all holders of similar sharesthen outstanding after taking into account any prior withdrawals of any suchshares.

Very truly yours,

AMERICAN SKANDIA INVESTMENT SERVICES, INCORPORATED

By: ______________________________Name:Title:



AMERICAN SKANDIA ADVISOR FUNDS, INC.MASTER CLASS A

DISTRIBUTION PLAN

This Distribution Plan (the "Plan") constitutes the writtenDistribution Plan for the Class A shares issued by American Skandia AdvisorFunds, Inc., a Maryland corporation (the "Company"), adopted pursuant to theprovisions of Rule 12b-1 under the Investment Company Act of 1940, as amended(the "Investment Company Act"). During the effective term of this Plan, theCompany may incur expenses primarily intended to result in the sale of its ClassA shares or to maintain or improve account services provided to holders of itsClass A shares upon the terms and conditions hereinafter set forth:

Section 1. The Company is an open-end management investment company formed underthe laws of the State of Maryland. The shares in the Company may be issued inone or more series (each, a "Fund") and the shares of each Fund may be issued inmultiple classes.

Section 2. This Plan initially will pertain to Class A Shares of each of theFunds named in Exhibit A attached hereto and made a part hereof (each, a"Participating Fund"). This Plan shall also apply to the Class A Shares of anyother series of the Company designated from time to time by the Board ofDirectors of the Company and added to the list of Participating Funds attachedhereto as Exhibit A. Where used in this Plan, the term "Shares" or "Class AShares" shall pertain only to Class A Shares of a Participating Fund.

Section 3. In order to provide for the implementation of the payments providedfor pursuant to this Plan, the Company may enter into an Underwriting andDistribution Agreement (the "Agreement") with American Skandia Marketing,Incorporated ("ASMI") pursuant to which ASMI will serve as the principalunderwriter and general distributor of the Company's shares, including the ClassA Shares, and pursuant to which each Participating Fund may pay compensation toASMI for its services and to defray various costs incurred or paid by ASMI inconnection with the distribution of Class A Shares. Such Agreement, or anymodification thereof, shall become effective with respect to Class A Shares ofany Participating Fund only upon compliance with Section 12(b) of the InvestmentCompany Act and Rule 12b-1 thereunder as the same may be amended from time totime.

Section 4. The Company shall pay to ASMI a distribution and service fee at theannual rate of 0.5% of the average net asset value of the outstanding Class Ashares of the Participating Funds, as determined at the close of each businessday, .25% of which is intended as a fee (the "Service Fee") for servicesprovided by ASMI to existing holders of Class A Shares. The fee payablehereunder is intended to compensate ASMI for services provided and expensesincurred by it relating to the offering of the Class A Shares. Expenses may



include, without limitation, payments by ASMI to dealers, brokers, banks andother financial institutions ("Dealers") with respect to services provided inconnection with sales of Class A Shares and for maintaining or improving accountservices provided to Class A shareholders, all as set forth in the Company'sregistration statement as in effect from time to time; provided, however, that(i) payments made by ASMI to any Dealer shall not exceed 0.50% of the Company'saverage daily net assets attributable to Class A Shares held in accounts of theDealer and its customers; and (ii) no Service Fee shall be paid by ASMI to anyDealer in respect of Class A Shares purchased at their net asset value with anyapplicable contingent deferred sales charge for a period of one year from thedate of their purchase. ASMI's fee hereunder shall be payable in arrears foreach calendar month within 5 days after the close of such calendar month or atsuch other intervals as the Board of Directors of the Company (the "Board ofDirectors") may determine. A majority of the Qualified Directors, as definedbelow, may, from time to time, reduce the amount of such payments or may suspendthe operation of the Plan for such period or periods of time as they maydetermine. Amounts payable under the Plan shall be subject to the limitations ofArticle III, Section 26 of the Rules of Fair Practice of the NationalAssociation of Securities Dealers, Inc. Amounts paid to ASMI hereunder shall notbe used to pay distribution expenses or service fees incurred with respect toany other class of shares of the Company.

