SEC Info - AARP Portfolios - ‘N-1/A’ on 12/20/05

Page	(sequential)	\|	(alphabetic)	Top
		Alternative Formats (Word, et al.) Additional Purchase, Redemption, Exchange and Conversion Information Financial Statements Management of the Trust More About Investments of the Portfolios More About the Trust Other Information Portfolio Matters Service Providers Summary Taxes
1	1st Page - Filing Submission
"	Summary
"	Management of the Trust
"	Service Providers
"	Portfolio Matters
"	Additional Purchase, Redemption, Exchange and Conversion Information
"	More About Investments of the Portfolios
"	Taxes
"	More About the Trust
"	Other Information
"	Financial Statements

As filed with the U.S. Securities and Exchange Commission on December 20, 2005

Registrant elects to register an indefinite number of shares pursuant to Rule 24f-2 under the Investment Company Act of 1940.

This Registration Statement is filed by the AARP Portfolios (the “Registrant” or the “Trust”) pursuant to Section 8(b) of the Investment Company Act of 1940 (the “Investment Company Act”), to register the Registrant as an open-ended management investment company under the Investment Company Act. Shares in the Registrant will not be registered pursuant to the Securities Act of 1933, as amended (the “1933 Act”), since such interests will be issued solely to, and purchased only by, “accredited investors”, within the meaning of Regulation D under the 1933 Act, and will not involve a “public offering” within the meaning of Section 4(2) of the 1933 Act. This Registration Statement does not constitute an offer to sell, or solicitation of an offer to buy, any Shares in the Registrant.

Responses to Items 1 through 3 of Form N-1A have been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.

The AARP Portfolios (the “Trust” or the “Registrant”) is a newly-formed Delaware statutory trust created pursuant to the Delaware Statutory Trust Act (12 Del. C. §3801 et seq.). The Trust’s Declaration of Trust authorizes the Board of Trustees of the Trust (the “Trustees” or the “Board”) to issue an unlimited number of transferable units of beneficial interests (“Shares”) and to establish and designate such Shares into one or more series. The Trust is currently comprised of three separate series, the U.S. Stock Market Portfolio, the International Stock Market Portfolio, and the U.S. Bond Market Portfolio (each, a “Portfolio” and together, the “Portfolios”). AARP Financial Incorporated (“AARP Financial”) is the Portfolios’ investment adviser and administrator. AARP Financial is newly-formed and has no experience as an investment adviser. AARP Financial has retained SSgA Funds Management, Inc. (“SSgA FM”) to serve as investment sub-adviser to the Portfolios.

A copy of the Statement of Additional Information (“SAI”) of the Portfolios may be obtained free of charge by calling AARP Portfolios at 1-800-958-6457.

ITEM 4. INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS.

The investment objective of the U.S. Stock Market Portfolio is to seek to produce the returns provided by the Morgan Stanley Capital International (“MSCI”) U.S. Investable Market 2500 Index as closely as possible, before deduction of expenses of the Portfolio. The index includes about 2,500 securities listed on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The stocks represent companies of all types and sizes. The index is the aggregation of the MSCI US Large Cap 300, Mid Cap 450, and Small Cap 1750 Indexes. The U.S. Stock Market Portfolio has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets plus the amount of any borrowings it may make for investment purposes, in stocks traded on stock exchanges in the United States.

The investment objective of the International Stock Market Portfolio is to seek to produce the returns provided by the MSCI Europe, Australasia and Far East (“EAFE”) Index as closely as possible, before deduction of expenses of the Portfolio. This index includes about 1,000 securities that are listed on the stock exchanges of 21 developed countries, excluding the United States and Canada. The International Stock Market Portfolio has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets plus the amount of any borrowings it may make for investment purposes, in stocks trading outside of the United States.

The investment objective of the U.S. Bond Market Portfolio is to seek to produce the return of the Lehman Brothers Aggregate Bond Index as closely as possible, before the deduction of the expenses of the Portfolio. This index includes a large variety of U.S. Bonds that are investment grade and taxable, covering three major types of bonds: government and corporate bonds, mortgage-backed securities, and asset-backed securities. Mortgage-backed securities include securitized mortgage pools by the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. Asset-backed securities include securities that are backed by credit card, auto, and home equity loans. The Portfolios will only invest in bonds that are considered “investment grade” – i.e., bonds rated Baa or higher by Moody’s Investor Services, Inc., of BBB or higher by Standard & Poor’s Rating Group or are deemed by SSgA FM, the Portfolios investment sub-adviser, to be of comparable quality. The U.S. Bond Market Portfolio has adopted a policy to invest, under normal circumstances, at least 80% of the value of its assets plus the amount of any borrowings it may make for investment purposes, in bonds traded on the United States bond market.

Each of the Portfolios seek to “track its index,” or in other words, produce returns that are as close as possible to its target index before deducting the fees of the Portfolios. It is difficult to match an index exactly because the returns of an index do not reflect the typical fees and expenses that the Portfolios have to pay when securities are traded. Also, as explained below, the Portfolios will not be able to buy every security in their indexes until they grow to an asset size that makes the purchase of every security cost effective.

It is anticipated that the U.S. and International Stock Market Portfolios will rely on optimization and sampling techniques until such time as they have sufficient assets to use a replication strategy. The U.S. Bond Market Portfolio may never fully replicate its index because some bonds in the index may be unavailable for purchase by the Portfolio.

In carrying out these techniques, all the Portfolios may invest to a limited extent in a variety of securities and derivatives that are not included in their target indices, including futures, options, exchange traded funds, cash, and other types of financial contracts and instruments. Generally speaking, a derivative is a financial contract whose value is based on a traditional security such as a stock, bond or market index such as the S&P 500 Index. While the Portfolios invest in derivatives to reduce tracking error, and as a convenient way to invest excess cash, these investments in derivatives may subject the Portfolios to risks that are different from, and possibly greater than, the risks of the securities they are derived from. The Portfolios will not use these derivatives for speculation or for the purpose of leveraging investment returns.

Each Portfolio’s investment objective is a non-fundamental policy and may be changed without the authorization of the holders of a majority of a Portfolio’s outstanding shares. All other investment policies, unless specifically designated as fundamental, are non-fundamental policies and may be changed by the Board without the authorization of the Portfolios’ shareholders. There can be no assurance that the Portfolios will achieve their objectives or goals.

If any of the Portfolios determines to change its 80% policies indicated above, it will provide at least 60 days’ prior notice to the affected Portfolios’ shareholders.

The Portfolios may invest all or any portion of their assets in short-term investments, such as U.S. Government obligations and U.S. Dollar denominated high-quality money market instruments, for liquidity, as a temporary defensive measure or in response to unusual market or economic conditions.

There is no guarantee of the performance of any of the Portfolios. The value of the Portfolios may go up or down, because the values of all investments do that.

Poor investment selection by SSgA FM, the investment sub-adviser of the Portfolios, may affect the Portfolios ability to achieve their investment objectives. Also, AARP Financial is a newly formed entity with no prior experience as an investment adviser.

The value of the Portfolios will go up and down as a result of fluctuating market prices. In general, stock prices have fluctuated more than bond prices over longer time periods. Price changes may be temporary or last for extended periods of time. Markets go up and down as they react to economic, political, geographic, or regulatory factors. These factors may affect the entire market or just certain securities, industry segments, or economic sectors.

Derivative instruments are financial contracts whose value is based on an underlying security, a currency exchange rate, an interest rate or a market index. Derivatives include many types of instruments representing a wide range of potential risks and rewards are derivatives, including futures contracts, options on futures contracts, options, interest rate swaps and forward currency exchange contracts.

The use of derivative instruments exposes the Portfolios to additional risks and transaction costs. Risks of derivative instruments include:

A Portfolio may not perform as well as the index it aims to match, because of tracking error. There are many differences between the performance of the indexes and real-world index funds that you can invest

in. In trying to track the performance of the indexes, portfolio managers of the Portfolios face the hurdles described below that may cause tracking error:

Risks Common to the U.S. Stock Market Portfolio and the International Stock Market Portfolio

The value of stocks may decline in response to developments affecting a particular issuer, the issuing company’s industry and/or general economic conditions. Price changes in stocks may be temporary or may last for an extended period of time.

The stocks of smaller, less-well-known companies are more volatile than large company stocks and may perform differently from the market as a whole. Smaller companies fail more often than bigger companies and may have more limited management and financial resources than bigger companies. Shares of smaller companies usually don’t trade as heavily on stock exchanges as shares of larger companies. This can make shares of smaller companies harder to sell than shares of bigger companies. Therefore, investments in smaller companies may carry greater risks than investments in larger, more established companies.

The Portfolio may lose money if it invests in bonds whose issuers cannot meet their obligations to pay interest or principal when due. An issuer may also lower the credit quality of a security if it suffers an adverse change in its financial condition. Lower credit quality would lead to greater volatility in the price

of the security and ultimately shares of the Portfolio. To mitigate this risk, bonds in which the Portfolio invests must be investment grade.

The value of the Portfolio’s investments in bonds may go down if interest rates go up. If interest rates go down, the value of the Portfolio’s bonds might increase. However, falling interest rates might lead some issuers to prepay bonds. That would force the Portfolio to invest in bonds with lower interest rates, potentially causing a decline in value and yield. Overall, changes in interest rates affect the value of long-term bonds more than short-term bonds.

The Portfolio may not perform well if it invests in bonds prepaid by issuers when interest rates fall, because it would have to invest in securities with lower interest rates. A decline in interest rates may also result in potential losses to mortgage- and other asset-backed securities, if the assets backing these securities are prepaid. On the other hand, a rise in interest rates may reduce the amount of prepayments, which would cause the average bond maturity to rise and increase the potential to lose money as interest rates rise.

Bonds are rated by national bond rating agencies. Securities rated Baa or higher by Moody’s Investors Services, Inc. or BBB or higher by Standard & Poor’s Rating Group are considered investment grade securities. Securities rated Baa or BBB may be somewhat riskier than higher rated obligations because they are regarded as having only an adequate capacity to pay principal and interest, and are considered to lack outstanding investment characteristics.

Although U.S. government securities issued directly by the U.S. government are guaranteed by the U.S. Treasury, other U.S. government securities issued by an agency or instrumentality of the U.S. government may not be. No assurance can be given that the U.S. government would provide financial support to its agencies and instrumentalities if not required to do so by law.

Investments in foreign stocks may be more volatile than investments in U.S. stocks and may perform differently from the U.S. market. It is possible that foreign governments may change stock exchange rules, increase taxes or confiscate investors’ assets. The governments of foreign countries may be less stable than the U.S. government and issuers in foreign jurisdictions may have less thorough regulation and accounting, auditing, and recordkeeping requirements. It may cost more to invest directly in a foreign stock than it would to invest in a U.S. stock. Changes in foreign currency exchange rates may also affect the value of the Portfolio. Prices of foreign stocks might not accurately reflect the issuing company’s condition due to limited information available, or due to poor regulation.

You will find a listing of the holdings in the Portfolios as of the end of each calendar year and each quarter on our Web site at www.aarpfunds.com. The Portfolios are required by Securities and Exchange Commission (“SEC”) regulations to report portfolio holdings 60 days after each fiscal quarter. The holdings of the Portfolios will be posted on the Web site after the Portfolios have filed the required information with the SEC. Please consult the Statement of Additional Information for more information about the disclosure of portfolio holdings.

All mutual funds are required to report their turnover rate, which is simply the portion of the fund’s investments that were bought and sold in one year. For example, if a fund holds 50 stocks and 40 of them are sold within the year to buy new stocks, the turnover rate is 80%. AARP Financial anticipates that the Portfolios will have turnover rate of less than 100%.

A higher turnover rate (over 100%) usually means higher costs for a fund for two reasons:

Because of the Portfolios’ commitment to the indexing investment strategy, the Portfolios generally invest for the long term, selling and buying investments only to adjust to changes in the target indexes.

The Trust has a Board of Trustees who oversee the Portfolios and approve the Portfolios agreements with the investment adviser and the other service providers.

AARP Financial manages the investment activities for the Portfolios, including providing the overall investment program of the Portfolios and overseeing SSgA FM. AARP Financial is a wholly owned subsidiary of AARP Services, Inc., which is a wholly owned subsidiary of AARP. AARP is a nonprofit membership organization dedicated to addressing the needs and interests of people age 50 and over in the United States. Founded in 1958, AARP delivers information, advocacy, and services to more than 35 million members to advance a society in which everyone ages with dignity and purpose. AARP Financial is located at Two Highwood Drive, 2nd Floor, Tewksbury, MA 01876.

SSgA FM manages the day-to-day investment of the Portfolios’ assets. SSgA FM managed over $100 billion in assets as of September 30, 2005 and is one of the State Street Global Advisors’ (“SSgA”) companies that collectively manage approximately $1.4 trillion in assets. SSgA FM is a wholly owned subsidiary of State Street Corporation and is located at One Lincoln Street, Boston, MA 02111.

Each Portfolio pays AARP Financial 0.05% annually of its average daily net assets to compensate AARP Financial for its advisory services to the Portfolios. AARP Financial pays SSgA FM for its sub-advisory services out of these fees.

The basis for the Board approving the investment advisory and sub-advisory agreements with AARP Financial and SSgA FM will be discussed in the Portfolios’ semi-annual report to shareholders after the Portfolios have completed their first half year.

The Trust and AARP Financial have applied to the SEC for an exemption to allow AARP Financial to change or add investment sub-advisers, and to change the investment sub-advisory agreements with those sub-advisers, without shareholder approval. Currently, shareholder approval of these sorts of changes of sub-advisers and investment sub-advisory agreements is required by law. There is no guarantee that the SEC will grant the requested exemption.

AARP Financial provides certain administrative services to the Portfolios, such as monitoring and coordinating the activities of each of the other service providers, providing treasury services, preparing legal documents, such as updating the offering memorandum and Statement of Additional Information, and providing administrative tax services. AARP Financial has retained State Street Bank and Trust Company (“State Street”) to assist in providing these administrative services. The Trust has retained State Street to be the custodian of the Portfolios’ assets. The custodian is generally responsible for safekeeping the Portfolios’ assets, settling securities transactions, receiving dividends and interest paying Portfolios expenses, and handling other related activities. The Trust has retained ALPS Distributors, Inc. as the placement agent for the Portfolios. The Trust has granted the placement agent the right to sell shares of the Portfolios on its behalf.

The following employees of the SSgA FM make up the portfolio management team for the Portfolios.

Mr. Gyllenhaal is a Principal at SSgA and a Principal of SSgA FM. Mr. Gyllenhaal is a Portfolio Manager in the Global Structured Products Team. Prior to assuming his current role, Mr. Gyllenhaal was a member of the Active International Equity Investment Team where he assisted in investment management, research, and product development for the international quantitative strategies. Prior to this, he worked as a member of the Global Structured Products, managing both Emerging and Developed Markets passive strategies. Prior to joining SSgA in 1994, Mr. Gyllenhaal worked at Brown Brothers Harriman as an account manager on international portfolios. Before this, he was employed in State Street’s mutual fund division. Mr. Gyllenhaal has been working in the investment management field since 1990. Mr. Gyllenhaal holds a BS in Finance and Economics from Bentley College, and an MBA from Babson College. He is currently a Level II CFA candidate.

strategies for index change trades, Russell reconstitution, and MSCI quarterly rebalancing and Provisional trades. Mr. May also served on the Russell 1000 Advisory Committee at the New York Board of Trade. He has been working in the investment management field since 1989 when he joined State Street Corporation’s Custody operation. Mr. May holds an MBA from Boston College and a BS in Finance from Bentley College, and earned the Chartered Financial Analyst designation. He is a member of the Boston Security Analysts Society and CFA Institute.

Mr. Beach is a Principal at SSgA and a Principal of SSgA FM. Mr. Beach is a Portfolio Manager in SSgA’s Global Structured Products Team. He is currently responsible for managing various international equity index funds. He is also responsible for new product development and research. Mr. Beach joined State Street in 1986 and held a number of positions in SSgA’s International Equity Operations Group. He has been working in the investment management field since 1986. Mr. Beach holds a BA in Economics from Amherst College and an MBA from Bentley College.

Ms. St. Pierre is a Principal at SSgA and a Principal of SSgA FM. Ms. St. Pierre is a Senior Portfolio Manager in SSgA’s Global Structured Products Team. She is responsible for managing both domestic and international equity index portfolios as well as a variety of S&P 500, Russell 3000, ETF and hedged accounts. Additionally, she has been involved in various research and process improvement projects. She is also responsible for a number of client relationships within the Global Structured Products Group. Prior to joining SSgA, Ms. St. Pierre worked in State Street Corporation’s Mutual Funds division in the U.S., as well as in Canada and Germany. She has been in the investment management field since she joined SSgA in 1995. Ms. St. Pierre holds a BS degree in Accounting from Lehigh University and an MBA degree in International Business from Bentley College. She is member of the CFA Institute and the Boston Security Analysts Society. Ms. St. Pierre is currently a Level III candidate of the Chartered Financial Analyst Program.

Mr. Kirby is a Principal of SSgA and a Principal of SSgA FM. He is head of SSgA’s Fixed Income Index Team. He has managed the product since 1999 and portfolios within the group since 1997. He has been working in the investment management field since 1983 and has more than 15 years of experience in the fixed income markets. Prior to joining SSgA in 1995, Mr. Kirby was with Lowell Blake & Associates in Boston, where he was a Portfolio Manager, responsible for client relations and SSgA’s fixed income investments. Before this he was a portfolio manager/fixed income analyst with Shawmut Bank and asset/liability risk specialist at CambridgePort Savings. Mr. Kirby holds a Bachelors Degree from Boston College and an MBA from the Sawyer School of Management at Suffolk University. He served as a member of a municipal retirement board for ten years and currently serves on the SSgA Fiduciary Advisory Committee and is a member of the Lehman Brothers Index Advisory Council.

Mr. Brunell is a Principal of SSgA and a Principal of SSgA FM. Mr. Brunell is a member of the Passive Fixed Income Team. Previously, Mr. Brunell was responsible for managing the U.S. Bond Operation group. He has been working in the investment management field since joining SSgA in 1997. Prior to joining the Fixed Income group, Mr. Brunell spent 3 years in the Mutual Funds Custody division of State Street Corp working on the accounting side of various domestic and international equity and bond portfolios. Mr. Brunell received a Bachelor of Science degree in Business Administration from Saint Michael’s College and an MSF from Boston College in May of 2004. He is also a CFA Level II candidate.

