BLANCHARD FUNDS, 485BPOS, 1996-08-26

BLANCHARD FUNDS
485BPOS, 1996-08-26

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1933 Act File No. 33-3165
1940 Act File No. 811-4579

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No. ..........

Post-Effective Amendment No. 37 ............

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 37 ...........................

Blanchard Funds

(Exact Name of Registrant as Specified in Charter)

Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)

(412) 288-1900
(Registrant's Telephone Number)

John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
X on August 27, 1996 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------

If appropriate, check the following box:

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

Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:

X filed the Notice required by that Rule on June 14, 1996; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.

Copies To:
Matthew G. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037

CROSS REFERENCE SHEET

This Amendment to the Registration Statement of Blanchard Funds, which
consists of seven investment portfolios: (1) Blanchard Asset Allocation
Fund; (2) Blanchard Capital Growth Fund; (3) Blanchard Flexible Income
Fund; (4) Blanchard Flexible Tax-Free Bond Fund; (5) Blanchard Global
Growth Fund; (6) Blanchard Growth & Income Fund; and (7) Blanchard Short-
Term Flexible Income Fund; relates only to Blanchard Global Growth Fund;
Blanchard Flexible Income Fund; Blanchard Short-Term Flexible Income Fund;
and Blanchard Flexible Tax-Free Bond Fund, and is comprised of the
following:

Part A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. (1-7) Cover Page.
Item 2. (1-7) Fee Table, Summary of Fund Expenses.
Item 3. (1-7) Highlights.
Item 4. (1-7) Investment Objectives and Policies; Additional
Information about the Funds and Portfolios; Additional
Information on Investment Policies and Techniques;
(1-7) General Information; Investment Information;
Investment Objective; Investment Policies; Additional
Risk Considerations; Investment Risks Associated with
Investment in Equity and Debt Securities.
Item 5. (1-7) Management of the Funds; Portfolio Advisory
Services.
(1-7) Blanchard Funds Information; Management of the
Fund; Distribution of Fund Shares; Administration
of the Fund.
(1-7) Transfer Agent and Dividend Disbursing Agent
Item 5 A. (1-7) Performance of the Portfolio Adviser;
Performance Computation Information.
(1-7) Not Applicable
Item 6. (1-7) Additional Information about the Funds and the
Portfolios; Other Information; Cover Page;
Shareholder Inquiries; Tax Matters.
(1-7) Expenses of the Fund; General Information;
Shareholder Information; Voting Rights;
Massachusetts Partnership Law; Tax Information;
Federal Income Tax.
Item 7. (1-7) How to Invest; Investor Services; How to
Invest; Distribution of Shares of the Funds.
(1-7) Net Asset Value; How to Invest; Purchases by
Mail; Investors Services; Automatic Withdrawal Plan.
Item 8. (1-7) How to Redeem; By Telephone; By Mail.
Item 9. (1-7) Not Applicable

Part B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL
INFORMATION

Item 10. (1-7) Cover Page.
Item 11. (1-7) Table of Contents.
Item 12. (1-7) Not Applicable
Item 13. (1-7) Investment Objective; Policies and
Restrictions;
Portfolio Transactions.
(1-7) General Information About the Fund; Investment
Objectives and Policies; Investment Limitations.
Item 14. (1-7) The Management of the Fund.
(1-7) Blanchard Funds Management; Trustee
Compensation.
Item 15. (1-7) Not Applicable
(1-7) Share Ownership.
Item 16. (1-7) Investment Advisory Services; Investment
Advisory Services; Cover Page; See Prospectus.
(1-7) Investment Advisory Services; Administrative
Services; Custodian.
Item 17. (1-7) Portfolio Transactions.
(1-7) Brokerage Transactions.
Item 18. (1-7) See Prospectus.
Item 19. (1-7) See Prospectus; Computation of Net Asset
Value.
(1-7) Purchasing Shares; Determining Net Asset
Value; Redeeming Shares; Redemption in Kind.
Item 20. (1-7) Tax Matters.
(1-7) Tax Status.
Item 21. (1-7) Not Applicable
Item 22. (1-7) Performance Information.
(1-7) Total Return; Yield; Performance Comparisons.
Item 23. (1-7) Not Applicable

Incorporate by reference pursuant to Rule 411 under the
Securities Act of 1933, Parts A and B, filed as Post-
Effective Amendment No. 25, filed June 21, 1996, in their
entirety (File Nos. 33-3165 and 811-4579).

BLANCHARD
GROUP OF FUNDS

BLANCHARD GLOBAL GROWTH FUND

BLANCHARD PRECIOUS METALS FUND, INC.

BLANCHARD FLEXIBLE INCOME FUND

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND

BLANCHARD FLEXIBLE TAX-FREE BOND FUND

Combined Prospectus

August 31, 1996

BLANCHARD

BLANCHARD GROUP OF FUNDS

COMBINED PROSPECTUS

. Blanchard Global Growth Fund

. Blanchard Precious Metals Fund, Inc.

. Blanchard Flexible Income Fund

. Blanchard Short-Term Flexible Income Fund

. Blanchard Flexible Tax-Free Bond Fund

Blanchard Funds (the "Trust"), which currently consists of seven investment
portfolios, and Blanchard Precious Metals Fund, Inc. (the "Company"), which
currently consists of one investment portfolio (each portfolio individually
referred to as a "Fund" and collectively as the "Funds"), are open-end
management investment companies which offer separate investment alternatives
for different investor needs. Virtus Capital Management, Inc. is the Funds'
overall manager. There is no guarantee that the Funds will achieve their
investment objectives.

Please read this Prospectus carefully and retain it for future reference. A
copy of each Fund's Statement of Additional Information, dated August 31, 1996,
has been filed with the Securities and Exchange Commission (`SEC'') and is
incorporated herein by reference. You may request a copy of the Statements of
Additional Information or a paper copy of this Prospectus, if you have received
your Prospectus electronically, free of charge by calling 1-800-829-3863. To
obtain other information or make inquiries about the Funds, contact Signet
Financial Services, Inc. at 1-800-829-3863. The Statements of
Additional Information, material incorporated by reference into this document,
and other information regarding the Funds, is maintained electronically with
the SEC at Internet Web site (http://www.sec.gov).

THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS, OBLIGATIONS OF, OR
GUARANTEED BY SIGNET BANK OR ANY OF ITS AFFILIATES, AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. IN ADDITION, THEY INVOLVE RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL INVESTED.

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

Prospectus dated August 31, 1996

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

HIGHLIGHTS 2
- ------------------------------------- HOW TO REDEEM 22
-------------------------------------

SUMMARY OF FUND EXPENSES 3 DISTRIBUTION OF SHARES OF THE
- ------------------------------------- FUNDS 23
-------------------------------------

FINANCIAL HIGHLIGHTS 4
- ------------------------------------- TAX MATTERS 25
-------------------------------------

THE FUNDS' INVESTMENT OBJECTIVES

AND POLICIES 6 PERFORMANCE INFORMATION 27
-------------------------------------
- -------------------------------------

MANAGEMENT OF THE FUNDS 16 ADDITIONAL INFORMATION ABOUT THE
- ------------------------------------- FUNDS 28
-------------------------------------

PORTFOLIO ADVISORY SERVICES 17
- ------------------------------------- ADDITIONAL INVESTMENT INFORMATION 30

-------------------------------------
HOW TO INVEST 18

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

CERTAIN INVESTMENT STRATEGIES AND
POLICIES 34

INVESTOR SERVICES 20
- ------------------------------------- -------------------------------------

APPENDIX 46
-------------------------------------

The Funds' investment objectives and policies are summarized below. See "The
Funds' Investment Objectives and Policies" for a more complete discussion.