Section 5. This Plan shall become effective only upon compliance with Section12(b) of the Investment Company Act and Rule 12b-1 thereunder and shall continuein effect for a period of more than one year after it takes effect only so longas such continuance is specifically approved at least annually by a majority ofthe Board of Directors and a majority of the Qualified Directors by votes castin person at a meeting called for the purpose of voting on continuation of thePlan.

Section 6. ASMI and any other person authorized to direct the disposition ofmonies paid or payable by the Company pursuant to this Plan or any relatedAgreement shall provide to the Board of Directors, and the Board of Directorsshall review, at least quarterly, a written report of the amounts so expendedand the purposes for which such expenditures were made.

Section 7. This Plan may be terminated as to Class A Shares of a ParticipatingFund at any time by vote of a majority of the Qualified Directors or byshareholder vote in accordance with the Investment Company Act. In the event ofsuch termination, the subject Fund shall cease to be a Participating Fund uponsatisfaction of its outstanding obligations hereunder.

Section 8. All agreements with any person relating to implementation ofthis Plan shall be in writing, and any agreement related to this Plan shallprovide:

a) that such agreement may be terminated with respect to Class A Shares ofa Participating Fund at any time, without payment of any penalty, by vote of amajority of the Qualified Directors or by shareholder vote in accordance withthe Investment Company Act on not more than 60 days' written notice to any otherparty to the agreement; and



b) that such agreement shall terminate automatically in the event of itsassignment.

Section 9. This Plan may not be amended to increase materially the amountspayable by a Participating Fund pursuant to Section 4 hereof without shareholderapproval in accordance with the Investment Company Act and any materialamendment to this Plan shall be approved by a majority of the Board of Directorsand a majority of the Qualified Directors by votes cast in person at a meetingcalled for the purpose of voting on the amendment.

Amendments to this Plan other than material amendments of thekind referred to above may be adopted by a vote of the Board of Directors,including a majority of Qualified Directors. The Board of Directors, by suchvote, also may interpret this Plan and make all determinations necessary oradvisable for its administration.

Section 10. As used in this Plan, (a) the term "Qualified Directors" shall meanthose Directors of the Company who are not interested persons of the Company,and have no direct or indirect financial interest in the operation of this Planor any agreements related to it, and (b) the terms "assignment" and "interestedperson" shall have the respective meanings specified in the Investment CompanyAct and the rules and regulations thereunder, subject to such exemptions as maybe granted by the Securities and Exchange Commission.

Section 11. While this Plan is in effect, the selection and nomination of theQualified Directors shall be committed to the discretion of the QualifiedDirectors then in office.

Executed as of ___________________, 1997.


By: __________________________

18506-1



AMERICAN SKANDIA ADVISOR FUNDS, INC.MASTER CLASS B

DISTRIBUTION PLAN

This Distribution Plan (the "Plan") constitutes the writtenDistribution Plan for the Class B shares issued by American Skandia AdvisorFunds, Inc., a Maryland corporation (the "Company"), adopted pursuant to theprovisions of Rule 12b-1 under the Investment Company Act of 1940, as amended(the "Investment Company Act"). During the effective term of this Plan, theCompany may incur expenses primarily intended to result in the sale of its ClassB shares or to maintain or improve account services provided to holders of itsClass B shares upon the terms and conditions hereinafter set forth:


Section 2. This Plan initially will pertain to Class B Shares of each of theFunds named in Exhibit A attached hereto and made a part hereof (each, a"Participating Fund"). This Plan shall also apply to the Class B Shares of anyother series of the Company designated from time to time by the Board ofDirectors of the Company and added to the list of Participating Funds attachedhereto as Exhibit A. Where used in this Plan, the term "Shares" or "Class BShares" shall pertain only to Class B Shares of a Participating Fund.

Section 3. In order to provide for the implementation of the payments providedfor pursuant to this Plan, the Company may enter into an Underwriting andDistribution Agreement (the "Agreement") with American Skandia Marketing,Incorporated ("ASMI"), pursuant to which ASMI will serve as the principalunderwriter and general distributor of the Company's shares, including the ClassB Shares, and pursuant to which each Participating Fund may pay compensation toASMI for its services and to defray various costs incurred or paid by ASMI inconnection with the distribution of Class B Shares. Such Agreement, or anymodification thereof, shall become effective with respect to Class B Shares ofany Participating Fund only upon compliance with Section 12(b) of the InvestmentCompany Act and Rule 12b-1 thereunder as the same may be amended from time totime.