The Statement of Additional Information provides additional information about the Portfolio Managers’ compensation, other accounts managed by the Portfolio Managers, and the Portfolio Managers’ ownership of securities in the Portfolios.

The price at which you buy or sell shares of the Portfolios is called net asset value (“NAV”). The NAV for each Portfolio’s shares is calculated every business day as of the close of regular trading on the New York Stock Exchange (normally, 4:00 p.m. Eastern time). The NAV will not be calculated on days in which the New York Stock Exchange is closed for trading. Shares of the Portfolios are available for purchase at their NAV without any sales charges, transaction fees, or brokerage commissions being charged.

To add up the net assets of a Portfolio, stocks held in the Portfolio are valued at their market price on the primary exchange where they are traded. Bonds held in the Portfolio are valued using quotes from bond dealers or bond pricing services.

If the price for a specific stock or bond held by the Portfolio is not readily available, the Portfolio will determine a fair value, using a method approved by the Board of Trustees of AARP Portfolios. For example, the Portfolio might need to determine the fair value of a stock if something occurs in the market that would affect pricing after trading is closed for the day, but before 4:00 p.m. Eastern time, when NAV is calculated. This occurs most frequently with international stocks, which may trade on exchanges that close many hours earlier.

When a Portfolio uses the fair value method, it is possible that the price the Portfolio uses for a specific stock or bond may differ from the market price or quote, when it is next available. It is also possible that the Funds’ NAV may differ from the NAV that would be calculated if the Portfolio had used the last reported price for the particular stock or bond. Since fair valuation is a judgment, there can be no assurance that the value given a particular security is accurate.

On any business day, if the Portfolios or an authorized agent of the Portfolios receive your request to buy or sell shares before closing time on the New York Stock Exchange, they will use that day’s NAV as the price for your transaction. If the Portfolios or an authorized agent for the Portfolios receive your request after closing time, they will use the next business day’s NAV for your transaction.

Any time the Portfolios or an authorized agent of the Portfolios require additional information before they can complete a transaction you requested, the Portfolios will use the NAV as of the business day they receive the required information for your transaction.

The Trust will issue shares of the Portfolios in private placement transactions to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933, as amended (the “1933 Act”), that do not involve a “public offering” within the meaning of Section 4(2) of the 1933 Act. There is currently no minimum initial or subsequent purchases amount with respect to any of the Portfolios. The Trust or its authorized agents will set up accounts for shareholders of the Portfolios.

In addition to cash purchases of shares of the Portfolios, if accepted by the Trust and subject to applicable law, investments in shares of a Portfolio may be made in exchange for securities eligible for purchase by the Portfolio and consistent with the goal and policies of the Portfolio as described in this Part A. All dividends, interest, subscriptions or other rights relating to such securities will become the property of the Portfolio.

Investments in a Portfolio will be credited to the shareholder’s account in the form of full and fractional shares at the NAV per share next determined after the investment is received in proper form as may be determined by the Trustees. The Portfolios consider purchase, exchange or redemption orders to be in “proper form” when they receive all required information, including properly completed and signed documents. The Portfolios may reject any requests that are not in proper form. The Portfolios may refuse any order for any reason. If this happens, the Trust will return any money it has received from you related to the proposed transaction.

Under the USA PATRIOT Act, Federal law requires all financial institutions to obtain, verify, and record information that identifies certain types of individuals and entities who apply to open accounts (“Customers”). If a Customer seeks to open an account to invest in a Portfolio, the Portfolio will ask for certain information that will allow us to identify the Customer. If the Customer does not provide the required information, and we cannot contact the Customer to obtain the information, we may not accept the Customer’s application and return the initial investment.

After an account is established, the Portfolios are required to take steps to verify a Customer’s identity. These actions may include checking the Customer’s information against various databases. If the Portfolios are unable to verify a Customer’s identity from the information it provides, it may be restricted from making purchases or transfers of shares; or its account may be closed and the shares redeemed. If the account is closed and the shares are redeemed, the redemption will be at the next available share price.

As a result, a Customer’s proceeds may be more or less than the amount it paid for its and the sale may be a taxable transaction.

Each shareholder of a Portfolio shall have the right to request that the Portfolio redeem the shareholder’s shares at a redemption price per share equal to the NAV next determined after receipt by the Portfolio of the request by the Portfolios or an authorized agent of the Portfolios, provided that the request is in proper form. A redemption request received after the close of regular trading on the New York Stock Exchange (usually 4:00 Eastern time) is deemed received on the next business day. Contact the Portfolios or their authorized agent to make such a request. Payment of the redemption price normally will be made within seven days after the date upon which the redemption request is effective. Payment of the redemption price may be wholly or partly in securities or other assets of the Trust at the value of such securities or assets used in the determination of the NAV, or may be in cash. The redemption price may be paid wholly or partly in securities, if the Trustees determine it to be in the best interests of the remaining shareholders of the Portfolio. The Trust is not liable for the delay of an investment adviser or other party in transferring or delivering securities selected for payments-in-kind.

To the extent that a payment of redemption proceeds is in cash, the Trust will wire the proceeds of redemption in federal funds to the commercial bank specified by the investor. Wire redemptions may be terminated or modified by the Trust at any time. An investor should contact its bank for information on any charges imposed by the bank in connection with the receipt of redemption proceeds by wire. During periods of substantial economic or market change, telephonic wire redemptions may be difficult to implement.

Payment on any redemption may be delayed for up to seven days following receipt of the redemption request. The right of any investor to receive payment with respect to any withdrawal also may be suspended or the payment of the withdrawal proceeds postponed during any day in which the New York Stock Exchange is closed (other than weekends or holidays) or trading on the New York Stock Exchange is restricted, or, to the extent otherwise permitted by the Investment Company Act of 1940 (“Investment Company Act”).

Frequent Trading: The Portfolios currently are intended primarily to serve as an investment vehicle for the AARP Funds, which are funds-of-funds and therefore may have trading activity every day as a result of net purchase and redemption activity in their shares. This purchase and sale activity is not deemed to be inappropriate because it is an inescapable consequence of the AARP Funds being mutual funds and is inherent in a funds-of-funds structure.

Some investors in the AARP Funds may attempt to engage in excessive trading called market timing where they try to predict future market directions and quickly buy and sell to capture short term profits. Others may simply buy and sell repeatedly over short periods of time, another form of excessive trading. Inappropriate excessive trading of the AARP Funds would interfere with the efficient management of the Portfolios, and would increase costs for all investors. The AARP Funds have adopted policies and procedures designed to address and monitor the frequent purchase and sale of shares by their shareholders.

The Trust has not adopted specific policies and procedures to address frequent purchases and sales of securities by its shareholders, but would do so if the Trust were to accept purchase orders from the types of investors deemed by the Trust to present the risk of inappropriate excessive trading.

Each Portfolio will allocate its investment income, expenses, and realized and unrealized capital gains and losses to its shareholders pro rata in accordance with the number of units a shareholder beneficially owns. Allocations of taxable income or loss may be made in a different manner in order to comply with federal income tax rules. By law, each year mutual funds must distribute, or pay out, at least 90% of their income and net capital gains to investors who, in turn, pay any required taxes on the distributions they receive.

Timing of distributions: The Portfolios generally pay capital gains distributions (if any) in December. The amount may vary considerably from year-to-year based on normal investment activity. The U.S. Bond Market Portfolio generally will pay income distributions quarterly. The U.S. Stock Market and International Stock Market Portfolios generally will pay income distributions (if any) no less frequently than annually.

Depending on how long the Portfolios hold securities before selling them, the distributions will be classified as either short-term or long-term capital gains or losses. Distributions from net short-term capital gains will generally be taxed as ordinary income. Because different tax rates apply, the Trust will supply information on whether distributions are treated as ordinary income and/or long-term capital gains for tax purposes. Changes in the components of the index for a Portfolio could affect the timing, amount and character of distributions.

Qualified dividend income: When a Portfolio receives a stock dividend from a U.S. corporation or a qualified foreign corporation, it is considered qualified dividend income, as long as the Portfolio held the stock for a required length of time. If a shareholder of a Portfolio also held shares in the Portfolio for a required period, it is eligible to treat distributions designated by the Portfolio as qualified dividends. The Trust will supply information on whether any portion of its distributions is qualified dividend income eligible for a reduced tax rate.

Tax on transactions: Just as the Portfolios realize capital gains when securities are sold at a higher price than originally paid, the shareholder of a Portfolio may realize a capital gain on transactions in shares of a Portfolio. The sale or exchange shares of a Portfolio at a higher price than paid will result in capital gain. Of course, the reverse is true as well: if a shareholder sells or exchanges shares at a loss, it may deduct the loss, subject to certain potential limitations on the deductibility of losses under the tax laws.

The Portfolios do not charge a sales fee, or “load” to investors, nor do the Portfolios pay distribution, or “Rule 12b-1” fees to cover the sale and distribution of the Portfolios’ shares.

The response to Item 8 of Form N-1A has been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.

Investors should read the offering memorandum before making any investment in any the Portfolios.

A copy of the offering memorandum and the annual and semi-annual reports to shareholders of the Portfolios, when available, may be obtained free of charge by calling the AARP Portfolios at 1-800-958-6457.

No person has been authorized to give any information or to make any representations not contained in this SAI or in the offering memorandum in connection with the offering made by the offering memorandum and, if given or made, such information or representations must not be relied upon as having been authorized by the Portfolios or their placement agent.

This SAI provides more information about AARP Portfolios, the “Trust,” and three of its series or Portfolios:

This SAI and the related offering memorandum do not constitute an offer by the Trust to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction.

The Portfolios principally serve as the investment vehicles or “underlying funds” for AARP Funds. The Trust is supervised by a board of trustees, the “Board.” The Board is responsible for representing the interests of the Portfolios and their shareholders. The Board meets periodically throughout the year to oversee the Portfolios’ activities. The Board consists of two “independent trustees” and one trustee who is affiliated with the Portfolios’ investment adviser. Trustees who are not “interested persons” of the Trust, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (“Investment Company Act”), are called “independent trustees.” Generally, a trustee qualifies as an independent trustee if he or she is free of conflicts of interest that arise as a result of his or her business or familial relationships to certain entities or individuals who do business with the Portfolios.

The Trust, on behalf of the Portfolios, has engaged a variety of entities to provide services to the Portfolios. The chart below includes:

Trustees and Officers. The table below includes information about the trustees and officers of the Trust, including their:

Standing Committees of the Board. The Board currently has two standing committees: (1) an Audit Committee and (2) a Nominating and Governance Committee. Currently, each independent trustee serves on each of these two committees and Ms. Sweeney, as an interested trustee, is not a member of either committee. Each committee has adopted a written charter setting forth its duties and responsibilities. Neither of the committees met during the 12-months prior to the date of this SAI.

Audit Committee. Mr. Turner serves as the Chairman of the Audit Committee. The Audit Committee normally meets at least twice a year and, among other things:

Nominating and Governance Committee. Mr. Clapman serves as the Chairman of the Nominating and Governance Committee. The Nominating and Governance Committee normally meets at least two times a year and:

If there is a vacancy on the Board, the Nominating and Governance Committee will:

When seeking suggestions for nominees to serve as independent trustees, the Nominating and Governance Committee may consider suggestions from anyone it deems appropriate. When seeking to fill a position on the Board previously held by an interested trustee, the Nominating and Governance Committee will consider the views and recommendations of the Adviser.

Eligible shareholders (or groups of shareholders) may submit the names of potential nominees for the Nominating and Governance Committee’s consideration. Each eligible shareholder (or group of shareholders) may submit no more than one nominee each calendar year and may not submit the same nominee twice. In order for the Nominating and Governance Committee to consider shareholder submissions, the proposed nominee must satisfy the requirements specified in the nominating committee charter, which is available on the Portfolios’ website at www.aarpfunds.com.

Management Ownership of the Portfolios. The following table sets forth, for each Trustee, the aggregate dollar range of equity securities owned of the Portfolios and of all funds in the Fund Complex overseen by each Trustee as of December 20, 2005.

As of December 20, 2005, the Portfolios had not commenced operations, and, consequently, the trustees and officers of the Trust, as a group, owned less than 1% of outstanding shares of each of the Portfolios. When the Portfolios commence operations, it is expected that shares of the Portfolios will only be available to the AARP Funds and one or more institutional investors. Therefore, it is not expected that the trustees and officers of the Portfolios, as a group, will own more than 1% of the Portfolio’s outstanding shares.

Compensation of Board Members. Independent trustees receive the following compensation for their services to the Fund Complex:

Trustees are reimbursed for all out-of-pocket expenses relating to attendance at Board and committee meetings. Interested trustees do not receive any compensation from the Portfolios for their service on the Board.

The following table summarizes the compensation, including committee fees, paid to the trustees of the Trust, for the 12-month period prior to the date of this SAI.

Adviser for the Portfolios. The Trust has hired AARP Financial to serve as investment adviser to each of the Portfolios. The Adviser has in turn hired the Sub-Adviser to serve as investment sub-adviser to each of the Portfolios.

The Advisory Agreement for the Portfolios was approved by the Trust’s Board on October 14, 2005. The Advisory Agreement provides that the Adviser has the general responsibility to provide a program of continuous investment management for and invest and reinvest the assets of each of the Portfolios. The Adviser’s responsibilities under the Advisory Agreement include:

Under the Advisory Agreement, the Adviser may delegate to one or more sub-advisers any or all of its duties or obligations, provided that the Adviser oversees, supervises and monitors the performance of any sub-adviser, and that any delegation does not relieve the Adviser of its duties and obligations under the Advisory Agreement. Pursuant to this authority, the Adviser has delegated responsibility for the day-to-day management of the Portfolios’ assets to SSgA FM. The Adviser pays all fees of SSgA FM from the fees it receives under the Advisory Agreement. Since the Portfolios had not commenced operations as of the date of this SAI, to date, the Adviser has not received any fees for services rendered to the Portfolios.

The primary responsibility of the Adviser is to oversee, supervise and monitor the performance of SSgA FM.

AARP Financial is a wholly owned subsidiary of AARP Services, Inc., which is a wholly owned subsidiary of AARP. AARP is a nonprofit membership organization dedicated to addressing the needs and interests of people age 50 and over in the United States. Founded in 1958, AARP delivers information, advocacy, and services to more than 35 million members to advance a society in which everyone ages with dignity and purpose. AARP Financial is a newly-formed investment adviser with no prior experience as an investment adviser.

Sub-Adviser for the Portfolios. The Sub-Adviser currently is responsible for all aspects of the day-to-day management of the Portfolios’ assets. The Sub-Adviser is not an affiliate of the Trust, its affiliated persons, or the Adviser other than as by reason of serving as investment sub-adviser to the Portfolios and the AARP Funds.

The Sub-Advisory Agreement for the Portfolios was approved by the Trust’s Board on October 14, 2005. The Sub-Advisory Agreement provides that the Sub-Adviser has the general responsibility to provide a program of continuous investment management for and invest and reinvest the assets of each of the Portfolios. The Sub-Adviser’s responsibilities under the Sub-Advisory Agreement include:

The Sub-Adviser provides the day-to-day portfolio management of the Portfolios. The Sub-Adviser may provide similar services to other investment companies or to other clients or engage in other activities, provided such other services and activities do not, during the term of the Sub-Advisory Agreement, interfere with the Sub-Adviser’s ability to meet its obligations to the Adviser, the Trust and the Portfolios.

The Adviser pays all fees of the Sub-Adviser from the fees it receives under the Advisory Agreement. Since the Portfolios had not commenced operations as of the date of this SAI, to date, no amounts have been paid to the Sub-Adviser for services rendered to the Portfolios.

Exemptive Relief. The Trust, AARP Funds and the Adviser expect to apply for an exemptive order from the SEC in the near future that would permit the Adviser greater flexibility than is currently provided by the Investment Company Act to retain investment sub-advisers and modify investment sub-advisory arrangements. Under the exemptive order, if granted, the Adviser would continue to provide or oversee the provision of portfolio management services to the Portfolios by one or more investment sub-advisers, but would have the additional flexibility to retain investment sub-advisers and materially modify investment sub-advisory agreements without shareholder approval, as is currently required by the Investment Company Act. However, there can be no assurance that the SEC would grant the exemptive relief.

Portfolio Management Teams. The following employees of the Sub-Adviser make up the portfolio management team for the Portfolios.

Mr. Gyllenhaal is a Principal at State Street Global Advisors (“SSgA”) and a Principal of SSgA FM. Mr. Gyllenhaal is a Portfolio Manager in the Global Structured Products Team. Prior to assuming his current role, Mr. Gyllenhaal was a member of the Active International Equity Investment Team where he assisted in investment management, research, and product development for the international quantitative strategies. Prior to this, he worked as a member of the Global Structured Products, managing both Emerging and Developed Markets passive strategies. Prior to joining SSgA in 1994, Mr. Gyllenhaal worked at Brown Brothers Harriman as an account manager on international portfolios. Before this, he was employed in State Street’s mutual fund division. Mr. Gyllenhaal has been working in the investment management field since 1990. Mr. Gyllenhaal holds a BS in Finance and Economics from Bentley College, and an MBA from Babson College. He is currently a Level II CFA candidate.

Mr. May is a Principal of SSgA and a Principal of SSgA FM. Mr. May is a Senior Portfolio Manager in SSgA’s Global Structured Products Team. Mr. May joined SSgA in 1991. Prior to the Global Structured Products Group, Mr. May worked in the SSgA’s Passive U.S. Equity Operations department as a Senior Analyst. As a member of the Developed Markets team, he worked on the formulation of trading strategies for index change trades, Russell reconstitution, and MSCI quarterly rebalancing and Provisional trades. Mr. May also served on the Russell 1000 Advisory Committee at the New York Board of Trade. He has been working in the investment management field since 1989 when he joined State Street Corporation’s Custody operation. Mr. May holds an MBA from Boston College and a BS in Finance from Bentley College, and earned the Chartered Financial Analyst designation. He is a member of the Boston Security Analysts Society and CFA Institute.

Mr. Beach is a Principal at SSgA and a Principal of SSgA FM. Mr. Beach is a Portfolio Manager in SSgA’s Global Structured Products Group. He is currently responsible for managing various international equity index funds. He is also responsible for new product development and research. Mr. Beach joined State Street in 1986 and held a number of positions in SSgA’s International Equity Operations Group. He has been working in the investment management field since 1986. Mr. Beach holds a BA in Economics from Amherst College and an MBA from Bentley College.