BLANCHARD GLOBAL GROWTH FUND ("BGGF") seeks to provide long-term capital
growth. As worldwide investment and economic trends change rapidly, the
flexible investment strategy of the Fund permits it to follow a global
allocation strategy that contemplates shifts among strategic market sectors.
These include the following: U.S. Equities; U.S. Fixed Income; Foreign
Equities; Foreign Fixed Income; Precious Metals Securities; and Emerging
Markets.

BLANCHARD PRECIOUS METALS FUND, INC. ("BPMF") seeks to provide long-term
capital appreciation and preservation of purchasing power through investments
in physical precious metals, such as gold, silver, platinum and palladium, and
in securities of companies involved with precious metals. A secondary
objective of the Fund is to reduce the risk of loss of capital and decrease
the volatility often associated with precious metals investments by changing
the allocation of its assets from precious metals securities to physical
precious metals and/or investing in short-term instruments and government
securities during periods when the Fund's portfolio manager believes the
precious metals markets may experience declines.

BLANCHARD FLEXIBLE INCOME FUND ("BFIF") seeks to provide high current income
while seeking opportunities for capital appreciation. The Fund is designed for
fixed-income investors with a long-term investment horizon. The Fund invests
in different fixed income securities markets: U.S. Government Securities,
Investment Grade Fixed Income Securities, High Yield Securities and
International Fixed Income Securities. In seeking its objective of high
current income, the Fund also takes into consideration preservation of
capital.

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND ("BSTFIF") (formerly, Blanchard
Short-Term Bond Fund) seeks to provide a high level of current income
consistent with preservation of capital by investing primarily in a broad
range of short-term debt securities. The Fund will normally maintain a dollar-
weighted average portfolio maturity of three years or less. The Fund intends
to invest primarily in investment-grade securities.

BLANCHARD FLEXIBLE TAX-FREE BOND FUND ("BFTFBF") seeks to provide a high level
of current interest income exempt from Federal income tax consistent with the
preservation of principal. The Fund invests primarily in bonds of varying
maturities issued by or on behalf of states, territories and possessions of
the United States and the District of Columbia and their political
subdivisions, agencies, authorities and instrumentalities, the interest from
which, in the opinion of bond counsel for the issuer, is exempt from Federal
income tax. The Fund has no restrictions on the maturities of bonds that it
may purchase. Rather, it retains the flexibility to lengthen or shorten the
overall maturity of its portfolio based on its portfolio adviser's outlook on
interest rate movements, as it attempts to reduce any price volatility. The
Fund invests primarily in high quality, investment-grade bonds.

HIGHLIGHTS
- -------------------------------------------------------------------------------

FUND MANAGEMENT

Virtus Capital Management, Inc. ("VCM") provides the overall management
services necessary for the Funds' operations. As of June 30, 1996, VCM had
more than $2.7 billion in assets under management. VCM selected, and
continually monitors and evaluates the Funds' Portfolio Advisers. The
Portfolio Advisers are responsible for the selection of each Fund's portfolio
investments.

VCM receives monthly compensation from each Fund based on the amount of assets
under management. VCM, not the Fund, pays the fees of each Portfolio Adviser
pursuant to a sub-advisory agreement. See "Management of the Funds" and
"Portfolio Advisory Services."

HOW TO INVEST AND REDEEM
You may purchase shares directly from Federated Securities Corp. (the
"Distributor"), which is each Fund's principal distributor. You may also
purchase shares from broker-dealers who have entered into a dealer agreement
with the Distributor.

The minimum amount required to open an account in any of the Funds is $3,000
($2,000 for qualified retirement plans, such as IRAs and Keoghs). The minimum
subsequent investment requirement for all Funds is $200. There is no fee for
additional investments made to existing accounts, nor is there a fee charged
when redeeming shares, sometimes called a back-end load. Each Fund has also
adopted a distribution plan which permits the reimbursement of distribution
expenses by the Fund on an annual basis. See "How to Invest" and "Distribution
of Shares of the Funds."

You may redeem your shares on any business day at the next determined net
asset value calculated after the Transfer Agent has received the redemption
request in proper form. See "How to Redeem."

Each Fund reserves the right to close to further new investments if such
Fund's Portfolio Adviser believes that the Fund's size may hamper their
effectiveness in managing the portfolio. In this event, no new investments
will be accepted until further review. Shareholders who have established
accounts prior to the closure date will be allowed to add to their accounts.

INVESTOR SERVICES AND PRIVILEGES
The Funds offer certain investor services and privileges that may be suited to
your particular investment needs, including free Telephone Exchange
Privileges, Investment and Withdrawal Plans and various Retirement Plans. See
"Investor Services."

DIVIDENDS

BGGF and BPMF intend to declare dividends at least annually from net
investment income. BSTFIF, BFTFBF and BFIF intend to declare dividends daily
and pay monthly from net investment income. Dividends are automatically
reinvested in additional Fund shares at net asset value on the payment date
and are reflected in the statements we send you, unless you elect to receive
them in cash, in which case we will send you a monthly check. See "Tax
Matters."

SPECIAL CONSIDERATIONS

The Funds are non-diversified funds. Non-diversified Funds may be invested in
a limited number of issues; thus, there may be greater risk in an investment
in these Funds than in diversified investment companies. Moreover, there are
potential risks associated with certain of the Funds' investments and
additional risk considerations that may be associated with certain techniques
and strategies employed by the Funds, including those relating to investments
in foreign securities and futures and options transactions. Such risks may not
be incurred by other investment companies which have similar investment
objectives, but which do not use these techniques and strategies.

Blanchard Funds is organized as a Massachusetts business trust, and the
Blanchard Precious Metals Fund, Inc. is organized as a Maryland corporation.
In each state, nomenclature varies. For convenience, in this Prospectus, you
will be referred to as "shareholders," your Fund shares as "shares" and your
directors or trustees as "Board Members." In addition, the portfolio advisers
will be collectively referred to as "Portfolio Advisers."