Section 4. The Company shall pay to ASMI a distribution and service fee at theannual rate of 1.0% of the average net asset value of the Class B Shares of theParticipating Funds which have been outstanding for eight years or less, asdetermined at the close of each business day, .25% of which is intended as a fee(the "Service Fee") for services provided by ASMI to existing holders of Class BShares. The fee payable to ASMI hereunder is intended to compensate ASMI forservices provided and expenses incurred by it relating to the offering of the



Class B Shares. Expenses may include, without limitation, payments by ASMI todealers, brokers, banks and other financial institutions ("Dealers") withrespect to services provided in connection with sales of Class B Shares and formaintaining and improving services provided to holders of Class B shares, all asset forth in the Company's registration statement as in effect from time totime. Such payments may be paid by ASMI to Dealers at a rate of up to .50% on anannual basis of the average net asset value for Class B Shares that have beenoutstanding for at least seven years (and any Class B Shares purchased throughthe reinvestment of dividends or capital gains) as determined at the close ofeach business day. ASMI's fee hereunder shall be payable in arrears for eachcalendar month within 5 days after the close of such calendar month or at suchother intervals as the Board of Directors of the Company (the "Board ofDirectors") may determine. A majority of the Qualified Directors, as definedbelow, may, from time to time, reduce the amount of such payments or may suspendthe operation of the Plan for such period or periods of time as they maydetermine; provided, however, that the Board shall first eliminate the ServiceFee before effecting any other reduction of payments hereunder. To the extentthat distribution fees are payable to ASMI under this Plan in respect of Class Bshares already sold by ASMI, such fees shall not be paid to any person otherthan ASMI or its designee so long as this Plan is in effect. Amounts payableunder the Plan shall be subject to the limitations of Article III, Section 26 ofthe Rules of Fair Practice of the National Association of Securities Dealers,Inc. Amounts paid to ASMI hereunder shall not be used to pay distributionexpenses or service fees incurred with respect to any other class of shares ofthe Company.



Section 7. This Plan may be terminated as to Class B Shares of a ParticipatingFund at any time by vote of the Board of Directors, including a majority of theQualified Directors, or by shareholder vote in accordance with the InvestmentCompany Act. In the event of such termination, the subject Fund shall cease tobe a Participating Fund upon satisfaction of its outstanding obligationshereunder.




a) that such agreement may be terminated with respect to Class B Shares ofa Participating Fund at any time, without payment of any penalty, by vote of amajority of the Qualified Directors or by shareholder vote in accordance withthe Investment Company Act on not more than 60 days' written notice to any otherparty to the agreement; and






Executed as of ___________________, 1997.AMERICAN SKANDIA ADVISOR FUNDS, INC.

By: __________________________

17125-1



AMERICAN SKANDIA ADVISOR FUNDS, INC.MASTER CLASS C

DISTRIBUTION PLAN

This Distribution Plan (the "Plan") constitutes the writtenDistribution Plan for the Class C shares issued by American Skandia AdvisorFunds, Inc., a Maryland corporation (the "Company"), adopted pursuant to theprovisions of Rule 12b-1 under the Investment Company Act of 1940, as amended(the "Investment Company Act"). During the effective term of this Plan, theCompany may incur expenses primarily intended to result in the sale of its ClassC shares or to maintain or improve account services provided to holders of itsClass C shares upon the terms and conditions hereinafter set forth:

Section 1. The Company is an open-end management investment company formed underthe laws of the State of Maryland. The shares of the Company may be issued inone or more series (each, a "Fund") and the shares of each Fund may be issued inmultiple classes.

Section 2. This Plan initially will pertain to Class C Shares of each of theFunds named in Exhibit A attached hereto and made a part hereof (each, a"Participating Fund"). This Plan shall also apply to the Class C Shares of anyother series of the Company designated from time to time by the Board ofDirectors of the Company and added to the list of Participating Funds attachedhereto as Exhibit A. Where used in this Plan, the term "Shares" or "Class CShares" shall pertain only to Class C Shares of a Participating Fund.