Ms. St. Pierre is a Principal at SSgA and a Principal of SSgA FM. Ms. St. Pierre is a Senior Portfolio Manager in SSgA’s Global Structured Products Team. She is responsible for managing both domestic and international equity index portfolios, as well as a variety of S&P 500, Russell 3000, ETF and hedged accounts. Additionally, Ms. St. Pierre has been involved in various research and process improvement projects. She is also responsible for a number of client relationships within the Global Structured Products Group. Prior to joining SSgA, Ms. St. Pierre worked in State Street Corporation’s Mutual Funds division in the U.S., as well as in Canada and Germany. She has been in the investment management field since she joined SSgA in 1995. Ms. St. Pierre holds a BS degree in Accounting from Lehigh University and an MBA degree in International Business from Bentley College. She is member of the CFA Institute and the Boston Security Analysts Society. Ms. St. Pierre is currently a Level III candidate of the Chartered Financial Analyst Program.

Accounts Managed by the Portfolio Managers. The table below identifies, for each portfolio manager of the Portfolios, the number of accounts managed and the total assets in such accounts, within each of the following categories: (a) registered investment companies, (b) other pooled investment vehicles, and (c) other accounts. For each category, the number of accounts and total assets in the accounts whose fees are based on performance is indicated in italics typeface.

Portfolio Management Team Compensation. The compensation of the Sub-Adviser’s investment professionals is based on a number of factors. The first factor considered is the external market. Through an extensive compensation survey process, the Sub-Adviser seeks to understand what its competitors are paying people to perform similar roles. This data is then used to determine a competitive baseline in the areas of base pay, bonus, and long term incentive (i.e., equity). The second factor taken into consideration is the size of the pool available for this compensation. The Sub-Adviser is a part of State Street Corporation, and therefore works within its corporate environment on determining the overall level of its incentive compensation pool. Once determined, this pool is then allocated to the various locations and departments of the Sub-Adviser. The determination of the allocation amounts to these locations and departments is influenced by the competitive market data, as well as the overall performance of the group. The pool is then allocated to individual employees based on their individual performance. There is no fixed formula for determining these amounts, nor is anyone’s compensation directly tied to the investment performance or asset value of a product or strategy. The same process is followed in determining equity allocations.

Portfolio Management Conflicts of Interest. A portfolio manager may be subject to potential conflicts of interest because he or she is responsible for other accounts in addition to the Portfolio he or she manages. Potential conflicts may arise out of (a) the portfolio manager’s execution of different investment strategies for various accounts or (b) the allocation of investment opportunities among the portfolio manager’s accounts with the same strategy.

A potential conflict of interest may arise as a result of the portfolio manager’s responsibility for multiple accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio manager’s accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment. The portfolio manager may also manage accounts whose objectives and policies differ from that of the Portfolio he or she manages. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio manager may have adverse consequences for another account managed by the portfolio manager. For example, an account may sell a significant position in a security, which could cause the market price of that security to decrease, while the Portfolio maintained its position in that security.

A potential conflict may arise when the portfolio manager is responsible for accounts that have different advisory fees - the difference in fees could create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to investment opportunities. This conflict may be heightened if an account is subject to a performance-based fee. Another potential conflict may arise when the portfolio manager has an investment in one or more accounts that participates in transactions with other accounts. His or her investment(s) may create an incentive for the portfolio manager to favor one account over another. SSgA FM has adopted policies and procedures reasonably designed to address these potential material conflicts. For instance, portfolio managers within SSgA FM are normally responsible for all accounts within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, SSgA FM and its advisory affiliates utilize a system for allocating investment opportunities among portfolios that is designed to provide a fair and equitable allocation.

Portfolio Management Team Portfolio Ownership. As of the date of this SAI, the Portfolios had not yet commenced operations. As a result, the Portfolios’ portfolio managers did not own any equity securities in the Portfolios. Nonetheless, due to the nature of the Portfolios, the Portfolios’ portfolio managers typically will not own shares of the Portfolios.

Administrator. In addition to serving as the Adviser to the Portfolios, AARP Financial also serves as the Administrator to the Portfolios. Under the Administration Agreement, the Administrator provides the Portfolios with general administrative duties associated with the day-to-day operations of the Portfolios, and monitors and coordinates the activities of the other service providers of the Portfolios.

The Administrator also provides accounting functions, including overseeing the computation of the Portfolios’ net asset value (“NAV”), assists in the preparation of financial and tax reports, monitors and tests of portfolio compliance, and oversees and reviews the regulatory affairs and corporate governance of the Portfolios. The Administrator will also perform such other services for the Portfolios that are mutually agreed to by the parties from time to time, for which it will receive such fees as may be mutually agreed upon, including the Administrator’s reasonable out-of-pocket expenses. Since the Portfolios had not commenced operations as of the date of this SAI, to date, the Administrator has not received any fees for services rendered to the Portfolios.

Sub-Administrator. Under the Sub-Administration Agreement, the Sub-Administrator is tasked with performing such duties as delegated to it by the Administrator.

Fees are paid to the Sub-Administrator by the Administrator out of the fees paid by the Portfolios to the Administrator, as stated in the Sub-Administration Agreement. The Administrator pays all fees of the Sub-Administrator from the fees it receives under the Administration Agreement. Since the Portfolios had not commenced operations as of the date of this SAI, to date, no amounts have been paid to the Sub-Administrator for services rendered to the Portfolios.

Placement Agent. Under the Placement Agency Agreement, the Placement Agent, as agent for the Portfolios, sells shares of the Portfolios on a continuous basis.

ALPS Distributors, Inc. has agreed to use appropriate efforts to solicit orders for the purchase of shares of the Portfolios, in a manner consistent with a private offering of the Portfolios’ shares. ALPS Distributors, Inc. is the sole principal underwriter for the Portfolios. Its address is 1625 Broadway, Suite 2200, Denver, Colorado 80202. ALPS Distributors, Inc. does not receive any fees or commissions for underwriting services rendered to the Portfolios.

The Portfolios’ service providers bear all expenses in connection with the performance of their services and each Portfolio bears the expenses incurred in its operations. Expenses paid by each Portfolio include, but are not limited to:

Any general expenses of the Trust that are not readily identifiable as belonging to a particular investment portfolio are allocated among all investment portfolios of the Trust by or under the direction of the Board. The Board determines how to apportion those expenses in a fair and equitable manner. The Adviser and the Administrator may voluntarily waive all or a portion of their fees and reimburse certain Portfolio expenses from time to time.

Proxy Voting Policies. As a general matter, the Board has delegated to the Adviser responsibility for voting the proxies of the companies held by the Portfolios according to guidelines established by the Board. These policies and procedures seek to use proxy voting as a tool to promote positive returns for long-term shareholders. The foundation of the proxy policies and procedures is that public companies that follow sound corporate governance practices which are responsive to shareholders will in the long run produce better investment returns than companies that do not follow such practices.

The Proxy Voting Policies and Procedures for the Portfolios are attached as Appendix A to this SAI. The Adviser has adopted the Portfolios’ Proxy Voting Policies and Procedures.

No later than August 31^st of each year, the Portfolios will be required to file with the SEC their proxy voting record for the 12-month period ending June 30 on Form N-PX. After June 30, 2006, an annual record of all proxy votes cast for the Portfolios during the most recent 12 months or since the inception of the Portfolios can be obtained without charge on the SEC’s website at www.sec.gov. The most recent Form N-PX will also be available without charge, upon request, by calling 1-800-958-6457.

Code of Ethics. The Adviser, Sub-Adviser, Placement Agent, and the Trust have each adopted a code of ethics under Rule 17j-1 of the Investment Company Act. The Trust’s code of ethics, by relying on the codes of the underlying service providers, permits personnel of the above-named service providers or officers of the Portfolios, subject to the provisions of the relevant code of ethics, to invest in securities, including securities that may be purchased or held by the Portfolios. Under the codes of ethics of the Adviser, the Sub-Adviser, and the Placement Agent, any of the Portfolios’ access persons covered by such codes of ethics must pre-clear personal securities transactions. Each code of ethics is designed to ensure that employees conduct their personal securities transactions in a manner that does not create an actual or potential conflict of interest to the business or fiduciary responsibilities of the Portfolios’ service providers or officers. In addition, the Adviser’s and Sub-Adviser’s codes of ethics establish standards prohibiting the trading in or recommending of securities based on material, nonpublic information or the divulgence of such information to others. There can be no assurance that the codes of ethics will be effective in preventing such activities. The codes of ethics may be examined at the office of the SEC in Washington, DC or on the Internet from the SEC’s website at http://www.sec.gov.

Portfolio Transactions and Brokerage. Under the general supervision of the Board, the Adviser or the Sub-Adviser make investment decisions for the Portfolios and oversee the placement of orders.

Each Portfolio invests in securities that are purchased and sold in transactions with brokers or dealers that may charge a commission. A discussion of those practices is included below.

The Sub-Adviser selects broker-dealers to execute transactions on behalf of each of the Portfolios using its best efforts to seek the best overall terms available. In assessing the best overall terms available for any transaction, the Sub-Adviser considers all factors it deems relevant, including, but not limited to, the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker-dealer, anonymity and confidentiality, promptness, the net results of specific transactions, the difficulty of execution, the size of the order, the operational facilities of the broker-dealer, the broker-dealer’s risk in positioning a block of securities, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. While the Sub-Adviser generally seeks reasonably competitive spreads or commissions, the Portfolios will not necessarily pay the lowest spread or commission available.

When an investment adviser or sub-adviser causes a fund to pay a broker-dealer that furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, the fund may be considered to have paid “soft dollars” for the brokerage and research services provided by the broker-dealer. The Board has adopted a policy that prohibits the

Sub-Adviser from causing the Portfolios to execute transactions with broker-dealers in order to generate soft dollar credits to pay for the brokerage and research services provided by the broker-dealer. However, there will be occasions when the Sub-Adviser, in the exercise of its duty to seek best execution, determines that a broker-dealer that furnishes brokerage and research services for a higher commission than that which might be charged by another broker-dealer for effecting the same transaction will in fact provide the best execution available under the circumstances. In that event, the Portfolios may receive research that was not being considered by the Sub-Adviser as part of its efforts to seek best execution and part of the commission paid may be considered “soft dollars.” Unsolicited research might consist of reports and statistics on specific companies or industries, general summaries of groups of bonds and their comparative earnings and yields, or broad overviews of the securities markets and the economy. Shareholders of the Portfolios should understand that the unsolicited research provided by such brokers may or may not be useful to the Sub-Adviser in connection with the Sub-Adviser’s services to the Portfolios, the Portfolios or the Sub-Adviser’s other clients. Supplementary research information so received is in addition to, and not in lieu of, services required to be performed by the Sub-Adviser and does not reduce the advisory fees payable to the Adviser by the Portfolios or the sub-advisory fee payable to the Sub-Adviser by the Adviser. It is possible that certain of the supplementary research or other services received will primarily benefit one or more other accounts for which investment discretion is exercised. Conversely, a Portfolio may be the primary beneficiary of the research or services received as a result of portfolio transactions effected for such other account or investment company.

Transactions on U.S. stock exchanges generally involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. Transactions on foreign stock exchanges involve payment for brokerage commissions that are generally fixed. Over-the-counter issues, including corporate debt and government securities, are normally traded through dealers on a “net” basis (i.e., without commission), or directly with the issuer. With respect to over-the-counter transactions, the Sub-Adviser will normally deal directly with dealers who make a market in the instruments except in those circumstances where more favorable prices and execution are available elsewhere. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer’s mark-up or mark-down.

Each of the Portfolios may participate, if and when practicable, in bidding for the purchase of portfolio securities directly from an issuer in order to take advantage of the lower purchase price available to members of a bidding group. A Portfolio will engage in this practice, however, only when the Sub-Adviser believes such practice to be in the Portfolio’s best interests.

Investment decisions for each Portfolio and for other investment accounts managed by the Sub-Adviser are made independently of each other in the light of differing conditions. However, the same investment decision may be made for two or more of such accounts. When a purchase or sale of the same security is made at substantially the same time on behalf of a Portfolio and one or more other accounts, the transaction will be averaged as to price, and available investments allocated as to amount, in a manner the Sub-Adviser believes to be equitable to each such account. Although the Sub-Adviser seek the most favorable overall net results for all of the accounts in any aggregated transaction, in some cases, this practice may adversely affect the price paid or received by the Portfolios or the size of the position obtained or sold by the Portfolios. To the extent permitted by law, the Sub-Adviser may aggregate the securities to be sold or purchased for the Portfolios with those to be sold or purchased for other investment companies or accounts in order to obtain best execution. However, the Sub-Adviser must designate that Portfolio shares included in any aggregated trade may not be used to generate soft dollar credits.

The Portfolios will not purchase any securities while the Adviser or Sub-Adviser or any affiliated person (as defined in the Investment Company Act) is a member of any underwriting or selling group for such securities except pursuant to procedures adopted by the Board, in accordance with Rule 10f-3 under the Investment Company Act.

Under the Investment Company Act, the Adviser, Sub-Adviser, the Placement Agent and their affiliates are prohibited from knowingly dealing with the Portfolios as a principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC or an exemption is otherwise available.

Information on brokerage commissions paid by the Portfolios and their regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) is not provided because the Portfolios have not commenced operations prior to the date of this SAI.

Turnover Rate. The turnover rate of each Portfolio is calculated by dividing the lesser of the Portfolio’s annual sales or purchases of portfolio securities (exclusive of purchases or sales of securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities held by the Portfolio during the year.

Information on the turnover rate of each of the Portfolios is not provided because the Portfolios had not commenced operations prior to the date of this SAI. Significant changes in turnover rates from year to year are primarily due to varying levels of purchase and redemption activity in a Portfolio’s shares and changes in the underlying indices the Portfolios are designed to track.

Disclosure of Portfolio Holdings. The Portfolios have adopted portfolio holdings disclosure policies and procedures to govern the disclosure of the securities holdings of the Portfolios (“Disclosure Policy”). The Disclosure Policy is designed to protect the confidentiality of the non-public portfolio holdings information of the Portfolios, to prevent the selective disclosure of the information, and to ensure compliance by the Portfolios with the federal securities laws, including the Investment Company Act. The Portfolios and their service providers must adhere to the Disclosure Policy.

No information concerning the portfolio holdings of the Portfolios may be disclosed to any unaffiliated third party, except as provided for in the Disclosure Policy and as authorized by the officers of the Trust, as applicable. This prohibition does not apply to information sharing with the Portfolios’ service providers, including advisers and sub-advisers to the Portfolios, independent registered public accountants, counsel, administrator, sub-administrator, or custodian, who require access to such information in order to fulfill their contractual duties to the Portfolios. These policies apply to disclosure of portfolio holding information to all categories of persons, including, without limitation, individual investors, institutional investors, intermediaries that distribute the Portfolios’ shares, third-party service providers other than the service providers identified on pages 2-3 of this SAI and counsel to the Portfolios identified under the heading “Other Information – Legal Counsel,” rating and ranking organizations and affiliated persons of the Portfolios. However, pursuant to the terms of the Custodian Agreement, the Custodian may aggregate portfolio holding information with similar information concerning other customers of the Custodian for use by the Custodian in the construction of statistical models, provided that such aggregated information represents a sufficiently large sample that portfolio holdings information can not be identified, either directly or by inference or implication, by reviewing the statistical models.

As a matter of regular course, the Portfolios’ and the Portfolios’ service providers have access to information regarding the holdings of each of the Portfolios on a daily basis. However, the Portfolios and their service providers are restricted from disclosing such information except in accordance with the Disclosure Policy as it relates to the Portfolios. In each instance listed in this paragraph, the disclosure of portfolio holdings of the Portfolios may be without any lag.

In order to facilitate the review of the Portfolios by certain mutual fund analysts and rating agencies, such as Morningstar and Lipper Analytical Services, as well as pricing services, proxy voting services, or other entities, each Portfolio or the Trust may from time to time, to the extent permitted under applicable law, distribute non-public information regarding a Portfolio, including portfolio holdings information, more frequently to such entities that have a legitimate business purpose in receiving such information. Any recipient of non-public information will be subject to a confidentiality agreement that contains, at a minimum, provisions specifying that: (1) the Portfolios’ non-public information provided is the confidential property of the Portfolios and may not be used for any purpose except in connection with the provision of services to the Portfolios and, in particular, that such information may not be traded upon; (2) the recipient of the non-public information agrees to limit access to the information to its employees and agents who are subject to a duty to keep and treat such information as confidential; and (3) upon written request from the Portfolios, the recipient of the non-public information shall promptly return or destroy the information. The Portfolios do not receive compensation or consideration in connection with the distribution of non-public portfolio information. In each instance listed in this paragraph, the disclosure of portfolio holdings of the Portfolios may be without any lag.

In addition, to the extent that an affiliate of the Adviser is a shareholder of the Portfolios, that affiliate may receive, from time to time, information regarding the portfolio holdings of the Portfolios. Such disclosure will be subject to a confidentiality agreement and may be provided without any lag.

The chief compliance officer of the Trust is responsible for ensuring that the Portfolios have adopted and implemented policies and procedures reasonably designed to ensure compliance with the Disclosure Policy and, to the extent necessary, the chief compliance officer shall monitor the Portfolios’ compliance with the Disclosure Policy.

Any exceptions to the Disclosure Policy may be made only if approved by the chief compliance officer of the Trust upon determining that the exception is in the best interests of the Portfolios, as applicable, and their shareholders. The chief compliance officer must report any exceptions made to the Disclosure Policy to the Board at its next regularly scheduled meeting.

Whenever portfolio holdings disclosure made pursuant to these procedures involves a conflict of interest between the Portfolios’ shareholders on one hand and the Portfolios’ investment adviser, sub-adviser or any affiliated person of the Portfolios on the other, the disclosure may not be made unless a majority of the independent trustees of the affected entity or a majority of a board committee consisting solely of the independent trustees of the affected entity approves such disclosure.

Each violation of the Disclosure Policy must be reported to the chief compliance officer. If the chief compliance officer, in the exercise of his or her duties, deems that such violation constitutes a “Material Compliance Matter” within the meaning of Rule 38a-1 under the Investment Company Act, he/she shall report it to the Board, as required by Rule 38a-1.