SUMMARY OF FUND EXPENSES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BGGF BPMF BFIF BSTFIF BFTFBF
---- ---- ---- ------ ------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)........... NONE NONE NONE NONE NONE
Maximum Sales Load Imposed on Reinvested
Dividends
(as a percentage of offering price)........... NONE NONE NONE NONE NONE
Contingent Deferred Sales Charge
(as a percentage of original purchase price
or redemption proceeds, as applicable)........ NONE NONE NONE NONE NONE
Redemption Fees
(as a percentage of amount redeemed, if
applicable)................................... NONE NONE NONE NONE NONE
Exchange Fee................................... NONE NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver if applicable)(1). 1.00% 1.00% 0.75% 0.50% 0.00%
12b-1 Fees (after waiver if applicable)(2)..... 0.75% 0.75% 0.25% 0.25% 0.00%
Other Expenses (after waivers if
applicable)(3)................................ 0.76% 0.54% 0.58% 0.63% 1.00%
Total Fund Operating Expenses (after waivers
if applicable)(4)........................... 2.51% 2.29% 1.58% 1.38% 1.00%
</TABLE>

(1) The management fee of Short-Term Flexible Income Fund and Flexible Tax-
Free Bond Fund has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.75% for the
Short-Term Flexible Income Fund and the Flexible Tax-Free Bond Fund.

(2) The maximum 12b-1 fee for the Flexible Tax-Free Bond Fund is 0.25%.

(3) Other expenses would have been 1.23% for the Flexible Tax-Free Bond Fund
absent the voluntary waiver by the administrator. The administrator can
terminate the voluntary waiver at any time at its sole discretion.

(4) Total Fund Operating Expenses would be 1.63% for the Short-Term Flexible
Income Fund, 2.23% for the Flexible Tax-Free Bond Fund, absent the
voluntary waivers described above in Notes 1, 2 and 3.

Annual Operating Expenses were 2.54% for the Global Growth Fund, 2.36% for the
Precious Metal Funds, 1.44% for the Short-Term Flexible Income Fund, 1.05% for
the Flexible Tax-Free Bond Fund and 1.56% for the Flexible Income Fund for the
fiscal year ended April 30, 1996. The Annual Operating Expenses in the table
above are based on expenses expected to be incurred during the fiscal period
ending September 30, 1996.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds will bear either
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "Management of the Funds" and "Distribution of Shares of the
Funds."

For the Global Growth Fund and the Precious Metals Fund, long-term
shareholders may pay more than the economic equivalent of the maximum front-
end sales charges permitted under the Association of Securities Dealers, Inc.

Example:
<TABLE>
<S> <C> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return; and
(2) redemption at the end of each time period. As
noted in the table above, the Funds charge no
redemption fees.
<CAPTION>
BGGF BPMF BFIF BSTFIF BFTFBF
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
1 year........................................... $ 25 $ 23 $ 16 $ 14 $ 10
3 years.......................................... 78 72 50 44 32
5 years.......................................... 134 123 86 76 55
10 years......................................... 285 263 188 166 122
</TABLE>

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

FINANCIAL HIGHLIGHTS--BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------

(For a share outstanding throughout each period)

The financial highlights for the period ended April 30, 1996 have been audited
by Deloitte & Touche LLP, independent auditors of Blanchard Funds and
Blanchard Precious Metals Fund, Inc. (collectively referred to as the
"Funds"). Their report dated June 19, 1996 on the Funds' financial statements
for the year ended April 30, 1996 is included in the Funds respective Annual
Reports, which are incorporated by reference. This table should be read in
conjunction with the Funds' financial statements and notes thereto, which may
be obtained free of charge from the Funds.
<TABLE>
<CAPTION>
Distributions
Net realized from net
and Distributions realized
Net asset unrealized Distributions in excess gains and
value, Net gain/(loss) Total from from net of net Tax foreign
Period ended beginning investment on investment investment investment return currency
April 30, of period income investments operations income income(f) of capital transactions
- ------------ --------- ---------- ------------ ---------- ------------- ------------- ---------- -------------
BGGF
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987(a) $ 8.00 0.01 2.50 2.51 -- -- -- --
1988 $10.51 0.14 (0.21) (0.07) (0.12) -- -- (0.64)
1989 $ 9.68 0.22 0.49 0.71 (0.10) -- -- (0.18)
1990 $10.11 0.30 0.09 0.39 (0.38) -- -- (0.50)
1991 $ 9.62 0.30 0.14 0.44 (0.21) -- -- (0.21)
1992 $ 9.64 0.33 0.26 0.59 (0.31) -- -- --
1993 $ 9.92 0.25 0.32 0.57 (0.30) -- -- (0.19)
1994 $10.00 0.03 1.29 1.32 -- -- -- (1.28)
1995 $10.04 0.08 (0.19) (0.11) -- -- -- --
1996 $ 9.71 0.04 1.86 1.90 (0.04) (0.04) -- --
BPMF
1989(b) $ 8.00 0.02 (0.83) (0.81) -- -- -- --
1990 $ 7.19 (0.03)(i) (0.59)(i) (0.62) -- -- (0.14) (0.03)
1991 $ 6.30 (0.08)(i) (0.93)(i) (1.01) -- -- -- --
1992 $ 5.29 (0.09)(i) (0.16)(i) (0.25) -- -- -- --
1993 $ 5.04 (0.08)(i) 1.87(i) 1.79 -- -- -- --
1994 $ 6.83 (0.11)(i) 2.01(i) 1.90 -- -- -- --
1995 $ 8.73 (0.02) (0.41) (0.43) -- -- (0.09) (0.03)
1996 $ 7.12 (0.10)(i) 2.75(i) 2.65 -- -- -- --
BFIF
1993(c) $ 5.00 0.21 0.09 0.30 (0.21) -- -- --
1994 $ 5.09 0.40 (0.17) 0.23 (0.36) -- (0.03) (0.08)
1995 $ 4.85 0.30 (0.13) 0.17 -- -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
BSTFIF
1993(d) $ 3.00 0.00(m) 0.00(m) 0.00(m) (0.00)(m) -- -- (0.00)(m)
1994 $ 3.00 0.17 (0.06) 0.11 (0.17) -- -- (0.01)
1995 $ 2.93 0.15 -- 0.15 (0.14) (0.00)(m) -- --
1996 $ 2.94 0.22 -- 0.22 (0.17) (0.00)(m) -- --
BFTFBF
1994(e) $ 5.00 0.18 (0.20) (0.02) (0.18) -- -- (0.03)
1995 $ 4.77 0.24 0.26 0.50 (0.23) (0.01) -- --
1996 $ 5.03 0.22 0.13 0.35 (0.22) (0.00)(m) -- --
</TABLE>

*Computed on an annualized basis.

(a)Reflects operations for the period from June 1, 1986 (commencement of
operations) to April 30, 1987.

(b)Reflects operations for the period from June 22, 1988 (commencement of
operations) to April 30, 1989.

(c)Reflects operations for the period from November 2, 1992 (commencement of
operations) to April 30, 1993.

(d)Reflects operations for the period from April 16, 1993 (commencement of
operations) to April 30, 1993.

(e)Reflects operations for the period from August 12, 1993 (commencement of
operations) to April 30, 1994.

(f) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

FINANCIAL HIGHLIGHTS--BLANCHARD GROUP OF FUNDS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Distributions in
excess of
net realized Net Ratios to Average Net Assets Net assets,
gains and asset ------------------------------------------------- end of
foreign value, Net Expense period
currency Total end Total investment waiver/ (000 Portfolio
transactions(f) distributions of period return(g) Expenses income/(loss) reimbursement(h) omitted) turnover
- ---------------- ------------- --------- --------- -------- ------------- ---------------- ----------- ---------

(g)Based on net asset value.