Section 3. In order to provide for the implementation of the payments providedfor pursuant to this Plan, the Company may enter into an Underwriting andDistribution Agreement (the "Agreement") with American Skandia Marketing,Incorporated ("ASMI"), pursuant to which ASMI will serve as the principalunderwriter and general distributor of the Company's shares, including the ClassC Shares, and pursuant to which each Participating Fund may pay compensation toASMI for its services and to defray various costs incurred or paid by ASMI inconnection with the distribution of Class C Shares. Such Agreement, or anymodification thereof, shall become effective with respect to Class C Shares ofany Participating Fund only upon compliance with Section 12(b) of the InvestmentCompany Act and Rule 12b-1 thereunder as the same may be amended from time totime.

Section 4. The Company shall pay to ASMI a distribution and service fee at theannual rate of 1.0% of the average net asset value of the Class C Shares of theParticipating Funds, as determined at the close of each business day, .25% ofwhich is intended as a fee for services provided by ASMI to existing holders ofClass C Shares. The fee payable to ASMI hereunder is intended to compensate ASMIfor services provided and expenses incurred by it relating to the offering ofthe Class C Shares. Expenses may include, without limitation, payments by ASMI



to dealers, brokers, banks and other financial institutions ("Dealers") withrespect to services in connection sales of Class C Shares and for maintaining orimproving services provided to holders of Class C Shares, all as set forth inthe Company's registration statement as in effect from time to time. ASMI's feehereunder shall be payable in arrears for each calendar month within 5 daysafter the close of such calendar month or at such other intervals as the Boardof Directors of the Company (the "Board of Directors") may determine. A majorityof the Qualified Directors, as defined below, may, from time to time, reduce theamount of such payments or may suspend the operation of the Plan for such periodor periods of time as they may determine. Amounts payable under the Plan shallbe subject to the limitations of Article III, Section 26 of the Rules of FairPractice of the National Association of Securities Dealers, Inc. Amounts paid toASMI hereunder shall not be used to pay distribution expenses or series feesincurred with respect to any other class of shares of the Company.



Section 7. This Plan may be terminated as to Class C Shares of a ParticipatingFund at any time by vote of a majority of the Qualified Directors or byshareholder vote in accordance with the Investment Company Act. In the event ofsuch termination, the subject Fund shall cease to be a Participating Fund uponsatisfaction of its outstanding obligations hereunder.


a) that such agreement may be terminated with respect to Class C Shares ofa Participating Fund at any time, without payment of any penalty, by vote of amajority of the Qualified Directors or by shareholder vote in accordance withthe Investment Company Act on not more than 60 days' written notice to any otherparty to the agreement; and


Section 9. This Plan may not be amended to increase materially the amountspayable by a Participating Fund pursuant to Section 4 hereof without approval inaccordance with the Investment Company Act and any material amendment to this



Plan shall be approved by a majority of the Board of Directors and a majority ofthe Qualified Directors by votes cast in person at a meeting called for thepurpose of voting on the amendment.




Executed as of ___________________, 1997.


By: __________________________

18507-1



AMERICAN SKANDIA ADVISOR FUNDS, INC.MASTER CLASS X

DISTRIBUTION PLAN

This Distribution Plan (the "Plan") constitutes the writtenDistribution Plan for the Class X shares issued by American Skandia AdvisorFunds, Inc., a Maryland corporation (the "Company"), adopted pursuant to theprovisions of Rule 12b-1 under the Investment Company Act of 1940, as amended(the "Investment Company Act"). During the effective term of this Plan, theCompany may incur expenses primarily intended to result in the sale of its ClassX shares or to maintain or improve account services provided to holders of itsClass X shares upon the terms and conditions hereinafter set forth:


Section 2. This Plan initially will pertain to Class X Shares of each of theFunds named in Exhibit A attached hereto and made a part hereof (each, a"Participating Fund"). This Plan shall also apply to the Class X Shares of anyother series of the Company designated from time to time by the Board ofDirectors of the Company and added to the list of Participating Funds attachedhereto as Exhibit A. Where used in this Plan, the term "Shares" or "Class XShares" shall pertain only to Class X Shares of a Participating Fund.