Quarterly Disclosures by the Portfolios. The Portfolios will publicly disclose the complete schedule of each Portfolio’s holdings, as reported on a calendar quarter-end basis, by making the information publicly available in a manner consistent with requirements established by the SEC. You may view a Portfolio’s complete schedule of portfolio holdings for the most recently completed quarter online at www.aarpfunds.com, or obtain a copy of the schedule by calling the Portfolios at 1-800-958-6457. Each Portfolio’s holdings will be posted at www.aarpfunds.com after the Portfolios have filed the required information with the SEC.

The Portfolios file their complete schedules of securities holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Portfolios’ Forms N-Q will be available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

Calculation of NAV. The offering memorandum discusses the method the Portfolios use to calculate their NAV per share and the time when such calculations are made. Included below is a description of the procedures used by the Portfolios in valuing their assets. Equity securities traded on a national securities exchange, except for securities traded in the Nasdaq National Market or the Nasdaq SmallCap Market, are valued at the last sale price. If there were no sales of such securities on the date of valuation, but where closing bid and asked prices for such day are available, then such securities may be valued, subject to approval by the Trust’s pricing committee, which is made up of officers of the Trust and employees of the Adviser as designated from time to time by management of the Adviser and ratified by the Board, at the mean between the most recently quoted bid and asked prices. Equity securities traded in the Nasdaq National Market or the Nasdaq SmallCap Market are valued at the Nasdaq Official Closing Price (“NOCP”). The NOCP will be calculated at 4:00:02 p.m. Eastern time on each business day as follows: (a) if the last traded price of a listed security reported by a Nasdaq member falls within the current best bid and ask price, then the NOCP will be the last traded price; (b) if the last traded price falls outside of that range, however, then the NOCP will be the last bid price (if higher) or the last ask price (if lower). Equity securities traded on other over-the-counter markets, including listed securities for which the primary market is believed to be over-the-counter, are valued at the mean between the most recently quoted bid and asked prices. Bonds are valued at the evaluated bid prices.

In the event that market quotations, as described above, are not readily available for any security, the security may be valued using pricing services or broker-dealer quotations. Each of the Portfolios may employ pricing services selected by the Adviser or Sub-Adviser, and approved by the Board, which may use generally accepted pricing methodologies. This may result in the securities being valued at a price different from the price that would have been determined had the pricing service not been used. If a pricing service cannot provide a valuation for the security, the security may be valued at the most recent bid quotation or evaluated price, as applicable, obtained from one or more broker-dealers that are known to follow the issue.

Where no last sales price is available for a Depositary Receipt (defined to include an ADR, GDR, EDR or NYR) on the exchange or market where it is principally traded, the Depositary Receipt will be valued at the mean between the most recently quoted bid and asked prices of its underlying security on the valuation date, multiplied by (a) the relevant exchange rate and (b) the conversion rate of the Depositary Receipt to one share of its underlying security.

If a Depositary Receipt cannot be valued pursuant to the preceding sentence, then the Depositary Receipt will be valued at the closing sales price of its underlying security on the security’s principal foreign exchange, multiplied by the relevant exchange rate and the conversion rate of the Depositary Receipt to one share of its underlying security.

Securities which are principally traded outside of the U.S. are valued at the last quoted sales price on the security’s principal exchange or market, except for less actively-traded securities trading on the London Stock Exchange, generally referred to as “Non-SETS” traded securities, the closing price will be the mid-price between the bid and ask prices. All other securities traded on the London Stock Exchange are valued at the last quoted sales price or other closing price determined by the London Stock Exchange. If a security is valued in a currency other than U.S. dollars, the value will be converted to U.S. dollars using the prevailing exchange rate at the close of the London Stock Exchange.

Notwithstanding the foregoing, if an event has occurred after the relevant foreign market has closed, but prior to the calculation of the relevant Portfolio’s NAV that is likely to materially affect the value of any foreign security held by the Portfolio (i.e., a “significant event”), the security will be valued by the Trust’s pricing committee, using pricing procedures that have been approved by the Board in order to determine the security’s fair value. The procedures require the pricing committee to meet when a security’s market price is not readily available. In order to guard against any conflict of interest with respect to pricing determinations, members of an affected Portfolio’s portfolio management team will not serve on the pricing committee in a voting capacity with respect to any pricing determination for that Portfolio. The pricing committee provides a forum for considering time-sensitive valuation issues, including those relating to market closures, changes in illiquid security values and other events that may have a potentially material impact on security values. The pricing committee will review all the valuation methodologies used by it and will take any actions necessary to ensure that appropriate procedures and internal controls are in place to address valuation issues. Generally, two voting members of the pricing committee are required to approve a valuation determination or procedural change. However, due to the unexpected nature of many day-to-day pricing matters and the limited amount of time available to make a pricing determination, a single member of the pricing committee may act on behalf of the full pricing committee when the other members are not readily available to participate in the determination before the applicable deadline. The pricing committee is required to report any fair valuations of the Portfolios’ securities to the board of trustees of the Portfolios as soon after it determines such a fair value price as is practicable.

Examples of potentially significant events that could affect the value of an individual security include corporate actions by the issuer, announcements by the issuer relating to its earnings or products, regulatory news, natural disasters and litigation. Examples of potentially significant events that could affect multiple securities held by a Portfolio include governmental actions, natural disasters, and armed conflicts.

In addition to fair valuations made by the pricing committee with respect to significant events, restricted and illiquid securities and securities and assets for which a current market price is not readily available will be valued by the pricing committee at their fair value pursuant to pricing procedures adopted by the Board.

Minutes of all pricing committee meetings are provided to the Board at its next regularly scheduled meeting. The pricing committee, in its discretion, may request the Board’s input on any particular issue.

All cash, receivables and current payables are carried on each Portfolio’s books at their face value. Other assets, if any, are valued at fair value as determined in good faith under the supervision of the Board.

In-Kind Purchases. Payment for shares of a Portfolio may, in the discretion of the Adviser, be made in the form of securities that are permissible investments for such Portfolio as described in the offering memorandum. For further information about this form of payment please contact the Placement Agent. In connection with an in-kind securities payment, a Portfolio will require, among other things, that the securities (a) meet the investment objectives and policies of such Portfolio; (b) are acquired for investment and not for resale; (c) are liquid securities that are not restricted as to transfer either by law or liquidity of markets; (d) have a value that is readily ascertainable by a listing on a nationally recognized securities exchange; and (e) are valued on the day of purchase in accordance with the pricing methods used by such Portfolio and that such Portfolio receives satisfactory assurance that (1) it will have good and marketable title to the securities received by it; (2) that the securities are in proper form for transfer to such Portfolio; and (3) adequate information will be provided concerning the basis and other tax matters relating to the securities. Call the Portfolios at 1-800-958-6457 for more information.

Investment Minimums. The Portfolios currently have no minimum investment requirements.

Redemptions. The redemption price for Portfolio shares is the NAV next determined after receipt of the redemption request in proper form. The Portfolios consider purchase, exchange or redemption orders to be in “proper form” when they receive all required information, including properly completed and signed documents. Payment of the redemption price may be wholly or partly in securities or other assets at the value of such securities or assets used in the determination of NAV, or may be in cash.

The Portfolios or their authorized agents may authorize one or more financial services institutions to receive redemption orders. To the extent permitted by law, a Portfolio will be deemed to have received a redemption order when its authorized agent receives the order. Orders will be priced at the applicable Portfolio’s NAV next computed after they are received by the Portfolio or its authorized agent in proper form.

Involuntary Redemptions. Each Portfolio reserves the right to involuntarily redeem any shareholder’s account, subject to applicable law, if:

Involuntary redemptions will be paid to the shareholder at the same price and in the same manner as are voluntary redemptions.

Other Purchase and Redemption Information. Each of the Portfolios reserves the right to suspend or postpone redemptions during any period when: (a) trading on the NYSE is restricted by applicable rules and regulations of the SEC; (b) the NYSE is closed other than for customary weekend and holiday closings; (c) the SEC has by order permitted such suspension or postponement for the protection of the shareholders or (d) an emergency, as determined by the SEC, exists making disposal of portfolio securities or valuation of net assets of a Portfolio not reasonably practicable. Upon the occurrence of any of the foregoing conditions, each of the Portfolios may also suspend or postpone the recording of the transfer of its shares.

Each Portfolio’s investment objective is a non-fundamental policy and may be changed without the authorization of the holders of a majority of a Portfolio’s outstanding shares and without prior notice. All other investment policies stated in the offering memorandum or this SAI, unless specifically designated as fundamental, are non-fundamental policies and may be changed by the Board without the authorization of the Portfolios’ shareholders and without notice. There can be no assurance that the Portfolios will achieve their objectives.

Currently there are three Portfolios in the Trust. The investment objective and principal investment strategies of each Portfolio are set out below.

The U.S. Stock Market Portfolio seeks to produce the returns provided by the Morgan Stanley Capital International (“MSCI”) U.S. Investable Market 2500 Index as closely as possible, before deduction of expenses of the Portfolio.

The International Stock Market Portfolio seeks to produce the returns provided by the MSCI Europe, Australasia and Far East (“EAFE”) Index as closely as possible, before deduction of expenses of the Portfolio.

The U.S. Bond Market Portfolio seeks to produce the returns provided by the Lehman Brothers Aggregate Bond Index, before deduction of expenses of the Portfolio, by investing in a well-diversified portfolio that is representative of the domestic investment grade bond market.

The Portfolios have names that suggest the Portfolios will focus on a type of investment, within the meaning of Rule 35d-1 of the Investment Company Act. The Trust has adopted a non-fundamental policy for each of the Portfolios to invest at least 80% of the value of its assets (net assets plus the amount of any borrowing for investment purposes) in the particular type of investments suggested by its name. The U.S. Stock Market Portfolio has adopted a policy to invest, under normal circumstances, at least 80% of the

value of its assets plus the amount of any borrowings it may make for investment purposes, in stocks traded on stock exchanges in the United States; the International Stock Market Portfolio has an identical policy regarding its investments in stocks trading outside of the United States; and the U.S. Bond Market Portfolio has an identical policy regarding its investments in bonds traded on the United States bond market. If the Trust determines to change any of these policies, it will provide at least 60 days’ prior notice to the affected Portfolios’ shareholders.

To the extent consistent with its investment objective and restrictions (set forth near the end of the text that follows), each Portfolio may invest in the following instruments and use the following techniques. Note that while the instruments and techniques are divided into Cash, Stocks, Bonds and Derivatives, many belong in multiple categories.

Temporary Defensive Position. During periods of unusual economic or market conditions or for temporary defensive purposes or liquidity, a Portfolio may invest without limit in cash and in U.S. dollar denominated high quality money market and other short term investments. These investments may result in a lower yield than would be available from investments with a lower quality or longer term.

Cash Sweep Program. Each Portfolio may participate in a Cash Sweep Program. In the Cash Sweep Program, uninvested cash balances are used to purchase shares of money market funds. The Cash Sweep Program reduces the risk of counterparty default on repurchase agreements and the market risk associated with direct purchases of short term obligations, while providing high current money market rates of return, ready liquidity and increased diversity of holdings.

Local Currency. Each Portfolio may invest excess cash positions in local currencies (non-U.S. currencies) to more closely approximate benchmark performance. Investing directly in local currency also involve risks such as future unfavorable political and economic developments, withholding tax, seizures of foreign deposits, currency controls, interest limitations, and other governmental restrictions that might affect repayment or payment of interest.

Cash Reserves. Each Portfolio may hold portions of its assets in short-term debt instruments with remaining maturities of 397 days or less pending investment or to meet anticipated redemptions and day-to-day operating expenses. Short-term debt instruments consist of: (a) short-term obligations of the U.S. government, its agencies, instrumentalities, authorities or political subdivisions; (b) other short-term debt securities rated at the time of purchase Aa or higher by Moody’s Investors Service, Inc. (“Moody’s”) or AA or higher by Standard & Poor’s Rating Group (“S&P”) or, if unrated, of comparable quality in the opinion of the Sub-Adviser; (c) commercial paper; (d) bank obligations, including negotiable certificates of deposit, time deposits and bankers’ acceptances; and (e) repurchase agreements. At the time a Portfolio invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer’s parent must have outstanding debt rated Aa or higher by Moody’s or AA or higher by S&P or outstanding commercial paper or bank obligations rated Prime-1 by Moody’s or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of the Sub-Adviser.

Eurodollar Certificates of Deposit (“ECDs”), Eurodollar Time Deposits (“ETDs”) and Yankee Certificates of Deposit (“YCDs”). Each Portfolio may invest in ECDs, ETDs and YCDs. ECDs and ETDs are U.S. dollar-denominated certificates of deposit issued by foreign branches of domestic banks and foreign banks. YCDs are U.S. dollar-denominated certificates of deposit issued by U.S. branches of

foreign banks. Different risks than those associated with the obligations of domestic banks may exist for ECDs, ETDs and YCDs because the banks issuing these instruments, or their domestic or foreign branches, are not necessarily subject to the same regulatory requirements that apply to domestic banks, such as loan limitations, examinations and reserve, accounting, auditing, recordkeeping and public reporting requirements. Obligations of foreign issuers also involve risks such as future unfavorable political and economic developments, withholding tax, seizures of foreign deposits, currency controls, interest limitations, and other governmental restrictions that might affect repayment of principal or payment of interest, or the ability to honor a credit commitment.

Repurchase Agreements. Each Portfolio may enter into repurchase agreements with banks and other financial institutions, such as broker-dealers. In substance, a repurchase agreement is a loan for which the Portfolio receives securities as collateral. Under a repurchase agreement, the Portfolio purchases securities from a financial institution that agrees to repurchase the securities at the Portfolio’s original purchase price plus interest within a specified time (normally one business day). The Portfolios will limit repurchase transactions to those member banks of the Federal Reserve System and broker-dealers whose creditworthiness the Adviser or Sub-Adviser, as applicable, considers satisfactory. Should the counterparty to a transaction fail financially, the Portfolios may encounter delay and incur costs before being able to sell the securities, or may be prevented from realizing on the securities. Further, the amount realized upon the sale of the securities may be less than that necessary to compensate the Portfolios fully.

Reverse Repurchase Agreements. The Portfolios may enter into reverse repurchase agreements. In substance, a reverse repurchase agreement is a borrowing for which a Portfolio provides securities as collateral. Under a reverse repurchase agreement, the Portfolio sells portfolio securities to a financial institution in return for cash in an amount equal to a percentage of the portfolio securities’ market value and agrees to repurchase the securities at a future date at a prescribed repurchase price equal to the amount of cash originally received plus interest on such amount. A Portfolio retains the right to receive interest and principal payments with respect to the securities while they are in the possession of the financial institutions. Cash or liquid high-quality debt obligations equal in value to the repurchase price including any accrued interest will be segregated by the Portfolio’s custodian on the Portfolio’s records while a reverse repurchase agreement is in effect. Reverse repurchase agreements involve the risk that the market value of securities sold by a Portfolio may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements also involve a risk of default by the counterparty, which may adversely affect a Portfolio’s ability to reacquire the underlying securities.

Section 4(2) Commercial Paper. Each Portfolio may also invest in commercial paper issued in reliance on the so-called private placement exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (“Section 4(2) paper”). Section 4(2) paper is restricted as to disposition under the federal securities laws and generally is sold to institutional investors that agree that they are purchasing the paper for investment and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(2) paper normally is resold to other institutional investors like the Portfolios through or with the assistance of the issuer or investment dealers that make a market in Section 4(2) paper. Section 4(2) paper will not be subject to a Portfolio’s percentage limitations on illiquid securities when the Adviser or Sub-Adviser (pursuant to guidelines adopted by the Board) determines that a liquid trading market exists.

Variable Amount Master Demand Notes. The Portfolios may invest in variable amount master demand notes which are unsecured obligations that are redeemable upon demand and are typically unrated. These instruments are issued pursuant to written agreements between their issuers and holders. The agreements

permit the holders to increase (subject to an agreed maximum) and the holders and issuers to decrease the principal amount of the notes, and specify that the rate of interest payable on the principal fluctuates according to an agreed formula. Generally, changes in interest rates will have a smaller effect on the market value of these securities than on the market value of comparable fixed income obligations. Thus, investing in these securities generally allows less opportunity for capital appreciation and depreciation than investing in comparable fixed income securities. There may be no active secondary market with respect to a particular variable rate instrument.

Foreign Currency Exchange Contracts. The International Stock Market Portfolio and the U.S. Stock Market Portfolio, to a lesser extent, may invest in foreign currency exchange contracts. The Portfolios have the authority to deal in forward foreign currency exchange contracts (including those involving the U.S. dollar). This is accomplished through individually negotiated contractual agreements to purchase or to sell a specified currency at a specified future date and price set at the time of the contract. A Portfolio’s dealings in forward foreign currency exchange contracts may be with respect to a specific purchase or sale of a security or with respect to its portfolio positions generally.

Foreign Securities. The International Stock Market Portfolio and the U.S. Stock Market Portfolio may invest in securities of foreign issuers. Investments in foreign securities involve risks of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments. There may be less publicly available information about foreign companies comparable to the reports and ratings published regarding U.S. companies. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. Many foreign markets have substantially less volume than either the established domestic securities exchanges or the OTC markets. Securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commission rates in foreign countries, which may be fixed rather than subject to negotiation as in the U.S., are likely to be higher. In many foreign countries there is less government supervision and regulation of securities exchanges, brokers and listed companies than in the U.S., and capital requirements for brokerage firms are generally lower. Settlement of transactions in foreign securities may, in some instances, be subject to delays and related administrative uncertainties.

The value of the foreign securities held by the Portfolios may be significantly affected by changes in currency exchange rates. Each Portfolio endeavors to buy and sell foreign currencies on favorable terms. Price spreads on currency exchange (to cover service charges) may be incurred, particularly when a Portfolio changes investments from one country to another or when proceeds from the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Each Portfolio may be affected either favorably or unfavorably by fluctuations in the relative rates of exchange between the currencies of different nations, exchange control regulations and indigenous economic and political developments.

Convertible Securities. Each Portfolio may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock of the same or a different issuer within a particular time period at a specified price or formula. A convertible security entitles the holder to receive the interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion or exchange, such securities ordinarily provide a stream of income with generally higher yields than common stocks of the same or similar issuers, but

lower than the yield of non-convertible debt. Of course, there can be no assurance of current income because issuers may default on their obligations. And there can be no assurance of capital appreciation because the value of the underlying common stock will fluctuate. Because of this conversion feature, the Portfolios consider some convertible securities to be equity securities.