(h)This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.

(i)Calculated based on average shares outstanding-prior years amounts restated
for comparative purposes.

(j)Net of expense reimbursement.

(k) During the Fund's first year (1989), the net expense ratio to average net
assets would have been 4.03%, if a portion of the 12b-1 distribution and
management fees had not been waived by the prior distributor and manager,
respectively.

(l) The investment income ratio to average net assets would have been 0.72%,
if a portion of the 12b-1 distribution and management fees had not been
waived by the prior distributor and prior manager, respectively.

(m)Less than one cent per share.

(See Notes which are an integral part of the Financial Statements)

THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
- -------------------------------------------------------------------------------

The investment objectives and policies of each Fund are described below.
Specific investment techniques that may be employed by the Funds are described
in a separate section of this Prospectus and in each Fund's Statement of
Additional Information. Our investment objectives and certain policies, except
as noted, are fundamental and can only be changed by vote of a majority of the
outstanding shares of a particular Fund. We may not always achieve our
objectives, but will follow the investment standards described below.

BLANCHARD GLOBAL GROWTH FUND

The Fund seeks to provide long-term capital growth. Current income is
incidental to the Fund's objective. The Fund attempts to achieve its objective
through the implementation of the strategy outlined below. The Fund will
invest, under normal market conditions, at least 65% of the value of its total
assets in securities of at least three different countries.

The Fund's investment policies reflect the opinion of Mellon Capital
Management, Inc. ("MCM" or the "Portfolio Adviser"), the Fund's portfolio
adviser or sub-adviser, that the world economic system is characterized by
various cycles affecting, among other things, business activities, inflation,
interest rates, currencies, and price levels and that by shifting its assets
among the six investment sectors, the Fund can take advantage of investment
opportunities created by such cycles. MCM believes that within each cycle,
certain investment sectors offer more investment opportunities than others.
Naturally, there can be no guarantee that MCM can predict business cycles with
100% accuracy or that the objective of the Fund can be achieved.

When Fund management believes that market conditions warrant a temporary
defensive position, it may invest up to 100% of the Fund's assets in cash,
including foreign currencies, short-term instruments such as commercial paper,
bank certificates of deposit, bankers' acceptances, or repurchase agreements
for such securities and securities of the U.S. government and its agencies and
instrumentalities.

VCM has identified the following six strategic investment sectors which have
generally responded, both positively and negatively, to almost all major
economic trends. A percentage of the Fund's assets need not be allocated into
all sectors. The following table indicates the maximum percentage of total
assets of the Fund that may be invested in each sector. The Fund may have zero
percent allocated to any sector when deemed appropriate by MCM.

PERCENTAGE OF TOTAL ASSETS OF THE FUND IN EACH SECTOR

SECTORS MAXIMUM
-----------------------------------------------------

U.S. Equities Secto 65% r
--------------------------------------------

Foreign Equities Secto 65% r
-----------------------------------------

U.S. Fixed Income Secto 65% r
----------------------------------------

Foreign Fixed Income Secto 65% r
-------------------------------------

Precious Metals Securities Secto 25% r
-------------------------------

Emerging Markets Secto 15% r
-----------------------------------------

The Portfolio Adviser will actively allocate Fund assets, through investments
in the U.S. Equities, Foreign Equities, U.S. Fixed Income and Foreign Fixed
Income Sectors, across the major debt and equity markets of the world,
overweighting sectors that the Portfolio Adviser believes are undervalued. The
Portfolio Adviser may also allocate Fund assets to the Precious Metals
Securities Sector and the Emerging Markets Sector in an attempt to further
diversify portfolio holdings, protect against increases in inflation and
enhance overall returns. The Portfolio Adviser will monitor currency exposure,
and such exposure will be actively hedged as currencies become overvalued.

It is possible that an overlapping of investments among the six investment
sectors may occur. For example, investments in U.S. equity securities are not
found only in the U.S. Equities Sector, as the Precious Metals Securities
Sector may invest in common stocks of U.S. precious metals-related companies
as well. Therefore, if the U.S. Equities Sector was at its maximum allocation
of 65% of the Fund's assets, and the Precious Metals Securities Sector had
investments in U.S. common stocks of precious metals companies, the total
assets of the Fund invested in U.S. equity securities could exceed 65%.

U.S. EQUITIES, FOREIGN EQUITIES, U.S. FIXED INCOME AND FOREIGN FIXED INCOME
SECTORS. Within the four U.S. and foreign equities and income sectors, the
Portfolio Adviser will use a highly disciplined process to determine the
percentage of the Fund's assets which will be from time-to-time allocated
among each U.S. and foreign country's markets, based upon the Portfolio
Adviser's assessment of risk and the degree by which each such market is
currently undervalued. (The foreign countries which will be included within
the Foreign Equities and the Foreign Fixed Income Sectors are the following:
Australia, Austria, Belgium, Canada, Denmark, France, Finland, Germany, Hong
Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway,
Singapore/Malaysia, South Africa, Spain, Sweden, Switzerland and the United
Kingdom. This list may be modified from time-to-time to conform to the list of
countries included in the Morgan Stanley Capital International World Index
[the "Morgan Stanley Index"]).

In estimating the relative attractiveness of each asset class, MCM will take
into account various factors. Common stocks will be evaluated using a
"dividend-discount" model. This model provides an expected return of the
relevant common stock index of each market in which the Fund may invest (i.e.,
the Standard & Poor's 500 Composite Stock Price Index* [the "S&P 500 Index"]
for the U.S. Equities Sector, and the separate country indexes comprising the
Morgan Stanley Index for the Foreign Equities Sector) based upon earnings for
companies whose stocks are included in such Indexes. The expected bond return
is that expected to be produced by long-term bonds with credit risks similar
to bonds rated Aa by Moody's Investors Service, Inc. or AA by Standard &
Poor's Corporation.

- --------

* "Standard & Poor's(R)," "S&P(R)," "S&P 500(R)" and "Standard & Poor's 500"
are trademarks of McGraw-Hill, Inc. and have been licensed for use by MCM.

The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability
of the S&P 500 Index to track general stock market performance. S&P's only
relationship to MCM is the licensing of certain trademarks and trade names
of S&P and of the S&P 500 Index which is determined, composed and calculated
by S&P without regard to MCM or the Fund. S&P has no obligation to take the
needs of MCM or the owners of the Fund into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for and
has not

Once expected return and volatility (risk) estimates are developed for each
asset class within the four U.S. and foreign equity and fixed income sectors,
the Portfolio Adviser will attempt to identify apparent imbalances in the
relative prices of the securities of each market, using a computer model.