Section 3. In order to provide for the implementation of the payments providedfor pursuant to this Plan, the Company may enter into an Underwriting andDistribution Agreement (the "Agreement") with American Skandia Marketing,Incorporated ("ASMI"), pursuant to which ASMI will serve as the principalunderwriter and general distributor of the Company's shares, including the ClassX Shares, and pursuant to which each Participating Fund may pay compensation toASMI for its services and to defray various costs incurred or paid by ASMI inconnection with the distribution of Class X Shares. Such Agreement, or anymodification thereof, shall become effective with respect to Class X Shares ofany Participating Fund only upon compliance with Section 12(b) of the InvestmentCompany Act, and Rule 12b-1 thereunder as the same may be amended from time totime.

Section 4. The Company shall pay to ASMI a distribution and service fee at theannual rate of 1.0% of the average net asset value of the Class X Shares of theParticipating Funds which have been outstanding for eight years or less, asdetermined at the close of each business day, .25% of which is intended as a feefor services provided to existing holders of Class X Shares. The fee payable toASMI hereunder is intended to compensate ASMI for services provided and expensesincurred by it relating to the offering of the Class X Shares. Such services and



expenses may include, without limitation, purchases by ASMI of additional ClassX shares as a bonus for investors in the Participating Funds; payments by ASMIto dealers, brokers, banks and other financial institutions ("Dealers") withrespect to services in connection with sales of Class X Shares; and the paymentto Dealers of a service fee of up to 0.50% on an annual basis of average dailynet asset value for Class B Shares that have been outstanding for at least sevenyears (and any Class B Shares purchased through the reinvestment of dividends orcapital gains on such shares), determined at the close of each business day, ascompensation for maintaining or improving services provided to holders of ClassX shares, all as set forth in the Company's registration statement as in effectfrom time to time. ASMI's fee hereunder shall be payable in arrears for eachcalendar month within 5 days after the close of such calendar month or at suchother intervals as the Board of Directors of the Company ("Board of Directors")may determine. A majority of the Qualified Directors, as defined below, may,from time to time, reduce the amount of such payments or may suspend theoperation of the Plan for such period or periods of time as they may determine.Amounts payable under the Plan shall be subject to the limitations of ArticleIII, Section 26 of the Rules of Fair Practice of the National Association ofSecurities Dealers, Inc. Amounts paid to ASMI hereunder shall not be used to paydistribution expenses or service fees incurred with respect to any other classof shares of the Company.



Section 7. This Plan may be terminated as to Class X Shares of a ParticipatingFund at any time by vote of the Board of Directors, including a majority of theQualified Directors, or by shareholder vote in accordance with the InvestmentCompany Act. In the event of such termination, the subject Fund shall cease tobe a Participating Fund upon satisfaction of its outstanding obligationshereunder.


a) that such agreement may be terminated with respect to Class X Shares ofa Participating Fund at any time, without payment of any penalty, by vote of amajority of the Qualified Directors or by shareholder vote in accordance withthe Investment Company Act on not more than 60 days' written notice to any other



party to the agreement; and






Executed as of ___________________, 1997.AMERICAN SKANDIA ADVISOR FUNDS, INC.

By: __________________________

17139-1



6


Plan Pursuant to Rule 18f-3(d) Under theInvestment Company Act of 1940

Effective ____________, 1997

Each of the series (each a "Fund" and, together, the "Funds")of American Skandia Advisor Funds, Inc. (the "Company"), an open-end investmentcompany, may from time to time issue one or more of the following classes ofshares: Class A shares, Class B shares, Class C shares and Class X shares. Eachclass is subject to such investment minimums and other conditions of eligibilityas are set forth in the Company's registration statement as in effect from timeto time (the "Registration Statement"). The differences in expenses among theseclasses of shares, and the conversion and exchange features of each class ofshares, are set forth below in this plan (this "Plan"). Except as noted below,expenses are allocated among the classes of shares of each Fund based upon thenet assets of each Fund attributable to shares of each class. This Plan issubject to change by action of the Board of Directors of the Company (the "Boardof Directors"), to the extent permitted by law and by the Articles ofIncorporation and By-laws of the Company.