The price of a convertible security will fluctuate in some relationship to changes in the price of the underlying asset. A convertible security is subject to risks in relation to the activities of the issuer and general market and economic conditions. The income payments typically paid on a convertible security may cushion the security against declines in the price of the underlying asset. However, the income stream from these payments causes fluctuations based on changes in interest rates and the credit quality of the issuer. Normally, the value of a convertible security is a function of its yield in comparison with yields of the other securities of comparable maturity and quality that do not have a conversion privilege and its market value worth if converted or exchanged into the underlying common stock.

The convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by the Portfolios is called for redemption, the Portfolios will be required to permit the issuer to redeem the security and convert it to underlying common stock or to cash, or would sell the convertible security to a third party. A convertible security may feature a put option that permits the holder of the convertible security to sell that security back to the issuer at a predetermined price. The Portfolios typically invest in convertible securities for their favorable price characteristics and total return potential and normally would not exercise an option or convert unless the security is called or conversion is forced.

Restricted and Illiquid Securities. Each Portfolio may invest in restricted or illiquid securities, including Rule 144A securities. Rule 144A securities are securities that are privately placed with and traded among qualified investors rather than the general public. Although Rule 144A securities are considered restricted securities, they may not necessarily be illiquid. Each Portfolio will invest no more than 15% of its net assets in illiquid securities or securities that are not readily marketable, including repurchase agreements and time deposits of more than seven days’ duration. The absence of a regular trading market for illiquid securities imposes additional risks on investments in these securities. Illiquid securities may be difficult to value and may often be disposed of only after considerable expense and delay.

Other Investment Company Shares. Each Portfolio may, to the extent permitted under the Investment Company Act and exemptive rules and orders, invest in shares of other investment companies which invest exclusively in money market instruments or in investment companies with investment policies and objectives which are substantially similar to the Portfolio’s. As a matter of non-fundamental policy, the Portfolios may not acquire any securities of open-end investment companies or registered unit investment trusts in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the Investment Company Act. These investments may be made temporarily, for example, to invest uncommitted cash balances or, in limited circumstances, to assist in meeting shareholder redemptions.

REITs. Each Portfolio may invest in real estate investment trusts (“REITs”). Equity REITs are defined as REITs with 75% or greater of their gross invested book assets invested directly or indirectly in the equity ownership of real estate and their value depends upon that of the underlying properties. Mortgage REITs are defined as REITs with 75% or more of their gross invested in book assets invested directly or indirectly in mortgages. Mortgage REITs make construction, development or long-term mortgage loans, and are sensitive to the credit quality of the borrower. Hybrid REITs are defined as not meeting the equity or mortgage tests. The values of REITs are also affected by management skill, cash flow, and tax and regulatory requirements.

Lending of Portfolio Securities. Each Portfolio has the authority to lend portfolio securities to brokers, dealers and other financial organizations in amounts up to 33 1/3% of the total value of its assets. Any such loan must be continuously secured by collateral in cash or cash equivalents maintained on a current basis in an amount at least equal to the market value of the securities loaned by a Portfolio. A Portfolio would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned, and would receive an additional return that may be in the form of a fixed fee or a percentage of the collateral. A Portfolio would have the right to call the loan and obtain the securities loaned at any time on notice of not more than five business days. In the event of bankruptcy or other default of the borrower, a Portfolio could experience both delays in liquidating the loan collateral or recovering the loaned securities and losses including (a) possible decline in the value of collateral or in the value of the securities loaned during the period while the Portfolio seeks to enforce its rights thereto, (b) possible sub-normal levels of income and lack of access to income during this period, and (c) expenses of enforcing its rights.

Forward Commitments. Each Portfolio may contract to purchase securities for a fixed price at a future date beyond customary settlement time. When effecting such transactions, cash or marketable securities held by a Portfolio of a dollar amount sufficient to make payment for the securities to be purchased will be segregated on a Portfolio’s records at the trade date and maintained until the transaction is settled. The failure of the other party to complete the transaction may cause the Portfolio to miss an advantageous price or yield. Forward commitments involve risk of loss if the value of the security to be purchased declines prior to settlement date, or if the other party fails to complete the transaction.

Exchange Traded Funds. Each Portfolio may purchase shares of exchange-traded funds, “ETFs.” Typically, a Portfolio would purchase shares to obtain exposure to all or a portion of the stock or bond market. ETFs are generally baskets of securities that either replicate or sample an index or a portion of an index. Most ETFs are investment companies and are therefore subject to the same limitations on and the same risks as a Portfolio investing in other investment company shares. The price of an ETF can fluctuate over a wide range, and a Portfolio could lose money if the value of the basket of securities owned by the ETF goes down. ETFs have additional risks to investment companies: the market price of the ETF’s shares may trade at a discount to their NAV, and active trading market for the ETF’s shares may not develop enough to ensure liquidity, and the ETF may be subject to stock exchange activity such as de-listing and halting of trading activity.

Investment-Grade Bonds. Each Portfolio may invest in corporate notes and bonds that are rated investment-grade by a Nationally Recognized Statistical Rating Organization or, if unrated, are determined by the Adviser or Sub-Adviser, as applicable to be of comparable quality. Investment-grade securities include securities rated Baa by Moody’s or BBB- by S&P (and securities of comparable quality), which securities have speculative characteristics. A description of the applicable credit ratings is set forth in Appendix B to this SAI.

Corporate Bonds. Corporate bonds are debt securities issued by corporations whose value may fluctuate based on changes in interest rates and the credit quality of the issuer. In general, the prices of such securities vary inversely with interest rates. As prevailing interest rates fall, the prices of bonds and other securities that trade on a yield basis generally rise. When prevailing interest rates rise, bond prices generally fall.

Variable and Floating Rate Securities. Each Portfolio may invest in variable and floating rate securities. A variable rate security provides for the automatic establishment of a new interest rate on set dates. Interest rates on these securities are ordinarily tied to, and are a percentage of, a widely recognized interest rate, such as the yield on 90-day U.S. Treasury bills or the prime rate of a specified bank. These rates may change as often as twice daily. Generally, changes in interest rates will have a smaller effect on the market value of variable and floating rate securities than on the market value of comparable fixed income obligations. Thus, investing in variable and floating rate securities generally allows less opportunity for capital appreciation and depreciation than investing in comparable fixed income securities. Variable rate obligations whose interest is readjusted no less frequently than annually will be deemed to have a maturity equal to the period remaining until the next readjustment of the interest rate.

Mortgage-Backed and Mortgage-Related Securities. The U.S. Bond Market Portfolio may invest in mortgage pass-through certificates. Mortgage pass-through certificates are issued by governmental, government-related and private organizations and are backed by pools of mortgage loans. These mortgage loans are made by savings and loan associations, mortgage bankers, commercial banks and other lenders to home buyers throughout the United States. The securities are “pass-through” securities because they provide investors with monthly payments of principal and interest that, in effect, are a “pass-through” of the monthly payments made by the individual borrowers on the underlying mortgage loans, net of any fees paid to the issuer or guarantor of the pass-through certificates. The principal governmental issuer of such securities is the Government National Mortgage Association (“GNMA”), which is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. Government-related issuers include the Federal Home Loan Mortgage Corporation (“FHLMC”), which is a shareholder-owned government-sponsored enterprise established by Congress, and the Federal National Mortgage Association (“FNMA”), a government sponsored corporation owned entirely by private stockholders. Commercial banks, savings and loan associations, private mortgage insurance companies, mortgage bankers and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may be the originators of the underlying mortgage loans as well as the guarantors of the mortgage-related securities.

Commercial Mortgage-Backed Securities. The U.S. Bond Market Portfolio may invest in commercial mortgage-backed securities (“CMBS”). CMBS are securities created from a pool of commercial mortgage loans. Interest and principal payments from these loans are passed on to the investor according to a particular payment scheme. They may be issued by U.S. government agencies or by private issuers. The credit quality of CMBS depends primarily on the quality of the underlying loans and on the particular deal structure. Generally, deals are structured with senior and subordinate classes. Multiple classes may permit the issuance of securities with payment terms, interest rates, or other characteristics differing from the underlying asset. Classes could include floating interest rates or a scheduled amortization of principal. The individual class is primarily rated based on the degree of seniority or subordination within the entire deal structure. The value of these securities may change because of actual or perceived changes in the creditworthiness of any of the participants in the underlying pool of commercial mortgages including the individual borrowers, their tenants, servicing agent, and the real estate itself.

GNMA Mortgage Pass-Through Certificates (“Ginnie Maes”). The U.S. Bond Market Portfolio may invest in Ginnie Maes. Ginnie Maes represent an undivided interest in a pool of mortgage loans that are insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the

Veterans Administration. Ginnie Maes entitle the holder to receive all payments (including prepayments) of principal and interest owed by the individual mortgagors, net of fees paid to GNMA and to the issuer which assembles the loan pool and passes through the monthly mortgage payments to the certificate holders (typically, a mortgage banking firm), regardless of whether the individual mortgagor actually makes the payment. Because payments are made to certificate holders regardless of whether payments are actually received on the underlying loans, Ginnie Maes are of the “modified pass-through” mortgage certificate type. GNMA is authorized to guarantee the timely payment of principal and interest on the Ginnie Maes as securities backed by an eligible pool of mortgage loans. The GNMA guaranty is backed by the full faith and credit of the United States, and GNMA has unlimited authority to borrow funds from the U.S. Treasury to make payments under the guaranty. The market for Ginnie Maes is highly liquid because of the size of the market and the active participation in the secondary market by securities dealers and a variety of investors.

FHLMC Mortgage Participation Certificates (“Freddie Macs”). The U.S. Bond Market Portfolio may invest in Freddie Macs. Freddie Macs represent interests in groups of specified first lien residential conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. In cases where FHLMC has not guaranteed timely payment of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying loan, but in no event later than one year after it becomes payable. Freddie Macs are not guaranteed by the United States or by any of the Federal Home Loan Banks and do not constitute a debt or obligation of the United States or of any Federal Home Loan Bank. The secondary market for Freddie Macs is highly liquid because of the size of the market and the active participation in the secondary market by FHLMC, securities dealers and a variety of investors.

FNMA Guaranteed Mortgage Pass-Through Certificates (“Fannie Maes”). The U.S. Bond Market Portfolio may invest in Fannie Maes. Fannie Maes represent an undivided interest in a pool of conventional mortgage loans secured by first mortgages or deeds of trust, on one-family to four-family residential properties. FNMA is obligated to distribute scheduled monthly installments of principal and interest on the loans in the pool, whether or not received, plus full principal of any foreclosed or otherwise liquidated loans. The obligation of FNMA under its guaranty is solely the obligation of FNMA and is not backed by, nor entitled to, the full faith and credit of the United States.

The market value of mortgage-related securities depends on, among other things, the level of interest rates, the certificates’ coupon rates and the payment history of the underlying borrowers.

Although the mortgage loans in a pool underlying a mortgage pass-through certificate will have maturities of up to 30 years, the average life of a mortgage pass-through certificate will be substantially less because the loans will be subject to normal principal amortization and also may be prepaid prior to maturity. Prepayment rates vary widely and may be affected by changes in mortgage interest rates. In periods of falling interest rates, the rate of prepayment on higher interest rate mortgages tends to increase, thereby shortening the actual average life of the mortgage pass-through certificate. Conversely, when interest rates are rising, the rate of prepayment tends to decrease, thereby lengthening the average life of the mortgage pass-through certificate. Accordingly, it is not possible to predict accurately the average life of a particular pool. Reinvestment of prepayments may occur at higher or lower rates than the original yield on the certificates. Due to the prepayment feature and the need to reinvest prepayments of principal at current rates, mortgage pass-through certificates with underlying loans bearing interest rates in excess of

the market rate can be less effective than typical noncallable bonds with similar maturities at “locking in” yields during periods of declining interest rates, although they may have comparable risks of declining in value during periods of rising interest rates.

Mortgage-Backed Security Rolls. The U.S. Bond Market Portfolio may enter into “forward roll” transactions with respect to mortgage-backed securities issued by GNMA, FNMA or FHLMC. In a forward roll transaction, the Portfolio will sell a mortgage security to a dealer or other permitted entity and simultaneously agree to repurchase a similar security from the institution at a later date at an agreed upon price. The mortgage securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories than those sold. There are two primary risks associated with the roll market for mortgage-backed securities. First, the value and safety of the roll depends entirely upon the counterparty’s ability to redeliver the security at the termination of the roll. Therefore, the counterparty to a roll must meet the same credit criteria as the Portfolio’s repurchase agreement counterparties. Second, the security that is redelivered at the end of the roll period must be substantially the same as the initial security, i.e., it must have the same original stated term to maturity, be priced to result in similar market yields and must be “good delivery.” Within these parameters, however, the actual pools that are redelivered could be less desirable than those originally rolled, especially with respect to prepayment characteristics.

U.S. Government Securities. Each Portfolio may purchase U.S. Government securities. The types of U.S. Government obligations in which each Portfolio may at times invest include: (a) a variety of U.S. Treasury obligations, which differ only in their interest rates, maturities and times of issuance; and (b) obligations issued or guaranteed by U.S. Government agencies and instrumentalities which are supported by any of the following: (1) the full faith and credit of the U.S. Treasury, (2) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Treasury, (3) discretionary authority of the U.S. Government agency or instrumentality, or (4) the credit of the instrumentality (examples of agencies and instrumentalities are: Federal Land Banks, Federal Housing Administration, Federal Farm Credit Bank, Farmers Home Administration, Export-Import Bank of the United States, Central Bank for Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks, General Services Administration, Maritime Administration, Tennessee Development Bank, Asian-American Development Bank, International Bank for Reconstruction and Development and Federal National Mortgage Association). No assurance can be given that in the future the U.S. Government will provide financial support to such U.S. Government agencies or instrumentalities other than as set forth above, since it is not obligated to do so by law.

When-Issued Securities. Each Portfolio may purchase securities on a when-issued basis. Delivery of and payment for these securities may take place as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period, and no income accrues to the Portfolio until settlement takes place. The Portfolio segregates liquid securities in an amount at least equal to these commitments. For the purpose of determining the adequacy of these securities, the segregated securities will be valued at market. If the market value of such securities declines, additional cash or securities will be segregated on the Portfolio’s records on a daily basis so that the market value of the account will equal the amount of such commitments by the Portfolio. When entering into a when-issued transaction, the Portfolios will rely on the other party to consummate the transaction; if the other party fails to do so, the Portfolios may be disadvantaged.

Securities purchased on a when-issued basis and held by a Portfolio are subject to changes in market value based upon the public’s perception of changes in the level of interest rates. Generally, the value of

such securities will fluctuate inversely to changes in interest rates — i.e., they will appreciate in value when interest rates decline and decrease in value when interest rates rise. Therefore, if in order to achieve higher interest income a Portfolio remains substantially fully invested at the same time that it has purchased securities on a “when-issued” basis, there will be a greater possibility of fluctuation in the Portfolio’s NAV.

When payment for when-issued securities is due, a Portfolio will meet its obligations from then-available cash flow, the sale of segregated securities, the sale of other securities or, and although it would not normally expect to do so, from the sale of the when-issued securities themselves (which may have a market value greater or less than the Portfolio’s payment obligation). The sale of securities to meet such obligations carries with it a greater potential for the realization of capital gains, which are subject to federal income taxes.

TBAs. The U.S. Bond Market Portfolio may invest in TBAs (to be announced) contracts which are contracts to buy or sell mortgage backed securities which will be delivered at agreed-upon dates in the future. TBAs involve risk of loss if the value of the security to be purchased declines prior to the settlement date, or if the other party fails to complete the transaction.

Zero Coupon Securities. The U.S. Bond Market Portfolio may invest in zero coupon securities. Zero coupon securities are notes, bonds and debentures that: (a) do not pay current interest and are issued at a substantial discount from par value; (b) have been stripped of their unmatured interest coupons and receipts; or (c) pay no interest until a stated date one or more years into the future. These securities also include certificates representing interests in such stripped coupons and receipts. Generally, changes in interest rates will have a greater impact on the market value of a zero coupon security than on the market value of the comparable securities that pay interest periodically during the life of the instrument. In order to satisfy a requirement for qualification as a “regulated investment company” (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), the Portfolios must distribute at least 90% of their net investment income, including the original issue discount accrued on zero coupon bonds. Because the Portfolio will not receive cash payments on a current basis from the issuer in respect of accrued original discount, the Portfolio may have to distribute cash obtained from other sources in order to satisfy the 90% distribution requirement. Such cash might be obtained from selling other portfolio holdings of the Portfolio. In some circumstances such sales might be necessary in order to satisfy cash distribution requirements even though investment considerations might otherwise make it undesirable for the Portfolio to sell such securities at such time.

The U.S. Bond Market Portfolio may invest in stripped securities that have been stripped by their holder, typically a custodian bank or investment brokerage firm. A number of securities firms and banks have stripped the interest coupons and resold them in custodian receipt programs with different names such as Treasury Income Growth Receipts (“TIGRS”) and Certificates of Accrual on Treasuries (“CATS”). Privately-issued stripped securities such as TIGRS and CATS are not themselves guaranteed by the U.S. Government, but the future payment of principal or interest on U.S. Treasury obligations which they represent is so guaranteed.

Asset-Backed Securities. The U.S. Bond Market Portfolio may invest in asset-backed securities. Asset-backed securities represent undivided fractional interests in pools of instruments, such as consumer loans, and are similar in structure to mortgage-related securities. Payments of principal and interest are passed through to holders of the securities and are typically supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or by priority to certain of the borrower’s other securities. The degree of credit enhancement varies, generally applying only until exhausted and covering only a fraction of the security’s par value. If the credit enhancement of an asset-backed security held by a Portfolio has been exhausted, and if any required payments of principal and interest are not made with respect to the underlying loans, the Portfolio may experience loss or delay in receiving payment and a decrease in the value of the security.