To implement its allocation strategy, the Portfolio Adviser will invest in the
following securities: (i) in the U.S. Equity Sector, the Portfolio Adviser
will invest in a diversified portfolio of common stocks which seeks to track
the performance of the S&P 500 Index; (ii) in the U.S. Fixed Income Sector,
the Portfolio Adviser will invest in a diversified portfolio of U.S. fixed
income obligations which seeks to track the performance of the Lehman Long-
Term Treasury Index; (iii) in the Foreign Equities Sector, the Portfolio
Adviser will invest in a diversified portfolio of common stocks which seeks to
track the performance of individual country segments of the Morgan Stanley
Index; (iv) and in the Foreign Fixed Income Sector, the Portfolio Adviser will
invest in a portfolio of foreign government fixed income obligations which
seeks to track the individual country segments of the Salomon Brothers World
Government (5+) Bond Index.

The Fund is not an "Index Fund," and thus does not have a policy of weighting
its portfolio so as to approximate the relative composition of the securities
contained in the indices which it seeks to track. Rather, it seeks to track
performance by investing in a select group of securities (each of which is
included in the relevant index) which the Portfolio Adviser believes, taken
together, will represent the performance of the index as a whole.

PRECIOUS METALS SECURITIES SECTOR. Precious metals securities include
securities of metal mining producer and non-producer companies that are
engaged in (i) the exploration, refining and development of gold, silver,
palladium, and platinum; (ii) the manufacture or production of products
incorporating such precious metals (for example, jewelry, photographic
supplies and medical equipment and supplies); or (iii) the marketing of
precious metals or precious metals products. Such marketing companies may be
in the industries named above or in separate industries that fall into the
category of wholesale-retail trade. A company will be considered to be
"engaged in" such activity if it derives more than 50% of its revenues from or
devotes more than 50% of its assets to such activity.
- --------

Footnote continued from page 7.
participated in the determination of the prices and amount of the Fund or
the timing of the issuance or sale of the Fund or in the determination or
calculation of the equation by which the Fund is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Fund.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS
OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY MCM, OWNERS OF THE FUND, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE
ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.

In particular, the Portfolio Adviser may invest in (1) publicly-traded common
stocks, (2) securities convertible into common stocks, such as convertible
preferred stock, convertible debentures, convertible rights and warrants (to
the extent permissible by the Fund's investment policies), and (3) debt
securities of such companies, all of which are believed by the Portfolio
Adviser to have the potential for appreciation.

EMERGING MARKETS SECTOR. The Fund may invest in emerging country equity
securities, which would include common stock, preferred stock (including
convertible preferred stock), bonds, notes and debentures convertible into
common or preferred stock, stock purchase warrants and rights, equity
interests in trusts and partnerships and American, Global or other types of
Depository Receipts of companies; (i) the principal securities market for
which is an emerging country; (ii) that alone or on a consolidated basis
derive 50% or more of their annual revenue from either goods produced, sales
made or services performed in emerging countries; or (iii) that are organized
under the laws of, and with a principal office in, an emerging country.
Determinations as to eligibility will be made by the Portfolio Adviser based
upon publicly available information and inquiries made to the companies.

An emerging country is any country that the International Bank for
Reconstruction and Development (more commonly known as the World Bank) has
determined to have a low or middle income economy. There are currently over
130 countries which are considered to be emerging countries, approximately 40
of which currently have stock markets. These countries generally include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Currently investing in
many emerging countries is not feasible or may involve unacceptable political
risks. The Emerging Markets Sector will focus its investments on those
emerging market countries in which the Portfolio Adviser believes the
economies are developing strongly and in which the markets are becoming more
sophisticated.

In addition to the normal determinants of interest rates, inflation, economic
growth and currency movements, country selections and weightings in emerging
growth markets are determined by developmental trends, credit ratings, the
political environment, market liquidity, progress towards privatization and
the degree of foreign investor interest. In addition to emphasizing industries
which are crucial to the development trend in a country and assessing
financial reporting standards and the availability of public information,
stock selection is based on a fundamental analysis of specific criteria
including (i) quality of management; (ii) stock fundamentals (strong earnings
growth and profit potential, positive cash flow, sound balance sheet,
geographical sales and profit spread, and good marketability in shares); and
(iii) price and timing.

Depository receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. In addition, the
issuers of the stock of unsponsored depository receipts are not obligated to
disclose material information in the United States and, therefore, there may
not be a correlation between such information and the market value of the
depository receipts.

OPTIONS AND FUTURES. With respect to all sectors, the Portfolio Adviser may
utilize stock and bond futures and options, currency hedging, and other
investment techniques described under "Certain Investment Strategies and
Policies--Options and Futures" and in the Fund's Statement of Additional
Information, subject to the limitations set forth therein.

BLANCHARD PRECIOUS METALS FUND, INC.

The Fund's primary investment objective is to provide long-term capital
appreciation and preservation of purchasing power through investments in
physical precious metals and securities of companies involved with precious
metals. A secondary objective is to reduce the risk of loss of capital and
decrease the volatility often associated with precious metals investments by
changing the allocation of the Fund's assets from precious metals securities
to physical precious metals investments and/or investing in short-term
instruments and government securities during periods when the Portfolio
Adviser, Cavelti Capital Management Ltd., believes the precious metals markets
may experience declines.

For the purpose of this Fund, the term "Precious Metals Securities" refers to
the debt and equity securities of domestic and foreign companies listed on
domestic and foreign exchanges which are directly involved in the exploration,
development, mining, refining, manufacturing, dealing or marketing of precious
metals or precious metals products. A company will be considered to be
"involved in" such activity if it derives more than 50% of its revenues from
or devotes more than 50% of its assets to such activity. The Fund may invest
in (1) publicly-traded common stocks, (2) securities convertible into common
stocks, such as convertible preferred stock, convertible debentures,
convertible rights and warrants (to the extent permissible by the Fund's
investment policies), and (3) debt securities of such companies, all of which
are believed by the Portfolio Adviser to have the potential for appreciation.
In addition, when the Portfolio Adviser believes that market conditions
warrant, the Fund may invest up to 100% of its assets in certain short-term
instruments.

The Fund may, from time to time, invest up to 5% of its assets in unrated
foreign debt securities which are judged by the Portfolio Adviser to be of at
least comparable quality to lower-rated U.S. debt securities (usually defined
as Baa or lower by Moody's or BBB or lower by Standard & Poor's). The
selection of unrated foreign debt securities will depend to a great extent on
the credit analysis performed by the Portfolio Adviser. Since it is possible
that the Fund could have up to 100% of its total assets in equity securities
of domestic and foreign companies directly involved in the exploration,
development, mining, refining, manufacturing, dealing or marketing of precious
metals or precious metals products, the Fund may be subject to greater risks
and greater market fluctuations than funds with a more diversified general
equity portfolio.

The Fund may invest up to 49% of its total assets in physical precious metal
of gold, silver, platinum or palladium through holdings in bullion or precious
metals certificates or storage receipts representing the physical metals. When
the Fund invests in precious metals certificates and storage receipts, it
receives certificates evidencing ownership of specific amounts of precious
metals bullion, instead of taking physical possession of the bullion
represented by the certificate. The Fund relies on the issuers of such
documents to maintain the underlying precious metal on deposit. A default by
any of the issuers could expose the Fund to loss of the metal on deposit. The
Fund will purchase certificates from institutions where the certificate is
100% backed by physical precious metals in the possession of the institutions
and enter into such transactions only with banks, brokers, dealers and
clearinghouses which have assets of over $1 billion and, in the Portfolio
Adviser's opinion, have a high degree of creditworthiness. The
creditworthiness of the issuers will be monitored by the Portfolio Adviser on
an ongoing basis.