CLASS A SHARESDISTRIBUTION AND SERVICE FEES

The Class A shares of each Fund pay distribution and servicefees pursuant to a distribution plan (the "Class A Plan") adopted pursuant toRule 12b-1 under the Investment Company Act of 1940 (the "Investment CompanyAct"). Class A shares also bear any costs associated with obtaining shareholderapproval of the Class A Plan (or an amendment to the Class A Plan). Pursuant tothe Class A Plan, Class A shares may pay distribution and service fees at anannual rate of up to 0.5% of the applicable Fund's average net assetsattributable to the Class A shares. Amounts payable under the Class A Plan aresubject to such further limitations as the Board of Directors may from time totime in effect and as are set forth in the Registration Statement.

CONVERSION FEATURESClass A shares of any Fund do not convert to any other class

of shares.

EXCHANGE FEATURESClass A shares of any Fund may be exchanged, at the holder's

option beginning seven days after the purchase, for Class A shares of any otherFund that offers Class A shares without the payment of a sales charge, providedthat Class A shares of such other Fund are available to residents of the



relevant state and that such requirements as may be applicable to exchanges,including investment minimums for such other Fund, and are set forth in theRegistration Statement are met or waived. The holding period for determining anyapplicable contingent deferred sales charge (a "CDSC") will include the holdingperiod of the shares exchanged, and will be calculated using the schedule of anyFund into or from which shares have been exchanged that would result in thehighest CDSC applicable to such Class A shares.

INITIAL SALES CHARGEClass A shares of all Funds are offered at a public offering

price that is equal to their net asset value ("NAV") with no initial salescharge to (i) investors making purchases aggregating $1 million or more, (ii)employer sponsored employee benefit plans established pursuant to Section 403(b)of the Internal Revenue Code of 1986, as amended (the "IRC"), or (iii) definedcontribution plans established pursuant to Section 401(a) of the IRC.

For all other investors, Class A shares of the Fundsdesignated as the High Yield Bond Fund and the Total Return Bond Fund (the "BondFunds") are offered at a public offering price that is equal to their NAV plus asales charge of up to 4.25 % for purchases aggregating less than $50,000; 3.75%for purchases aggregating at least $50,000 but less than $100,000; 3.25% forpurchases aggregating at least $100,000 but less than $250,000; 2.25% forpurchases aggregating at least $250,000 but less than $500,000; and 1.50% forpurchases aggregating at least $500,000 but less than $1,000,000. Class A sharesof all Funds other than the Bond Funds are offered to such investors at a publicoffering price that is equal to their NAV plus an initial sales charge of up to5.00% for purchases aggregating less than $50,000; 4.25% for purchasesaggregating at least $50,000 but less than $100,000; 3.25% for purchasesaggregating at least $100,000 but less than $250,000; 2.25% for purchasesaggregating at least $250,000 but less than $500,000; and 1.50% for purchasesaggregating at least $500,000 but less than $1 million.

The sales charges on Class A shares in all Funds are subjectto reduction or waiver as permitted by Rule 22d-1 under the Investment CompanyAct and as described in the Registration Statement.

CONTINGENT DEFERRED SALES CHARGEClass A shares purchased without an initial sales charge are

subject to a CDSC (the "Class A CDSC") of 1.0% if redeemed within twelve monthsof the first business day of the calendar month of their purchase. The Class ACDSC will be assessed on the lesser of (1) the NAV of the Class A shares at thetime of redemption (not including Class A shares purchased by reinvestment ofdividends or capital gains distributions); or (2) the amount originally investedin the Class A shares redeemed by the holder thereof.

The Class A CDSC is subject to reduction or waiver in certaincircumstances as permitted by Rule 6c-10 under the Investment Company Act and asdescribed in the Registration Statement.