Treasury Inflation-Protection Securities. The U.S. Bond Market Portfolio may invest in Treasury Inflation –Protection Securities (“TIPS”), a type of inflation-indexed Treasury security. TIPS provide for semiannual payments of interest and payment of principal at maturity. In general, each payment will be adjusted to take into account any inflation or deflation that occurs between the issue date of the security and payment date based on the Consumer Price Index for All Urban Consumers. Each semiannual payment of interest will be determined by multiplying a single fixed rate of interest by the inflation adjusted principal amount of the security for the date of the interest payment. Thus, although the interest rate will be fixed, the amount of each interest payment will vary with changes in the principal of the security as adjusted for inflation and deflation. TIPS also provide for an additional payment (a “minimum guarantee payment”) at maturity if the security’s inflation adjusted principal amount for the maturity date is less than the security’s principal amount at issuance. The amount of the additional payment will equal the excess of the security’s principal amount at issuance over the security’s inflation adjusted principal amount for the maturity date.

A derivative security is a financial arrangement the value of which is based on, or derived from, a traditional security, asset, or market index. Some derivative structures are index or structured securities whose value or performance is linked to other equity securities, currencies, interest rates, indices or other

financial indicators. Some derivatives securities, such as mortgage-related and other asset-backed securities, are fundamentally like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are many types of derivatives and multiple ways to use them in each Portfolio. For example, futures and options are commonly used for hedging purposes to attempt to protect the Portfolios from the exposure to changing interest rates, securities prices, or currency exchange rates. They can also be used as a relatively low cost method of gaining exposure to a particular securities market without investing directing in those securities.

There are risks associated with investing in derivative securities. These risks include the possibility that there may be no liquid secondary market, or that the exchange may limit price fluctuations, that the underlying security, interest rate, market index or other financial asset will not move in the direction anticipated, the risk that the counterparty may not perform its obligations, or that the adverse price movements can result in a loss substantially greater than each Portfolio’s initial investment.

American Depositary Receipts and European Depositary Receipts. The U.S. Stock Market Portfolio and the International Stock Market Portfolio may purchase American Depositary Receipts (“ADRs”) and European Depositary Receipts (“EDRs”) of foreign corporations. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets and EDRs are issued by European financial institutions for trading primarily in European securities markets. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Depositary receipts may be issued pursuant to sponsored or un-sponsored programs. In sponsored programs, an issuer has made arrangements to have its securities traded in the form of depositary receipts. In un-sponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and un-sponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be less information available regarding issuers of securities underlying un-sponsored programs and there may not be a correlation between such information and the market value of the depositary receipts. Depositary receipts also involve the risks of other investments in foreign securities.

ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. However, by investing in ADRs rather than directly in a foreign issuer’s stock, a Portfolio can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large liquid market in the U.S. for many ADRs. The information available for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers are subject. For purposes of a Portfolio’s investment policies, the Portfolio’s investments in ADRs, EDRs, and similar instruments will be deemed to be investments in the equity securities representing securities of foreign issuers to which they relate.

Options on Securities and Securities Indices. Each Portfolio may purchase or sell options on securities in which it may invest and on indices that are comprised of securities in which it may invest, subject to the limitations set forth above and provided such options are traded on a national securities exchange or in the over-the-counter market. Options on securities indices are similar to options on securities except there is no transfer of a security and settlement is in cash. A call option on a securities index grants the purchaser of the call, for a premium paid to the seller, the right to receive in cash an amount equal to the difference between the closing value of the index and the exercise price of the option times a multiplier established by the exchange upon which the option is traded. Typically, a call option will be profitable to the holder of the option if the value of the security or the index increases during the term of the option; a put option will be valuable if the value of the security or the index decreases during the term of the option. The Portfolios may also invest in warrants, which entitle the holder to buy equity securities at a specific price for a specific period of time.

Swap Agreements. Swap agreements are two party contracts entered into primarily for periods ranging from a few weeks to more than a year. In a standard swap transaction, two parties agree to exchange the returns (or the difference in rates of return) earned or realized on particular predetermined investments or instruments, which may then be adjusted for an interest factor. The gross returns to be swapped between the two parties are generally calculated with respect to a notional amount. This notional amount is the return or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities representing a particular index. Forms of swap agreements include, for example:

Each Portfolio’s return on a swap will depend on the ability of its counterparty to perform its obligations under the swap. The Portfolio bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Adviser or Sub-Adviser, as applicable, will cause a Portfolio to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Portfolio’s repurchase agreement guidelines approved by the Board. The swap market is a relatively new market and is largely unregulated.

Futures Contracts and Options on Futures. Each Portfolio may enter into futures contracts on securities in which it may invest or on indices comprised of such securities and may purchase and write call and put options on such contracts. A financial futures contract is a contract to buy or sell a specified quantity of financial instruments such as U.S. Treasury bills, notes and bonds at a specified future date at a price agreed upon when the contract is made. An index futures contract is a contract to buy or sell specified units of an index at a specified future date at a price agreed upon when the contract is made. The value of a unit is based on the current value of the index. Under such contracts no delivery of the actual securities making up the index takes place. Rather, upon expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of the index at expiration, net of variation margin previously paid. Substantially all futures contracts are closed out before settlement date or called for cash settlement. A futures contract is closed out by buying or selling an identical offsetting futures contract. Upon entering into a futures contract, a Portfolio is required to deposit an initial margin with the custodian for the Portfolio, for the benefit of the futures broker. The initial margin serves as a “good faith” deposit that a Portfolio will honor its futures commitments. Subsequent payments (called “variation margin”) to and from the broker are made on a daily basis as the price of the underlying investment fluctuates. Options on futures contracts give the purchaser the right to assume a position in a futures contract at a specified price at any time before expiration of the option. No Portfolio will commit more than 5% of the market value of its total assets to initial margin deposits on futures and premiums paid for options on futures.

Each Portfolio is subject to the investment limitations enumerated in this section, which may be changed with respect to the Portfolio only by a vote of the holders of a “majority of the outstanding voting securities” of the Portfolio. For this purpose, a majority of the outstanding voting securities of a Portfolio means (a) of 67% or more of the voting securities present at such meeting, if the holders of more than 50% of the outstanding voting securities of such company are present or represented by proxy; or (b) of

more than 50% of the outstanding voting securities of such company, whichever is less. As a matter of fundamental policy, each Portfolio:

If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in the value of a Portfolio’s investments will not constitute a violation of such limitation, except that any borrowing by a Portfolio that exceeds the fundamental investment limitations stated above must be reduced to meet such limitations within the period required by the Investment Company Act (currently three days). In addition, if a Portfolio’s holdings of illiquid securities exceed 15% of net assets because of changes in the value of the Portfolio’s investments, the Portfolio will take action to reduce its holdings of illiquid securities within a time frame deemed to be in the best interest of the Portfolio. Otherwise, a Portfolio may continue to hold a security even though it causes the Portfolio to exceed a percentage limitation because of fluctuation in the value of the Portfolio’s assets.

The following summarizes certain additional Federal and state income tax considerations generally affecting the Portfolios and their shareholders that are not described in the Portfolios’ offering memorandum. No attempt is made to present a detailed explanation of the tax treatment of the Portfolios or their shareholders, and the discussion here and in the applicable offering memorandum is not intended as a substitute for careful tax planning. This discussion is based upon present provisions of the Internal Revenue Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, which change may be retroactive. Prospective investors should consult their own tax advisers with regard to the federal tax consequences of the purchase, ownership and disposition of Portfolio shares, as well as the tax consequences arising under the laws of any state, foreign country, or other taxing jurisdiction.

General. Each Portfolio intends to elect and qualify annually to be taxed as a RIC under Subchapter M of the Internal Revenue Code. As a RIC, each Portfolio generally is exempt from Federal income tax on its net investment income and realized capital gains which it distributes to its shareholders, provided that it distributes an amount equal to the sum of (a) at least 90% of its investment company taxable income (net investment income and the excess of net short-term capital gain over net long-term capital loss), if any, for the year and (b) at least 90% of its net tax-exempt interest income, if any, for the year (“Distribution Requirement”) and satisfies certain other requirements of the Internal Revenue Code that are described below. Distributions of investment company taxable income and net tax-exempt interest income made during the taxable year or, under specified circumstances, within 12 months after the close of the taxable year will satisfy the Distribution Requirement.

In addition to satisfying the Distribution Requirement, each Portfolio must derive with respect to a taxable year at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans and gains from the sale or other disposition of stock or securities or foreign currencies, interests in certain publicly traded partnerships, or from other income derived with respect to its business of investing in such stock, securities, or currencies (“Income Requirement”).

At the close of each quarter of its taxable year, at least 50% of the value of each Portfolio’s assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to which a Portfolio has not invested more than 5% of the value of its total assets in securities of such issuer and as to which a Portfolio does not hold more than 10% of the outstanding voting securities of such issuer) and no more than 25% of the value of each Portfolio’s total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which such Portfolio controls and which are engaged in the same or similar trade or business, or in certain publicly traded partnerships.

Distributions of net investment income received by a Portfolio from investments in debt securities and any net realized short-term capital gains distributed by a Portfolio will be taxable to shareholders as ordinary income and will not be eligible for the dividends-received deduction for corporations.

Each Portfolio intends to distribute to shareholders any excess of net long-term capital gain over net short-term capital loss (“net capital gain”) for each taxable year. Such gain is designated and distributed as a capital gain dividend and is taxable to shareholders as gain from the sale or exchange of a capital asset held for more than one year (i.e., long-term capital gain), regardless of the length of time a shareholder has held his or her Portfolio shares and regardless of whether the distribution is paid in cash or reinvested in shares. Capital gain dividends are not eligible for the dividends-received deduction for corporations.

Distributions of a Portfolio for any taxable year generally qualify for the dividends-received deduction to the extent of the gross amount of “qualifying dividends” received by such Portfolio for the year and if certain holding period requirements are met by the Portfolio and also by the shareholder. Generally, a dividend will be treated as a “qualifying dividend” if it has been received from a domestic corporation.

Current tax law generally provides for a maximum tax rate for individual taxpayers of 15% on long-term capital gains. The tax law also provides for “qualified dividend income” to be taxed to non-corporate shareholders at individual long-term capital gain rates to the extent the Portfolios receive qualified dividend income. Qualified dividend income generally includes dividends from domestic corporations and dividends from foreign corporations that meet certain specified criteria, although dividends paid by REITs will not generally be eligible to qualify as qualified dividend income. The Portfolios generally can pass the tax treatment of qualified dividend income they receive through to Portfolio shareholders. For the Portfolios to receive qualified dividend income, the Portfolios must meet certain holding period requirements (typically more than 60 days) for the stock on which the otherwise qualified dividend is paid. In addition, the Portfolios cannot be obligated to make payments (pursuant to a short sale or otherwise) with respect to substantially similar or related property. The same provisions, including the more than 60-day holding period requirements, generally apply to each shareholder’s investment in the applicable Portfolios.

The provisions of the Internal Revenue Code applicable to qualified dividend income and the 15% maximum individual tax rate on long-term capital gains are currently effective through 2008. Thereafter, qualified dividend income will no longer be taxed at the rates applicable to long-term capital gains, and the maximum individual tax rate on long-term capital gains will increase to 20%, unless Congress enacts legislation providing otherwise. Distributions from the Portfolios attributable to investments in bonds and other debt instruments will not generally qualify for the lower rates. Note that distributions of earnings from dividends paid by “qualified foreign corporations” can also qualify for the lower tax rates on qualifying dividends. Qualified foreign corporations are corporations incorporated in a U.S. possession, corporations whose stock is readily tradable on an established securities market in the U.S., and corporations eligible for the benefits of a comprehensive income tax treaty with the United States which satisfy certain other requirements. Passive foreign investment companies are not treated as “qualified foreign corporations.” The rate reductions do not apply to corporate taxpayers or to foreign shareholders. The Portfolios will be able to designate separately distributions of any qualifying long-term capital gains or qualifying dividends earned by a Portfolio that would be eligible for the lower maximum rate. Further, because many companies in which the Portfolios invest do not pay significant dividends on their stock, the Portfolios may not derive significant amounts of qualifying dividend income that would be eligible for the lower rate on qualifying dividends.

If for any taxable year a Portfolio does not qualify as a RIC, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders. In such event, all distributions (whether or not derived from exempt-interest income) would be taxable as ordinary income and would be eligible for the dividends-received deduction in the case of corporate shareholders to the extent of the Portfolios’ current and accumulated earnings and profits.

Shareholders will be advised annually as to the Federal income tax consequences of distributions made by each of the Portfolios.

Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax. To prevent imposition of the excise tax, each Portfolio must distribute during each calendar year an amount equal to the sum of (a) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (b) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses, as prescribed by the Internal Revenue Code) for the one-year period ending on October 31 of the calendar year, and (c) any ordinary income and capital gains for previous years that was not distributed or taxed during those years. A distribution will be treated as paid on December 31 of the current calendar year if it is declared by the Portfolios in October, November or December with a record date in such a month and paid by the Portfolios during January of the following calendar year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are made. To prevent application of the excise tax, each Portfolio intends to make its distributions in accordance with the calendar year distribution requirement.

Each Portfolio will be required in certain cases to withhold and remit to the United States Treasury at the current rate of 28% of taxable distributions, including gross proceeds realized upon sale or other dispositions paid to any shareholder (a) who has provided either an incorrect tax identification number or no number at all, (b) who is subject to backup withholding by the Internal Revenue Service for failure to report the receipt of taxable interest or dividend income properly, or (c) who has failed to certify that he or she is not subject to backup withholding or that he or she is an “exempt recipient.”

Disposition of Shares. Upon the redemption or sale of shares of a Portfolio, a shareholder generally may realize a capital gain or loss depending upon his or her basis in the shares. Any such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder’s hands and will be long-term or short-term, generally depending upon the shareholder’s holding period for the shares. Any loss realized on a redemption, sale or exchange will be disallowed to the extent the shares disposed of are replaced (including shares acquired pursuant to a dividend reinvestment plan) within a period of 61 days beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the disposition of Portfolio shares held by the shareholder for six months or less will be treated as a long-term capital loss to the extent of any distributions of net capital gains received by the shareholder with respect to such shares and treated as long-term capital gains.

Although each Portfolio expects to qualify as a “RIC” and to be relieved of all or substantially all Federal income taxes, depending upon the extent of its activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located or in which it is otherwise deemed to be conducting business, each Portfolio may be subject to the tax laws of such states or localities.

Options and Futures Contracts. The taxation of equity options and over-the-counter options on debt securities is governed by Internal Revenue Code Section 1234. Pursuant to Internal Revenue Code Section 1234, the premium received by a Portfolio for selling a put or call option is not included in income at the time of receipt. If the option expires, the premium is short-term capital gain to a Portfolio. If a Portfolio enters into a closing transaction, the difference between the amount paid to close out its position and the premium received is short-term capital gain or loss. If a call option written by a Portfolio is exercised, thereby requiring the Portfolio to sell the underlying security, the premium will increase the amount realized upon the sale of such security and any resulting gain or loss will be a capital gain or loss, and will be long-term or short-term depending upon the holding period of the security. With respect to a put or call option that is purchased by a Portfolio, if the option is sold, any resulting gain or loss will be a capital gain or loss, and will be long-term or short-term, depending upon the holding period of the option. If the option expires, the resulting loss is a capital loss and is long-term or short-term, depending upon the holding period of the option. If the option is exercised, the cost of the option, in the case of a call option, is added to the basis of the purchased security and, in the case of a put option, reduces the amount realized on the underlying security in determining gain or loss.

Any regulated futures and foreign currency contracts and certain options (namely, nonequity options and dealer equity options) in which a Portfolio may invest may be “Section 1256 contracts.” Gains or losses on Section 1256 contracts are generally considered 60% long-term and 40% short-term capital gains or losses; however, foreign currency gains or losses arising from certain Section 1256 contracts may be treated as ordinary income or loss. Also, Section 1256 contracts held by a Portfolio at the end of each taxable year (and, generally, for purposes of the 4% excise tax, on October 31 of each year) are “marked to market” (that is, treated as sold at fair market value), with the result that unrealized gains or losses are treated as though they were realized.

Generally, hedging transactions, if any, undertaken by a Portfolio may result in “straddles” for federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Portfolio. In addition, losses realized by a Portfolio on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences to the Portfolios of engaging in hedging transactions are not entirely clear. Hedging transactions may increase the amount of short-term capital gain realized by a Portfolio which is taxed as ordinary income when distributed to shareholders.

Each of the Portfolios may make one or more of the elections available under the Internal Revenue Code which are applicable to straddles. If a Portfolio makes any of the elections, the amount, character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections may operate to accelerate the recognition of gains or losses from the affected straddle positions.

Because application of the straddle rules may affect the character of gains or losses, and may defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be more than or less than the distributions of a Portfolio that did not engage in such hedging transactions.

The diversification requirements applicable to a Portfolio’s assets may limit the extent to which the Portfolio will be able to engage in transactions in options, futures or forward contracts.

Under the recently enacted tax law, certain hedging activities may cause a dividend that would otherwise be subject to the lower tax rate applicable to a “qualifying dividend,” instead to be taxed at the rate of the tax applicable to ordinary income.

Constructive Sales. IRS rules may affect the timing and character of gain if a Portfolio engages in transactions that reduce or eliminate its risk of loss with respect to appreciated financial positions. If a Portfolio enters into certain transactions in property while holding substantially identical property, the Portfolio would be treated as if it had sold and immediately repurchased the property and would be taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale would depend upon the Portfolio’s holding period in the property. Loss from a constructive sale would be recognized when the property was subsequently disposed of, and its character would depend on the Portfolio’s holding period and the application of various loss deferral provisions of the Internal Revenue Code.

Currency Fluctuations - “Section 988” Gains or Losses. Under the Internal Revenue Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Portfolio accrues receivables or liabilities denominated in a foreign currency and the time the Portfolio actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain options, futures, and forward contracts, gains or losses attributable to fluctuations in the value of the foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains or losses, referred to under the Internal Revenue Code as “Section 988” gains or losses, may increase or decrease the amount of a Portfolio’s investment company taxable income to be distributed to its shareholders as ordinary income.

Passive Foreign Investment Companies. Each of the Portfolios may invest in shares of foreign corporations that may be classified under the Internal Revenue Code as passive foreign investment companies (“PFICs”). In general, a foreign corporation is classified as a PFIC if at least one-half of its assets constitute passive assets, or 75% or more of its gross income is passive income. If a Portfolio receives a so-called “excess distribution” with respect to PFIC shares, the Portfolio itself may be subject

to a tax on a portion of the excess distribution, whether or not the corresponding income is distributed by the Portfolio to shareholders. In general, under the PFIC rules, an excess distribution is treated as having been realized ratably over the period during which the Portfolio held the PFIC shares. Each Portfolio will itself be subject to tax on the portion, if any, of an excess distribution that is so allocated to prior Portfolio taxable years and an interest factor will be added to the tax, as if the tax had been payable in such prior taxable years. Certain distributions from a PFIC as well as gain from the sale of PFIC shares are treated as excess distributions. Excess distributions are characterized as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been classified as capital gain.