The Fund will not invest in coins. The Fund may purchase contracts for forward
delivery of physical precious metals. Forward contracts for precious metals
are contracts between the Fund and institutions

dealing in precious metals for the future receipt or delivery of metals at a
price fixed at the time of the transaction. While some of the Fund's
investments may earn interest or dividends, the Fund is not designed for
investors seeking income. The Fund's investment strategy calls for different
approaches to the precious metals markets in different economic and investment
conditions.

As Precious Metals Securities have historically out-performed the price of the
physical metals during periods of generally rising precious metals prices, the
Fund will ordinarily tend to emphasize precious metals securities over
physical precious metals investments during such periods. However, to the
extent that the current behavior of precious metals markets does not conform
to historical patterns at any given time, investments of the Fund will be
placed in those markets believed by the Portfolio Adviser to have the most
promising potential for appreciation. Conversely, during periods of stable or
falling precious metals prices, physical precious metals have generally held
their value better than precious metals securities. Therefore, during those
periods, the Fund will tend to emphasize investments in physical precious
metals investments.

As the Fund can invest in all four precious metals; gold, silver, platinum and
palladium, the Portfolio Adviser will attempt to capitalize on price
differentials in the metals markets. Although the Portfolio Adviser believes
that prices of gold, silver, platinum or palladium generally tend to move in
the same direction at the same time, with gold often setting the pace,
experience has proven that this is not always the case. The Fund, therefore,
may emphasize some metals over others when the Portfolio Adviser believes it
is advisable to do so. There is no assurance that the Portfolio Adviser's
forecasts of precious metals prices and the resulting allocation of the Fund's
assets among precious metals or between Precious Metals Securities and
Physical Precious Metals Investments will always be correct.

When the Portfolio Adviser believes that precious metals prices may suffer
declines, it may protect against market risk by increasing the Fund's cash
position. Under normal conditions, the Fund will have at least 65% of its
total assets invested in Precious Metals Securities and Physical Precious
Metals Investments. Under other circumstances, the Fund may invest up to 100%
of its assets in short-term instruments, including commercial paper, bank
certificates of deposit, bankers' acceptances and securities of the U.S.
government and its agencies and instrumentalities as well as in cash and cash
equivalents dominated in foreign currency.

The Portfolio Adviser believes that precious metals and securities of precious
metals related companies continue to offer excellent prospects for capital
appreciation and protection of your purchasing power, during any economic
environment, and especially during periods of inflation, as well as periods of
political and economic instability. The market for precious metals is
worldwide; therefore, precious metals prices are subject to many political,
social and economic influences, often resulting in high volatility. See "Risk
Factors and Special Considerations--Precious Metals and Precious Metals
Securities" for further details.

As physical precious metals earn no income, appreciation in the market price
of gold and other precious metals is the sole manner in which the Fund is able
to realize gains on these investments. Furthermore, the Fund encounters
storage and transaction costs in connection with its ownership of physical
precious metals which are higher than those attendant to the purchase, holding
and disposition of more traditional types of investments.

The Portfolio Adviser believes that physical precious metals are readily
marketable, and thus would not be subject to the Fund's limitation on
investing in illiquid securities described under "Certain Investment
Strategies and Policies--Illiquid Securities."

The production and marketing of gold and precious metals may be affected by
the action of certain governments and changes in existing governments. For
example, the mining of gold is highly concentrated in a few countries.
Economic and political conditions prevailing in these countries may have a
direct effect on the production and marketing of newly produced gold and sales
of central bank gold holdings. It is expected that a majority of gold mining
companies in which the Fund will invest will be located within the United
States and Canada. For a further discussion on this subject, including certain
risk considerations and limitations regarding investments in South African
issuers, see "Investment Techniques and Associated Risks--Precious Metals and
Precious Metals Securities."

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
The investment objective of the Fund is to provide a high level of current
income consistent with preservation of capital by investing primarily in
short-term investment grade debt securities. The Fund's Portfolio Adviser is
OFFITBANK. The Fund is designed for investors seeking higher yields than are
available from money market funds, but who also want more price stability than
is offered by longer-term bond funds. Under normal market conditions, the Fund
will invest at least 80% of its assets in a broad range of U.S. debt
securities of all types. The Fund may invest up to 20% of the value of its
assets in securities of foreign issuers denominated in foreign currency and
not publicly traded in the United States.

Under normal market conditions, at least 65% of the value of the Fund's assets
will be invested in investment-grade bonds, which are considered to be those
rated at least Baa by Moody's or at least BBB by Standard & Poor's or, if
unrated, deemed to be of comparable quality by the Portfolio Adviser. The Fund
may invest less than 35% of its assets in lower-quality debt securities if the
Portfolio Adviser deems that such securities present attractive investment
opportunities. The Fund will not invest in debt securities rated lower than
Caa by Moody's and CCC by Standard & Poor's, or, if unrated, of comparable
quality in the Portfolio Adviser's opinion. Debt securities rated Baa by
Moody's and BBB by Standard & Poor's are considered investment grade
obligations which lack outstanding investment characteristics and may have
speculative characteristics as well. Debt securities rated Caa by Moody's and
CCC by Standard & Poor's are considered to have predominantly speculative
characteristics with respect to capacity to pay interest and repay principal
and to be of poor standing. See "Risk Factors-- Lower Quality Debt Securities"
for a discussion of certain risks, and Appendix A.

Although it is intended that the average maturity of the Fund's portfolio will
be three years or less, the Fund retains the flexibility to increase the
average maturity to up to five years in times when abnormal market conditions
warrant temporary measures. Accordingly, the Fund's average maturity may vary,
based on the Portfolio Adviser's analysis of interest rate trends and other
data. In general, the Fund's average maturity will tend to be shorter when the
Portfolio Adviser expects interest rates to rise and longer when it expects
interest rates to decline. The Fund may invest in individual securities with
terms to maturity of greater than five years if the Fund's portfolio contains
sufficient short-term securities so that the weighted average maturity
complies with the above-stated policy. As the useful life of individual pools
of assets underlying certain obligations in which the Fund may invest may at
times be of a shorter duration than the stated maturity of the obligation
itself, the Fund may consider the useful life of such underlying assets as the
maturity of the obligation owned by the Fund.

Under normal market conditions, the Fund does not expect to have a substantial
portion of its assets invested in money market instruments. However, when the
Portfolio Adviser determines that adverse

market conditions exist, the Fund may adopt a temporary defensive posture and
hold cash or invest its entire portfolio in money market instruments. In
addition, during times of international political or economic uncertainty,
most or all of the Fund's investments may be made in the U.S. and denominated
in U.S. dollars. To the extent the Fund is so invested, the Fund's investment
objective may not be achieved.