CLASS B SHARESDISTRIBUTION AND SERVICE FEES



The Class B shares of each Fund pay distribution and servicefees pursuant to a distribution plan (the "Class B Plan") adopted pursuant toRule 12b-1 under the Investment Company Act. Class B shares also bear any costsassociated with obtaining shareholder approval of the Class B Plan (or anamendment to the Class B Plan). Pursuant to the Class B Plan, Class B shares maypay distribution and service fees at an annual rate of up to 1.0% of theapplicable Fund's average net assets attributable to Class B shares that havebeen outstanding for eight years or less. Amounts payable under the Class B Planare subject to such further limitations as the Board of Directors may from timeto time determine and as are set forth in the Registration Statement.

CONVERSION FEATURESClass B shares of any Fund automatically convert to Class A

shares of the same Fund eight years after the first business day of the calendarmonth of their purchase. Such conversion will be effected on the basis of therelative net asset values of the Class A and Class B shares on the conversiondate without imposition of any sales load, fee or other charge. When Class Bshares of any Fund convert to Class A shares, a portion of any other Class Bshares that have been acquired by each holder through the reinvestment ofdividends or capital gains ("Class B Dividend Shares") on the converted Class Bshares will also convert to Class A shares of the same Fund. The portion ofClass B Dividend Shares to be converted will be based upon the ratio of theClass B shares automatically converting to Class A shares to the total number ofClass B shares then held by such holder.

EXCHANGE FEATURESClass B shares of any Fund may be exchanged, at the holder's

option beginning seven days after purchase, for Class B shares of any other Fundthat offers Class B shares without the payment of a sales charge, provided thatClass B shares of such other Fund are available to residents of the relevantstate and that such requirements as may be applicable to exchanges, includinginvestment minimums for such other Fund, and are set forth in the RegistrationStatement are met or waived. The holding period for determining any applicableCDSC will include the holding period of the shares exchanged and will becalculated using the schedule of any Fund into or from which shares have beenexchanged that would result in the highest CDSC applicable to such Class Bshares.

INITIAL SALES CHARGEThe Class B shares of each Fund are offered at a public

offering price that is equal to their NAV, with no initial sales charge.

CONTINGENT DEFERRED SALES CHARGEClass B shares of any Fund that are redeemed within seven

years of the first business day of the calendar month of their purchase aresubject to a CDSC (the "Class B CDSC") in accordance with the followingschedule: Redemption During: Class B CDSC (as % of amount subject to charge):

1st year after purchase 6.0%2nd year after purchase 5.0%3rd year after purchase 4.0%



4th year after purchase 3.0%5th year after purchase 2.0%6th year after purchase 2.0%7th year after purchase 1.0%8th year after purchase None

The Class B CDSC will be assessed on the lesser of (i) the NAVof the Class B shares at the time of redemption (not including Class B sharespurchased by reinvestment of dividends of capital gains distributions), or (ii)the amount originally invested in the Class B shares redeemed by the holderthereof.

The Class B CDSC is subject to reduction or waiver in certaincircumstances as permitted by Rule 6c-10 under the Investment Company Act and asdescribed in the Registration Statement.

CLASS C SHARESDISTRIBUTION AND SERVICE FEES

The Class C shares of each Fund pay distribution and servicefees pursuant to a distribution plan (the "Class C Plan") adopted pursuant toRule 12b-1 under the Investment Company Act. Class C shares also bear any costsassociated with obtaining shareholder approval of the Class C Plan (or anamendment to the Class C Plan). Pursuant to the Class C Plan, Class C may paydistribution and service fees at an annual rate of up to 1.00% of the applicableFund's average net assets attributable to the Class C shares. Amounts payableunder the Class C Plan are subject to such further limitations as the Board ofDirectors may from time to time determine and are set forth in the RegistrationStatement.

CONVERSION FEATURESClass C shares of any Fund do not convert to any other class

of shares.