Each of the Portfolios may be eligible to elect alternative tax treatment with respect to PFIC shares. Under an election that currently is available in some circumstances, a Portfolio generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether distributions were received from the PFIC in a given year. If this election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election would involve marking to market the Portfolio’s PFIC shares at the end of each taxable year, with the result that unrealized gains would be treated as though they were realized and reported as ordinary income. Any mark-to-market losses and any loss from an actual disposition of Portfolio shares would be deductible as ordinary losses to the extent of any net mark-to-market gains included in income in prior years.

Because the application of the PFIC rules may affect, among other things, the character of gains, the amount of gain or loss and the timing of the recognition of income with respect to PFIC stock, as well as subject each Portfolio itself to tax on certain income from PFIC stock, the amount that must be distributed to shareholders, and which will be taxed to shareholders as ordinary income or long-term capital gain, may be increased or decreased substantially as compared to a fund that did not invest in PFIC stock. Note that distributions from a PFIC are not eligible for the reduced rate of tax on “qualifying dividends.”

State, Local and Foreign Taxes. Income received by a Portfolio from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Portfolio shareholders may be subject to state, local and foreign taxes on their Portfolio distributions. In many states, fund distributions which are derived from interest on certain U.S. Government obligations are exempt from taxation.

Other Taxation. Distributions by the Portfolios and dispositions of Portfolios shares also may be subject to other state and local taxes, and their treatment under state and local income tax laws may differ from the U.S. Federal income tax treatment. Foreign shareholders will generally be subject to U.S. tax withholding at a rate of 30% (or a lower rate if a treaty applies) on distributions received from the Portfolios.

Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein.

Shareholders should consult their tax advisers with respect to the particular tax consequences to them of an investment in the Portfolios and particular questions of federal, state and local taxation.

The Trust is a Delaware statutory trust, which is registered under the Investment Company Act as an open-end, diversified management investment company. Prior to December 12, 2005, the Trust was known as “Retirement Readiness Core Portfolios.” Under the Trust’s Amended and Restated Declaration of Trust dated December 12, 2005 (“Declaration of Trust”), the beneficial interest in the Trust may be divided into one or more series and the series may be divided into one or more classes. The Trust’s Declaration of Trust authorizes the Board to establish, designate, redesignate, classify, reclassify and change in any manner any authorized but unissued shares of the Trust by setting or changing, in any one or more respects, their preferences, conversion or other rights, voting powers, duties, privileges and business purpose. Pursuant to such authority, the Trust’s Board has authorized the issuance of an unlimited number of shares of beneficial interest of the Trust, representing interests in the Portfolios.

In the event of a liquidation or dissolution of the Trust or an individual Portfolio, shareholders of a particular Portfolio would be entitled to receive the assets available for distribution belonging to such Portfolio, and a proportionate distribution, based upon the relative NAVs of the Portfolio and any other Portfolios, of any general assets not belonging to any particular Portfolio which are available for distribution. Upon liquidation, shareholders of such Portfolios are entitled to participate in the net distributable assets of the particular Portfolios involved based on the number of shares of the Portfolios that are held by each shareholder.

Holders of all outstanding shares of the Portfolios will vote together in the aggregate and on all matters. Further, shareholders of all of the Portfolios, as well as those of any other investment portfolio now or hereafter offered by the Trust, will vote together in the aggregate and not separately on the Portfolio-by-Portfolio basis, except as otherwise required by law or when permitted by the Board.

Shares of the Trust have non-cumulative voting rights and, accordingly, the holders of more than 50% of the Trust’s outstanding shares (irrespective of class) may elect all of the trustees. Shares of the Portfolios have no subscription or preemptive rights and only such conversion and exchange rights as the Board may grant in its discretion. When issued for payment as described in the offering memorandum and SAI, shares will be fully paid and non-assessable by the Trust.

Shareholder meetings to elect trustees will not be held unless and until such time as required by law. At that time, the trustees then in office will call a shareholders’ meeting to elect trustees. Except as set forth above, the trustees will continue to hold office and may appoint successor trustees. Meetings of the shareholders of the Trust shall be called by the trustees upon the written request of shareholders owning at least 10% of the outstanding shares entitled to vote.

The Trust’s Declaration of Trust, as amended, authorizes the Board, without shareholder approval (unless otherwise required by applicable law), to: (a) divide the beneficial interest in each series or class thereof into shares, with or without par value as the trustees shall determine; (b) issue shares without limitation as to number (including fractional shares) to such Persons and for such amount and type of consideration, subject to any restriction set forth in the By-Laws, including cash or securities, at such time or times and on such terms as the trustees may deem appropriate; (c) establish, designate, redesignate, classify, reclassify and change in any manner any series or class thereof and fix such preferences, voting powers, rights, duties and privileges and business purpose of each series or class thereof as the trustees may from time to time determine, which preferences, voting powers, rights, duties and privileges may be senior or subordinate to (or in the case of business purpose, different from) any existing series or class thereof and

may be limited to specified property or obligations of the Trust or profits and losses associated with specified property or obligations of the Trust; provided, however, that the trustees may not reclassify or change any outstanding shares in a manner materially adverse to shareholders of such shares, without obtaining the authorization or vote of the series or class of shareholders that would be materially adversely affected; (d) divide or combine the shares of any series or class thereof into a greater or lesser number without thereby materially changing the proportionate beneficial interest of the shares of such series or class thereof in the assets held with respect to that series or class; (e) issue shares to acquire other assets (including assets subject to, and in connection with, the assumption of liabilities) and businesses; (f) change the name of any series or class thereof; (g) dissolve and terminate any one or more series or classes thereof; and (h) take such other action with respect to the shares as the trustees may deem desirable. However, the exercise of such authority may be subject to certain restrictions under the Investment Company Act. The Board may also authorize the termination of any series or class of shares after the assets belonging to such series or class have been distributed to its shareholders.

Notwithstanding any provision of law requiring a greater vote of the Trust’s shares (or of any class voting as a class) in connection with any corporate action, unless otherwise provided by law or by the Trust’s Declaration of Trust, one-third (33-1/3%) of the outstanding shares entitled to vote shall constitute a quorum at a shareholders’ meeting. When any one or more Portfolios is to vote separate from any other Portfolio, one-third (33-1/3%) of the outstanding shares of each such Portfolio entitled to vote shall constitute a quorum at a shareholders’ meeting of that Portfolio. Except when a larger vote is required by any provision of the Trust’s Declaration of Trust, the Trust’s By-Laws or by applicable law, when a quorum is present at any meeting, a majority of the shares voted shall decide any questions, including the election of trustees, provided that where any provision of law or of the Trust’s Declaration of Trust requires that the holders of any Portfolio shall vote as a whole, then a majority of the outstanding shares of that Portfolio voted on the matter shall decide that matter insofar as that Portfolio is concerned. In any vote submitted to shareholders of a Portfolio, each whole share held by a shareholder will be entitled to one vote for each share as to any matter on which it is entitled to vote, and each fractional share shall be entitled to a proportionate fractional vote.

Trustee Liability. The Declaration of Trust provides that a trustee, when acting in such capacity, shall not be personally liable to any person other than the Trust or a beneficial owner for any act, omission or obligation of the Trust or any trustee; shall not be liable for any act or omission or any conduct whatsoever in his capacity as trustee, except for any liability to the Trust or to shareholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of trustee hereunder. Furthermore, the Declaration of Trust provides that no trustee who has been determined to be an “audit committee financial expert” (for purposes of Section 407 of the Sarbanes-Oxley Act of 2002 or any successor provision thereto) by the trustees shall be subject to any greater liability or duty of care in discharging such trustee’s duties and responsibilities by virtue of such determination than is any trustee who has not been so designated.

With the exception discussed above, the Declaration of Trust provides that each Trustee shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any proceeding in which he or she becomes involved as a party or otherwise by virtue of being or having been a trustee or officer of the Trust and against amounts paid or incurred by him or her in the settlement thereof; and expenses in connection with the defense of any proceeding of the character described in clause (i) above shall be advanced by the Trust to the Covered Person (as defined in the Declaration of Trust) from time to time prior to final

disposition of such proceeding to the fullest extent permitted by law. For purposes of this indemnification provision in the Declaration of Trust, “proceeding” means any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including appeals); and “liabilities” and “expenses” includes, without limitation, attorneys’ fees, costs, judgments, amounts paid in settlement, fines, penalties and all other liabilities whatsoever.

Legal Counsel. The law firm of Dechert LLP, 1775 I Street, N.W., Washington, DC 20006, has passed upon certain legal matters in connection with the shares offered by the Portfolios and serves as counsel to the Portfolios and the independent trustees.

Independent Registered Public Accounting Firm. The Trust has engaged KPMG LLP, 99 High Street, Boston, MA, 02110, to be the independent registered public accounting firm for the Trust. KPMG LLP has required that its audit contract with the Trust be subject to alternative dispute resolution and a limitation on punitive damages.

Control Persons and Principal Holders of Securities. As of the date of this SAI, AARP Services Inc. owned 100% of the shares of the Portfolios, and, therefore, may be deemed to have controlled the Portfolios as of the date of this SAI.

Registration Statement. This SAI and each Portfolio’s offering memorandum do not contain all the information included in the Trust’s registration statement filed with the SEC under the Investment Company Act with respect to each Portfolio and securities offered hereby, certain portions of which have been omitted pursuant to the rules and regulations of the SEC. The registration statement, including the exhibits filed therewith, may be examined at the offices of the SEC in Washington, DC. Text-only versions of Portfolio documents can be viewed online or downloaded from the SEC’s website at http://www.sec.gov.

Statements contained herein and in each Portfolio’s offering memorandum as to the contents of any contract or other documents referred to are not necessarily complete, and, in such instance, reference is made to the copy of such contract or other documents filed as an exhibit to the Trust’s registration statement, each such statement being qualified in all respects by such reference.

There is no financial information for the Portfolios since the Portfolios had not yet commenced operations prior to the date of this SAI.

AARP Financial Incorporated (the “Adviser”) is an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser provides investment advisory services to the series of AARP Funds (the “Funds”) and the series of AARP Portfolios (the “Portfolios”). AARP Funds and AARP Portfolios (each a “Trust”) are both investment companies registered under the Investment Company Act of 1940, as amended.

Each advisory client that has entered into an investment advisory agreement with the Adviser (including AARP Funds on behalf of the Funds and AARP Portfolios on behalf of the Portfolios) has delegated to the Adviser discretionary investment management authority with respect to the assets held in the client’s portfolio (which includes proxy voting authority) and has directed the Adviser to implement theses Proxy Voting Policies and Procedures (“Policies and Procedures”) in voting shares owned by such advisory clients over which the Adviser has discretionary voting authority. These Policies and Procedures may be revised from time to time, however, any material amendments must be approved by the Board of Trustees of the Trusts.

Day-to-day administration of the proxy voting process at the Adviser is the responsibility of the Proxy Manager appointed by the Adviser. The Proxy Manager is responsible for reviewing regularly the voting record to ensure that proxies are voted in accordance with these Policies and Procedures and the Proxy Voting Guidelines attached hereto as Exhibit A (with respect to the Portfolios only) and for ensuring that procedures, documentation, and reports relating to the voting of proxies are promptly and properly prepared and disseminated. The Proxy Manager shall seek to reconcile on a regular basis all proxies received against holdings of all client accounts over which the Adviser has voting authority to ensure that all shares held on the record date, and for which a voting obligation exists, are voted.

Because the Funds invest substantially all of their assets in the Portfolios, it is anticipated that the only matters upon which the Funds will be asked to vote are matters that require approval of the shareholders of the Portfolios. Due to the inherent conflict of interest presented in that situation, the Funds will pass through any matters to be approved by shareholders of the Portfolios to the shareholders of the Funds. The Adviser will then vote each Fund’s proxies on matters affecting the Portfolios in direct proportion to the votes received from shareholders of that Fund.

The Portfolios invest in a variety of securities, including voting securities of many different issuers. As a result, the Portfolios, as the beneficial owner of those voting securities, will be asked to vote on various matters affecting the issuers of those voting securities. AARP Portfolios has adopted and the Adviser will implement these Policies and Procedures, as they relate to the Portfolios, as a means reasonably designed to ensure that it votes any proxy or other beneficial interest in an equity security owned by the Portfolios over which the Adviser has discretionary proxy voting authority.

The Adviser will vote or cause to have voted any proxy prudently and solely in the best interest of the Portfolios and their shareholders considering all relevant factors and without undue influence from individuals or groups who may have an economic interest in the outcome of a proxy vote. Ultimately, each vote is cast on a case-by-case basis taking into consideration the contractual obligations under the advisory agreements or comparable documents, and all other relevant facts and circumstances at the time of the vote.

The Adviser’s use of sub-advisers to manage each Portfolio’s investments serves to minimize the number of, but not prevent, material conflicts of interest it faces in voting proxies. The Proxy Manager reviews each proxy to assess the extent to which there may be a potential conflict of interest. A potential conflict of interest situation may arise where, for example, the Adviser (or one of its affiliates) manages assets for, or otherwise has a material business relationship with, a company whose management is soliciting proxies, and failure to vote proxies in favor of management of the company may harm the Adviser’s (or its affiliate’s) relationship with the company. In an effort to identify potential conflicts of interest, the Compliance Department will prepare a list of the Adviser’s clients and vendors, and list of

companies with which AARP Services Inc. and AARP have material business relationships, and provide that list to the Proxy Manager. The Compliance Department will periodically update this list as new information becomes available. All personnel are required to contact the Proxy Manager about any apparent conflicts of interest, including apparent conflicts of interest involving personal relationships. Apparent conflicts are reviewed by the Proxy Manager to determine if there is a conflict, and if so, whether the conflict is material.

If a proxy is identified as presenting a material conflict of interest, the matter must be reviewed by the Proxy Manager, which will resolve the conflict and direct the vote. In order to avoid even the appearance of impropriety, the Proxy Manager will not take the Adviser’s relationship (or the relationship of an affiliate of the Adviser) with a company into account, and will vote the company’s proxies in the best interest of the Funds, in accordance with these Policies and Procedures. If the Proxy Manager is himself or herself subject to the identified conflict, he or she will not participate in the proxy voting activities regarding the particular proxy, including the decision on whether and how to vote the proxy in question and the matter will be referred to the Board of Trustees of AARP Portfolios for a determination as to how the proxy should be voted. The Proxy Manager will record and maintain materials to document the factors that were considered to evidence that there was a reasonable basis for the Proxy Manager’s decision with respect to any conflict of interest.

The Compliance Department is responsible for reviewing regularly the voting record to ensure that proxies are voted in accordance with these Policies and Procedures and for ensuring that procedures, documentation, and reports relating to the voting of proxies are promptly and properly prepared and disseminated.

The Adviser shall, with respect to those clients over which it has discretionary proxy voting authority, make and retain the following documentation:

All books and records required to be maintained hereunder, shall be maintained and preserved in an easily accessible place for a period of not less than five (5) years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the Adviser.

These Proxy Voting Guidelines are a reflection of AARP Portfolios’ (the “Trust”) views that the Trust’s fiduciary obligations to their shareholders include an obligation to vote their proxies in a manner consistent with solid corporate governance and corporate social responsibility.

The Trust believes that good corporations are characterized by sound corporate governance and overall corporate social responsibility. A well-governed company that meets high standards of corporate ethics and operates in the best interests of the shareholders, employees, customers, communities and the environment will be better positioned for long-term success. This long-term success translates into positive returns for long-term shareholders.

From Moody’s Investors Services, Inc. (“Moody’s”) description of its bond ratings:

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

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

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

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

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

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

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

Moody’s applies numerical modifiers 1, 2 and 3 in each generic rating classification from “Aa” through “Caa.” The modifier 1 indicates that the bond being rated ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower end of its generic rating category.

From Standard & Poor’s Corporation (“S&P”) description of its bond ratings:

“AAA”: An obligation rated “AAA” has the highest rating assigned by S&P. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

“AA”: An obligation rated “AA” differs from the highest-rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

“A”: An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

“BBB”: An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

“BB,” “B” and “CCC”: Obligations rated “BB,” “B” and “CCC” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “CCC” the higher. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

“BB”: An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

“B”: An obligation rated “B” is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

“CCC”: An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

The ratings from “AA” to “CCC” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

“AAA”: Highest credit quality. “AAA” ratings denote the lowest expectation of credit risk. They are assigned only in the case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

“AA”: Very high credit quality. “AA” ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

“A”: High credit quality. “A” ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

“BBB”: Good credit quality. “BBB” ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.

“BB”: Speculative. “BB” ratings indicate that there is a possibility of credit risk developing, particularly as a result of economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.

“B”: Highly speculative. “B” ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon sustained, favorable business or economic environment.

“CCC,” “CC” and “C”: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business and economic developments. A “CC” rating indicates that default of some kind appears probable. “C” ratings signal imminent default.

“+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the “AAA” category or to categories below “CCC.”

The following Moody’s designations indicate the relative repayment ability of rated issuers:

“Prime-1” or “P-1”: Issuers rated “Prime-1” (or supporting institutions) have a superior ability for repayment of senior short-term debt obligations. “Prime-1” repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity.

“Prime-2” or “P-2”: Issuers rated “Prime-2” (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics of “Prime-1” rated issuers, but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.

Commercial paper ratings of S&P are current assessments of the likelihood of timely payment of debt having original maturities of no more than 365 days.

“A-1”: This designation indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation.

“A-2”: Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated “A-1.”

A Fitch short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.

“F1”: Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

“F2”: Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin of safety is not as great as in the case of the higher ratings.

APPENDIX C – INFORMATION REGARDING THE USE OF MORGAN STANLEY CAPITAL INTERNATIONAL (“MSCI”) INDEXES

The Portfolios are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI index (collectively, the “MSCI Parties”). The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by AARP Financial Incorporated. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or owners of the Portfolios or any other person or entity regarding the advisability of investing in funds generally or in the Portfolios particularly or the ability of any MSCI index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI indexes which are determined, composed and calculated by MSCI without regard to the Portfolios or the issuer or owners of the Portfolios or any other person or entity. None of the MSCI Parties has any obligation to take the needs of the issuer or owners of the Portfolios or any other person or entity into consideration in determining, composing or calculating the MSCI indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of the Portfolios to be issued or in the determination or calculation of the equation by or the consideration into which the Portfolios are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of the Portfolios or any other person or entity in connection with the administration, marketing or offering of the Portfolios.

Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI indexes from sources that MSCI considers reliable, none of the MSCI Parties warranties or guarantees the originality, accuracy and/or the completeness of any MSCI index or any data included therein. None of the MSCI parties makes any warranty, express or implied, as to results to be obtained by the issuer of the funds, owners of the funds, or any other person or entity, form the use of any MSCI index or any data included therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of or in connection with any MSCI index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each MSCI index and any data included therein. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even it notified of the possibility of such damages.

The U.S. Stock Market Portfolio, the International Stock Market Portfolio, and the U.S. Bond Market Portfolio (together the “Portfolios”) were not open for investment prior to the date of this Part C filing and therefore, at that time, no person owned of record or was known by the Portfolios to own beneficially 5% or more of any class of the Portfolios. At the time that the Portfolios open for investment, “accredited investors,” within the meaning of Regulation D under the Securities Act of 1933, who may include AARP Financial Incorporated and/or its affiliates, are expected to make investments in the Portfolios in order to launch the Portfolios and may be deemed to control the Portfolios.

The Registrant’s Amended and Restated Declaration of Trust made as of December 12, 2005, Article VII, Section 3, provides as follows:

(i) every person who is, has been, or becomes a Trustee or officer of the Trust (hereinafter referred to as a “Covered Person”) shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any proceeding in which he or she becomes involved as a party or otherwise by virtue of being or having been a Trustee or officer of the Trust and against amounts paid or incurred by him or her in the settlement thereof; and

(ii) expenses in connection with the defense of any proceeding of the character described in clause (i) above shall be advanced by the Trust to the Covered Person from time to time prior to final disposition of such proceeding to the fullest extent permitted by law.

(b) For purposes of this Section 3 and Section 5 of this Article VII below, “proceeding” means any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including appeals); and “liabilities” and “expenses” includes, without limitation, attorneys’ fees, costs, judgments, amounts paid in settlement, fines, penalties and all other liabilities whatsoever.

(c) No indemnification shall be provided hereunder to a Covered Person who shall have been adjudicated by a court or body before which the proceeding was brought (i) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office or (ii) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust.

(d) The Trust’s financial obligations arising from the indemnification provided herein may be insured by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person as to acts or omissions as a Covered Person and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel, other than Covered Persons, and other persons may be entitled by contract or otherwise under law.

(e) Expenses in connection with the defense of any proceeding of the character described in paragraph (a) above may be advanced by the Trust or series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Trust or series if it is ultimately determined that he is not entitled to indemnification under this Section 3; provided, however, that either (i) such Covered Person shall have provided appropriate security for such undertaking, (ii) the Trust is insured against losses arising out of any such advance payments, or (iii) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review of readily available facts (as opposed to a trial type inquiry or full investigation), that there is reason to believe that such Covered Person will be found entitled to indemnification under Section 3.

(f) In no event will any revision, amendment or change to this Section 3 or the By-Laws affect in any manner the rights of any Covered Person to receive indemnification by the Trust against all liabilities and expenses reasonably incurred or paid by the Covered Person in connection with any proceeding in which the Covered Person becomes involved as a party or otherwise by virtue of being or having been a Trustee or officer of the Trust (including any amount paid or incurred by the Covered Person in the settlement of such proceeding) with respect to any act or omission of such Covered Person that occurred or is alleged to have occurred prior to the time such revision, amendment or change to this Section 3 or the By-Laws is made.

The Registrant’s Statement of Additional Information provides additional information in the section entitled “More About the Trust.”

AARP Financial is a registered investment adviser. AARP Financial serves as investment adviser to the AARP Portfolios and provides investment supervisory services. Information as to the officers and directors of AARP Financial is included in its Form ADV last filed with the Securities and Exchange Commission (SEC File No. 801-64899) and is incorporated herein by reference.

SSgA FM serves as the sub-adviser for the AARP Portfolios pursuant to a sub-advisory agreement. SSgA FM is registered with the Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended, and is a wholly-owned subsidiary of State Street Corporation, a publicly-held bank holding company. Information as to the officers and directors of SSgA FM is included in its Form ADV last filed with the Securities and Exchange Commission (SEC File No. 801-60103) and is incorporated herein by reference.

(a) The sole principal underwriter for the Trust is ALPS Distributors, Inc. which acts as placement agent for the Registrant and provides distribution services for the following other funds Westcore Trust, Financial Investors Trust, Stonebridge Growth Fund, Inc., Stonebridge Aggressive Growth Fund, Inc., SPDR Trust, MidCap SPDR Trust, Select Sector SPDRS Trust, DIAMONDS Trust, PowerShares Exchange- Traded Funds Trust, Nasdaq 100 Trust, Firsthand Funds, Holland Balanced Fund, Financial Investors Variable Insurance Trust, State Street Institutional Investment Trust, Ameristock Mutual Fund, Inc., W.P. Stewart & Co. Growth Fund, Inc., Accessor Funds, Inc., BLDRS Index Fund Trust, Drake Funds, Wasatch Funds, Williams Capital Liquid Assets Fund, First Funds, Agile Funds, The Henssler Funds, Inc., CornerCap Group of Funds and Milestone Funds.

(b) To the best of Registrant’s knowledge, the directors and executive officers of ALPS Distributors, Inc., the placement agent for Registrant, are as follows:

(c) ALPS Distributors, Inc. received no direct or indirect commissions or other compensation from the Trust during the last fiscal year of the Trust.

All accounts, books, and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder are maintained at the offices of the: (a) Registrant; (b) Investment Adviser; (c) Sub-Adviser; (d) Principal Underwriter; (e) Administrator; (f) Sub-Administrator and (g) Custodian. The address of each is as follows:

Pursuant to the requirements of the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, and District of Columbia, on the 20th day of December, 2005.


AARP Portfolios

By		/s/ *LARRY C. RENFRO*
		Larry C. Renfro
		President


Name and Address of Service Provider		Function and Services Provided
*SSgA Funds Management, Inc. (“SSgA FM”* or “Sub-Adviser”)** One Lincoln Street Boston, MA 02111-2900		Sub-Adviser to the Portfolios. The Sub-Adviser manages the day-to-day investment of the Portfolios’ assets.

*AARP Financial Incorporated (“AARP Financial”* or “Administrator”)** Two Highwood Drive, 2nd Floor, Tewksbury MA 01876		Administrator for the Portfolios. The Administrator undertakes numerous administrative functions for the Portfolios, including • monitoring and coordinating the activities of each of the other service providers; • providing treasury services; • preparing legal documents, such as updating the offering memorandum and SAI; and • providing administrative tax services. The Administrator may delegate administrative duties to the Sub-Administrator.

*State Street Bank and Trust Company (“Sub-Administrator”)* One Federal Street, 9th Floor Boston MA 02110		Sub-Administrator for the Portfolios. The Sub-Administrator undertakes administrative services delegated to it by the Administrator.

ALPS Distributors, Inc. *(“Placement Agent”)* 1625 Broadway, Suite 2200 Denver, CO 80202		Placement Agent for the Portfolios. The Placement Agent is responsible for the sales of the Portfolios’ shares.

*State Street Bank and Trust Company (“Custodian”)* John Adams Building 1776 Heritage Drive North Quincy, MA 02171		Custodian of the Portfolios’ assets. The Custodian is generally responsible for these activities: • safekeeping the assets of the Portfolios; • settling securities transactions; • receiving dividends and interest; • paying Portfolio expenses; and • handling other related activities.

KPMG LLP 99 High Street Boston, MA 02110		KPMG LLP serves as the independent registered public accounting firm for the Portfolios.


Name, Address and Age	Position(s) with the Trust and Term of Office⁽¹⁾	Principal Occupation(s) During Past 5 Years	Number of Funds and Portfolios in Fund Complex⁽²⁾ Overseen by Trustee	Other Directorships Held by Trustee
Independent Trustees

Peter C. Clapman 3 Valley Road Scarsdale, NY 10583 Age: 69	Chairman of the Board and Trustee since 2005	Consultant, governance advisory services (July 2005 – present); Head of U.S. operations, Governance for Owners (governance services and consulting) (June 2005 – present); Executive Director, Pace Law School (director education) (April 2005 – present); Senior Vice President and Chief Counsel, TIAA-CREF (financial services, pension and investment products) (1972 – July 2005).	6	Director, National Association of Corporate Directors (non-profit private director education) (January 2005 – present).

Lynn E. Turner 10901 West 120^th Suite 335 Broomfield, CO 80021 Age: 53	Trustee since 2005	Managing Director of Research, Glass Lewis & Co. LLC (financial and proxy research) (July 2003 - present); Managing Director/Senior Advisor, Kroll Inc. (forensic accounting) (July 2003 – present); Professor, Colorado State University (August 2001 – June 2003); Chief Accountant, Securities and Exchange Commission (July 1998 – August 2001).	6	None.
Interested Trustee

Dawn M. Sweeney⁽³⁾ 601 E Street, N.W. Washington, DC 20004 Age: 46	Trustee since 2005	President, AARP Services, Inc. (August 2002 – present); Associate Executive Director, Membership, AARP (December 1999 – August 2002).	6	None.


Name, Address and Age	Position(s) with the Trust and Term of Office⁽¹⁾	Principal Occupation(s) During Past 5 Years

Larry C. Renfro 601 E Street, N.W. Washington, DC 20004 Age: 53	President and Treasurer	President, AARP Financial (October 2005 – present); Managing Director, Renfro Associates/Devonshire Group (consulting) (November 2004 – August 2005); Chief Executive Officer, NewRiver, Inc. (electronic delivery of compliance research) (September 1998 – October 2004).

Leilani Sanders Hall 601 E Street, N.W. Washington, DC 20004 Age: 54	Vice President and Chief Compliance Officer	Chief Compliance Officer, AARP Financial (November 2005 – Present); Senior Special Adviser, U.S. Securities & Exchange Commission (October 2003 – September 2005); Self-Employed Consultant (January 2002 – October 2003); Senior Vice President, The Pioneer Group, Inc. (investment management) (March 1995 – January 2002).

Nancy M. Smith 601 E Street, N.W. Washington, DC 20004 Age: 50	Secretary	Vice President, Investment Services, AARP Services, Inc. (August 2005 – present); Self-Employed Consultant; (February 2002 – July 2005) Vice President Web Content, FOLIOfn (financial services, broker-dealer) (October 1999 – February 2002).

Julie Tedesco State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 Age: 48	Assistant Secretary	Vice President and Senior Counsel of State Street Bank and Trust Company (2000 – present); Counsel of First Data Investor Services Group, Inc. (1994 – 2000).

Thresa Dewar State Street Bank and Trust Company 2 Avenue De Lafayette Boston, MA 02111 Age: 51	Assistant Treasurer	Vice President – Fund Administration of State Street Bank and Trust Company (1997 – present).


	Dollar Range of Equity Securities in the Portfolios*	Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies*
Independent Trustees
Peter C. Clapman	None	None
Lynn E. Turner	None	None

Interested Trustee
Dawn M. Sweeney	None	None


Retainer	$	40,000 per year
Attendance at In-Person Board Meetings	$	1,000 per day
Attendance at Telephonic Board Meetings	$	250 per meeting
Attendance at Committee Meetings	$	1,000 per day

AARP Portfolios – ‘N-1/A’ on 12/20/05

On: Tuesday, 12/20/05, at 5:32pm ET · Accession #: 1193125-5-245840 · File #: 811-21839

Pre-Effective Amendment to Registration Statement of an Open-End Management Investment Company — Form N-1
Filing Table of Contents

N-1/A — Aarp Portfolios
Document Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference


Net assets (which are total assets – liabilities)	=	Net asset value (NAV) per share
Number of shares outstanding


		Page
Summary		3

Management of the Trust		4

Service Providers		9

Portfolio Matters		15

Additional Purchase, Redemption, Exchange and Conversion Information		22

More About Investments of the Portfolios		23

Taxes		37

More About the Trust		43

Other Information		45

Financial Statements		45

Appendix A – AARP Funds/AARP Portfolios Proxy Voting Policies and Procedures		A-1

Appendix B – Ratings		B-1

Appendix C – Information Regarding the Use of Morgan Stanley Capital International (“MSCI”) Indexes		C-1


Name of Trustee	Aggregate Compensation from the Trust⁽¹⁾		Pension or Retirement Benefits Accrued as Part of Portfolio Expenses	Estimated Annual Benefits upon Retirement	Total Compensation from Fund Complex Paid to Trustees⁽¹⁾
Independent Trustees
Peter C. Clapman	$	0	N/A	N/A	$	0
Lynn E. Turner		0	N/A	N/A		0

Interested Trustee
Dawn M. Sweeney		0	N/A	N/A		0


Adviser		AARP Financial Incorporated

Agreement		Investment Advisory Agreement between the Adviser and the Trust, on behalf of the Portfolios, dated as of December 20, 2005 (the “Advisory Agreement”)

Fees		For its services to each of the Portfolios, the Adviser receives an annual management fee, accrued daily and payable following the last day of each month, equal to 0.05% of the Portfolio’s average daily net assets.


Sub-Adviser		SSgA Funds Management, Inc.

Agreement		Investment Sub-Advisory Agreement among the Trust, the Sub-Adviser and the Adviser, dated as of December 20, 2005 (“Sub-Advisory Agreement”).

Fees		For the Sub-Adviser’s services to each of the Portfolios, the Adviser pays the Sub-Adviser an annual fee, accrued daily and payable following the last day of each month, equal to 0.045% of the Portfolio’s average daily net assets up to $500 million, 0.025% of the Portfolio’s average daily net assets from $500 million to $5 billion, and 0.015% for excess average daily net assets over $5 billion.


Portfolio	Registered Investment Companies		Other Pooled Investment Vehicles		Other Accounts
Portfolio	# of Accounts	Assets ($B)	# of Accounts	Assets ($B)	# of Accounts	Assets ($B)
U.S. Stock Market Portfolio
Deane Gyllenhaal	14	2.9	4	0.6	14	2.6
James May	4	63.9	2	86.5	13	24.2

International Stock Market Portfolio
Jeffrey Beach	3	0.7	1	18.6	0	0
Kala St. Pierre	7	4.0	3	6.0	14	1.7

U.S. Bond Market Portfolio
John Kirby	1	0.2	7	11.5	9	3.0
Michael J. Brunell	0	0	11	15.0	4	1.2


Administrator		AARP Financial, Incorporated

Agreement		Administration Agreement between the Administrator and the Trust, on behalf of the Portfolios, dated as of December 20, 2005 (“Administration Agreement”)

Fees		For the administrative services, the Administrator receives an annual fee, accrued daily and payable following the last day of each month, equal to 0.035% of the Portfolios’ average daily net assets.


Sub-Administrator		State Street Bank and Trust Company

Agreement		Sub-Administration Agreement between the Administrator and the Sub-Administrator, with respect to the Portfolios dated as of December 20, 2005 (“Sub-Administration Agreement”)

Fees		For the sub-administrative services, the Sub-Administrator receives an annual fee, accrued daily and payable following the last day of each month, equal to 0.0175% of the Portfolios’ average daily net assets up to $6 billion, equal to 0.015% of the Portfolios’ average daily net assets from $6 billion to $8 billion, and equal to 0.0125% of the Portfolios’ average daily net assets in excess of $8 billion.


Placement Agent		ALPS Distributors, Inc.

Agreement		Placement Agency Agreement between the Placement Agent and the Trust, on behalf of the Portfolios, dated as of December 20, 2005 (“Placement Agency Agreement”)

Fees		All expenses will be paid by the Placement Agent


(a) (1)		Amended and Restated Certificate of Trust made as of December 12, 2005 (filed herewith)

(2)		Amended and Restated Declaration of Trust made as of December 12, 2005 (filed herewith)

(b)		Amended and Restated Bylaws dated December 12, 2005 (filed herewith)

(c)		See Article III, “Meetings of Shareholders,” and Article VIII, “Inspection of Records and Reports” of Registrant’s Bylaws made as of October 3, 2005. See Article III, “Shares,” and Article V, “Shareholders’ Voting Powers and Meetings” of Declaration of Trust of AARP Portfolios dated December 12, 2005.

(d) (1)		Form of Investment Advisory Agreement with AARP Financial Incorporated (filed herewith)

(2)		Form of Investment Sub-Advisory Agreement with SSgA Funds Management Inc. (filed herewith).

(e)		The response to Item 23(e) has been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.

(f)		Not Applicable

(g)		Form of Custodian Agreement with State Street Bank and Trust Company (filed herewith).

(h) (1)		Form of Administration Agreement with AARP Financial Incorporated (filed herewith)

(2)		Form of Placement Agency Agreement with ALPS Distributors, Inc. (filed herewith)

(i)		The response to Item 23(i) has been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.

(j)		The response to Item 23(j) has been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.

(k)		The response to Item 23(k) has been omitted pursuant to paragraph (B)(2)(b) of the General Instructions to Form N-1A.



(l)		Not Applicable

(m)		Not applicable.

(n)		Not applicable.

(o)		Reserved.

(p) (1)		AARP Portfolios’ Code of Ethics (filed herewith).

(2)		Code of Ethics of AARP Financial Incorporated (filed herewith)

(3)		Code of Ethics of SSgA Funds Management Inc. (filed herewith)

(4)		Code of Ethics of ALPS Distributors, Inc. (filed herewith)


Name and Principal Business Address*	Positions and Offices with Registrant	Positions and Offices with Underwriter
Thomas A. Carter	None	Managing Director-Sales and Finance and Treasurer

Edmund J. Burke	None	Director and President

Jeremy May	None	Managing Director-Operations and Client Services and Secretary

Diana M. Adams	None	Vice-President and Controller

Tané T. Tyler	None	Chief Legal Officer and Assistant Secretary

Bradley J. Swenson	None	Chief Compliance Officer

This ‘N-1/A’ Filing	Date	Other Filings

	6/30/06	N-CSR, N-PX, NSAR-B
Filed on:	12/20/05	N-8A
	12/12/05
	12/8/05
	10/14/05
	10/3/05
	9/30/05
		List all Filings