The Fund will invest in bonds, notes, mortgage securities, asset-backed
securities, government and government agency obligations, zero coupon
securities and convertible securities, and short-term obligations such as
banker's acceptances, certificates of deposit, repurchase agreements and
commercial paper, in any proportion that the Portfolio Adviser determines is
appropriate and in the best interest of shareholders. The Fund may invest in
U.S. government securities and in options, futures contracts and repurchase
transactions with respect to such securities. See "Additional Investment
Information."

The Fund may invest up to 20% of its assets in international securities
consisting of debt obligations and other fixed-income securities, in each case
denominated in non-U.S. currencies or composite currencies, including: debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities; debt obligations of supranational entities (described
below); debt obligations of the U.S. government issued in non-dollar
securities; and debt obligations and other fixed-income securities of foreign
and U.S. corporate issuers (non-dollar denominated).

When investing in international securities, the Fund is not limited to
purchasing debt securities rated at the time of purchase by Moody's or
Standard & Poor's. However, the Fund is limited to the extent that it may not
invest more than 34.9% of its assets in lower quality debt securities. In
making international securities investments, the Portfolio Adviser may
consider, among other things, the relative growth and inflation rates of
different countries. The Portfolio Adviser may also consider expected changes
in foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. The Portfolio Adviser may further evaluate, among other
things, foreign yield curves and regulatory and political factors, including
the fiscal and monetary policies of such countries.

The Fund may invest, without limitation, in unrated debt securities issued by
foreign governments, their agencies and instrumentalities, where the foreign
government, its agency or instrumentality is rated less than Baa by Moody's or
less than BBB by Standard & Poor's, provided, however, that the Portfolio
Adviser has determined through its own credit analysis that the credit
characteristics of any such unrated security are equivalent to those of a
security rated at least Baa by Moody's or BBB by Standard & Poor's. To the
extent that the Portfolio Adviser has not made any such determination, such
unrated debt securities will be deemed to have the rating assigned by Moody's
or Standard & Poor's to the governmental entity. To the extent that such
securities are deemed to be rated less than Baa by Moody's or less than BBB by
Standard & Poor's, investment in such securities will be subject to the under
35% limitation on investment in lower quality debt securities.

The obligations of foreign governmental entities, including supranational
issuers, have various kinds of government support. Obligations of foreign
governmental entities include obligations issued or guaranteed by national,
provincial, state or other governments with taxing power or by their agencies.
These obligations may or may not be supported by the full faith and credit of
a foreign government.

Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its
borrowings. Each supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by
members at the entity's call), reserves and net income. The Fund does not have
a policy of concentrating investments in supranational entities.

BLANCHARD FLEXIBLE INCOME FUND

The investment objective of the Fund is to provide high current income while
seeking opportunities for capital appreciation. The Portfolio Adviser for the
Fund is OFFITBANK. The Fund intends to invest in the following fixed income
securities markets:

U.S. GOVERNMENT SECURITIES. This consists of debt obligations of the U.S.
government and its agencies and instrumentalities and related options,
futures contracts and repurchase agreements.

INVESTMENT GRADE FIXED INCOME SECURITIES. This consists of investment grade
fixed income securities, including mortgage related and asset backed
securities.

HIGH YIELD SECURITIES. This consists of higher yielding (and, therefore,
higher risk), lower rated U.S. corporate fixed income securities.

INTERNATIONAL FIXED INCOME SECURITIES. This consists of obligations of foreign
governments, their agencies and instrumentalities and other fixed income
securities denominated in foreign currencies or composite currencies
including: debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities; debt obligations of supranational
entities (see discussion in "Blanchard Short-Term Flexible Income Fund"
above); debt obligations of the U.S. government issued in non-dollar
securities; and debt obligations and other fixed income securities of foreign
and U.S. corporate issuers (non-dollar denominated). The Fund is not limited
to purchasing debt securities rated at the time of purchase by Moody's or
Standard & Poor's.

The Fund may invest in any country where the Portfolio Adviser sees potential
for high income. It presently expects to invest primarily in non-dollar
denominated securities of issuers in the industrialized Western European
countries; in Canada, Japan, Australia and New Zealand; and in Latin America.
In making international fixed income securities investments, the Portfolio
Adviser may consider, among other things, the relative growth and inflation
rates of different countries. The Portfolio Adviser may also consider expected
changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of
securities denominated in foreign currencies. The Portfolio Adviser may
further evaluate, among other things,

foreign yield curves and regulatory and political factors, including the
fiscal and monetary policies of such countries. The Fund may also invest up to
25% of its assets in the fixed income securities of issuers in emerging market
countries. It is the policy of the Fund not to invest more than 10% of its
assets in any one emerging market country, except that the Fund may invest up
to 15% of its assets in fixed income securities of issuers in Mexico. For
additional information on each of these securities markets see "Additional
Investment Information."

The Portfolio Adviser believes that the ability to invest the Fund's assets
among these markets, as opposed to investing in any one, may enable the Fund
to enhance current income and increase opportunities for capital appreciation
while taking risk to principal into consideration. The Fund may invest up to
35% of its assets in lower quality fixed income securities. There is no limit
on the percentage of Fund assets invested in any of the fixed income markets
except for High Yield Securities which is limited to less than 35%, and
further limited to the extent of any lower quality fixed income securities
held in the International Fixed Income Securities portfolio. At least 65% of
the Fund's total assets generally will be invested in income producing
securities; however, the Fund expects that substantially all of its total
assets will be invested in income-producing securities, together with certain
futures, options and foreign currency contracts and other investments
described below. When the Portfolio Adviser determines that adverse market
conditions exist, the Fund may adopt a temporary defensive posture and hold
cash or invest its entire portfolio in money market instruments. In addition,
during times of international political or economic uncertainty, most or all
of the Fund's investments may be made in the U.S. and denominated in U.S.
dollars. For a complete discussion of the types of investments in which the
Fund will invest see "Additional Investment Information."

BLANCHARD FLEXIBLE TAX-FREE BOND FUND

The Fund's investment objective is to provide a high level of current interest
income exempt from Federal income tax consistent with the preservation of
principal. The Fund will invest at least 65% of its assets in municipal bonds,
except when maintaining a temporary defensive position. The Fund's Portfolio
Adviser is The United States Trust Company of New York.

The Fund invests in municipal obligations which are determined by the
Portfolio Adviser to present minimal credit risks. As a matter of fundamental
policy, except during temporary defensive periods, the Fund will maintain at
least 80% of its assets in tax-exempt obligations, including the alternative
minimum tax. (This policy may not be changed without the vote of the holders
of a majority of the Fund's outstanding shares.) However, from time to time on
a temporary defensive basis due to market conditions, the Fund may hold
uninvested cash reserves or invest in taxable obligations in such proportions
as, in the opinion of the Portfolio Adviser, prevailing market or economic
conditions may warrant. Uninvested cash reserves will not earn income.
Interest income from certain short-term holdings may be taxable to
shareholders as ordinary income.