EXCHANGE FEATURESClass C shares of any Fund may be exchanged, at the holder's

option beginning seven days after purchase, for Class C shares of any other Fundthat offers Class C shares without the payment of a sales charge, provided thatClass C shares of such other Fund are available to residents of the relevantstate and that such requirements as may be applicable to exchanges, includinginvestment minimums for such other Fund, and are set forth in the RegistrationStatement are met or waived. The holding period for determining any applicableCDSC will include the holding period of the shares exchanged, and will becalculated using the schedule of any Fund into or from which shares have beenexchanged that would result in the highest CDSC applicable to such Class Cshares.

INITIAL SALES CHARGEThe Class C shares of each fund are offered at a public

offering price that is equal to their NAV, without an initial sales charge.

CONTINGENT DEFERRED SALES CHARGE



Class C shares of any Fund that are subject to a CDSC (the"Class C CDSC") of 1.00% if redeemed within twelve months of the first businessday of the calendar month of their purchase. The Class C CDSC will be assessedon the lesser of (i) the NAV of the Class C shares at the time of redemption(not including Class C shares purchased by reinvestment of dividends or capitalgains distributions) or (ii) the amount originally invested in the Class Cshares redeemed by the holder thereof.

The Class C CDSC is subject to reduction or waiver in certaincircumstances as permitted by Rule 6c-10 under the Investment Company Act and asdescribed in the Registration Statement.

CLASS X SHARES

DISTRIBUTION AND SERVICE FEESThe Class X shares of each Fund pay distribution and service

fees pursuant to a distribution plan (the "Class X Plan") adopted pursuant toRule 12b-1 under the Investment Company Act. Class X shares will also bear anycosts associated with obtaining approval of the Class X Plan (or an amendment tothe Class X Plan). Pursuant to the Class X Plan, Class X shares may paydistribution and service fees at an annual rate of up to 1.0% of the relevantFund's average net assets attributable to Class X shares. Amounts payable underthe Class X Plan are subject to such further limitations as the Board ofDirectors may from time to time determine and as are set forth in theRegistration Statement.

CONVERSION FEATURESClass X shares of any Fund automatically convert to Class A

shares of the same Fund eight years after the first business day of the calendarmonth of their purchase. Such conversion will be effected on the basis of therelative net asset values of the Class A and Class X shares on the conversiondate without imposition of any sales load, fee or other charge. When Class Xshares of any Fund convert to Class A shares, a portion of any other Class Xshares that have been acquired by each holder through the reinvestment ofdividends or capital gains distributions ("Class X Dividend Shares") on theconverted Class X shares will also convert to Class A shares of the same Fund.The portion of Class X Dividend Shares to be converted will be based upon theratio of the Class X shares automatically converting to Class A shares to thetotal number of Class X shares then held by such holder.

EXCHANGE FEATURESClass X shares of any Fund may be exchanged, at the holder's

option beginning seven days after purchase, for Class X shares of any other Fundthat offers Class X shares without the payment of a sales charge, provided thatClass X shares of such other Fund are available to residents of the relevantstate and that such requirements as may be applicable to exchanges, includinginvestment minimums for such other Fund, and are set forth in the RegistrationStatement are met or waived.

The holding period for determining any applicable CDSC willinclude the holding period of the shares exchanged and will be calculated using



the schedule of any Fund into a form which shares have been exchanged that wouldresult in the highest CDSC applicable to such Class X shares.

INITIAL SALES CHARGE

The Class X shares of each Fund are offered at a publicoffering price that is equal to their NAV, with no initial sales charge.

CONTINGENT DEFERRED SALES CHARGE

Class X shares of any Fund that are redeemed within sevenyears of the first business day of the calendar month of their purchase aresubject to a CDSC (the "Class X CDSC") in accordance with the followingschedule: Redemption During: Class X CDSC (as % of amount subject to charge):


The Class X CDSC will be assessed on the lesser of (i) the NAVof the Class X shares at the time of redemption (not including any Class Xshares received by the holder of the Class X shares redeemed as part of a bonusshare program described in the Registration Statement or any Class X sharespurchased by reinvestment of dividends or capital gains distributions), or (ii)the amount originally invested in the Class X shares redeemed by the holderthereof.

The Class X CDSC is subject to reduction or waiver in certaincircumstances as permitted by Rule 6c-10 under the Investment Company Act and asdescribed in the Registration Statement.

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