The municipal obligations purchased by the Fund will consist of: (1) municipal
bonds rated "A" or better by Moody's or by Standard & Poor's or, in certain
instances, municipal bonds with lower ratings if they are deemed by the
Portfolio Adviser to be comparable to A-rated issues; (2) municipal notes
rated "MIG-2" or better ("VMIG-2" or better in the case of variable rate
notes) by Moody's or "SP-2" or better by Standard & Poor's and (3) municipal
commercial paper rated "Prime-2" or better by Moody's or "A-2" (collectively,
"Municipal Obligations"). If not rated, securities purchased by the Fund will
be of comparable quality to the above ratings as determined by the Portfolio
Adviser under the supervision of the Board Members. A discussion of Moody's
and Standard & Poor's rating

categories is contained in Appendix A. The Fund may purchase and sell
municipal bond index and interest rate futures contracts as a hedge against
changes in market condition.

The Fund may also invest in securities issued by money market funds which are
investment companies that invest in high-quality, short-term securities and
that determine their net asset value per share based on the amortized cost or
penny-rounding method. Such securities will be acquired by the Fund within the
limits prescribed by the Investment Company Act of 1940 ("1940 Act"). By
investing in shares of money market funds, the Fund pays a portion of the
operating and management expenses of such money market funds, as well as its
own operating and management expenses. Investors should consider the tax
consequences of an investment by the Fund in money market funds distributing
taxable income. However, it is a policy of the Fund to maximize the percentage
of distributions to shareholders that are not subject to Federal income taxes.

MANAGEMENT OF THE FUNDS
- -------------------------------------------------------------------------------

BOARD OF TRUSTEES/DIRECTORS. The Board of Trustees of Blanchard Funds and the
Board of Directors of BPMF (the "Boards" or the "Board Members") are
responsible for managing the business affairs of the Funds and for exercising
all of the powers of the Funds except those reserved for the shareholders. The
Executive Committee of the Boards handles the Boards' responsibilities between
meetings of the Boards.

MANAGER. VCM is responsible for managing the Funds and overseeing the
investment of their assets, subject at all times to the supervision of the
Board Members. In addition, VCM selects, monitors and evaluates the Portfolio
Advisers. VCM will review the Portfolio Advisers' performance records
periodically, and will make changes if necessary, subject to Board Member and
shareholder approval.

MANAGEMENT FEES. VCM receives an annual management fee at annual rates equal
to percentages of the relevant Fund's average net assets as follows:

BGGF and BPMF--1.00% of the Fund's first $150 million of average daily net
assets, .875% of the Fund's average daily net assets in excess of $150 million
but not exceeding $300 million and .75% of the Fund's average daily net assets
in excess of $300 million. BFIF--.75%; BSTFIF--.75%; BFTFBF--.75%. These fees
are higher than the fees paid by most investment companies because of the
complexity of managing these types of Funds.

The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.

The management contract provides for the voluntary waiver of expenses by VCM
from time to time. VCM can terminate this voluntary waiver of expenses at any
time with respect to a Fund at its sole discretion. VCM has also undertaken to
reimburse the Funds for operating expenses in excess of limitations
established by certain states.

VCM'S BACKGROUND. Virtus Capital Management, Inc., a Maryland corporation
formed in 1995, is a wholly owned subsidiary of Signet Banking Corporation.
Signet Banking Corporation is a multi-state, bank holding company which has
provided investment management services since 1956. VCM, which is a registered
investment adviser, manages, in addition to the Funds, The Virtus Funds, three
fixed income common trust funds with $190.5 million in assets.

PORTFOLIO ADVISORY SERVICES
- -------------------------------------------------------------------------------

THE PORTFOLIO ADVISERS

To provide portfolio advisory services for the Funds, VCM has entered into
sub-advisory agreements with the Portfolio Advisers set forth below. The
Portfolio Advisers have extensive experience in investing and managing large
private and institutional accounts. Under the terms of each sub-advisory
agreement, the Portfolio Adviser has discretion to purchase and sell
securities for that Fund, except as limited by such Fund's investment
objective, policies and restrictions. Although each Portfolio Adviser's
activities are subject to general oversight by VCM and the Board Members,
selection of specific securities in which the Fund may invest are made by the
Portfolio Adviser.

BLANCHARD GLOBAL GROWTH FUND

Mellon Capital Management Corporation is the Portfolio Adviser to the Fund.
MCM was established in 1983, and provides investment advisory services to
investment companies, pension plans, foundations, endowments and other
institutions located both in the U.S. and abroad. As of September 30, 1995,
MCM had over $40 billion of assets under management. MCM, a wholly owned
indirect subsidiary of Mellon Bank Corporation, is located at 595 Market
Street, Suite 3000, San Francisco, California 94105.

The Fund's portfolio manager is Charles J. Jacklin. Mr. Jacklin has performed
this duty since May 1996. Mr. Jacklin manages and develops global asset
allocation strategies, and develops and implements MCM's value-added
investment strategies. Prior to joining MCM, he served on the finance
faculties of the Stanford University and University of Chicago Schools of
Business. Mr. Jacklin has also served as Senior Staff Economist for Financial
Markets and Banking for the President's Council of Economic Advisers, and had
primary responsibility for all matters related to financial markets and
banking. He has published a number of articles on finance and investment in
academic research journals, and is an associate editor for the Review of
Quantitative Finance and Accounting. Mr. Jacklin holds a Ph.D. in Finance from
Stanford University.

THE SUB-ADVISORY CONTRACT. The Sub-Advisory Contract provides that MCM shall
pay all expenses incurred by it and its staff in connection with the
performance of its services under the Sub-Advisory Contract, including the
payment of salaries of all officers and employees who are employed by it. VCM
will pay MCM an annual fee not to exceed .375% of the Fund's average daily net
assets up to $100 million; .35% on net assets between $100 million and $150
million; and .325% on net assets in excess of $150 million.

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
BLANCHARD FLEXIBLE INCOME FUND

VCM has retained OFFITBANK, 520 Madison Avenue, New York, New York 10022 to
provide portfolio advisory services to the Funds. OFFITBANK, a New York State
chartered trust bank, is the continuation of the business of Offit Associates,
Inc., a registered investment adviser founded in December, 1982. The firm
converted to a trust bank in July, 1990. The core business of OFFITBANK is
portfolio management for institutions, non-profit organizations and wealthy
family groups. OFFITBANK specializes in fixed income management and offers its
clients a complete range of fixed income investments in capital markets
throughout the world. OFFITBANK currently manages in

excess of $7 billion in assets. Jack D. Burks, Managing Director of OFFITBANK,
has over 10 years of experience in Fixed Income Portfolio Management and is
responsible for the day-to-day management of the Funds' portfolios.

THE SUB-ADVISORY AGREEMENTS. The sub-advisory agreements between VCM and
OFFITBANK provide for the payment by VCM to OFFITBANK of a monthly fee at the
annual rate of .30% of the first $25 million of each Fund's average daily net
assets; .25% of the next $25 million of average daily net assets; and .20% of
average daily net assets in excess of $50 million.

BLANCHARD FLEXIBLE TAX-FREE BOND FUND

VCM has retained The United States Trust Company of New York ("U.S. Trust") to
provide portfolio advisory services to the Fund. U.S. Trust, a New York State
chartered bank and trust company established in 1853, currently manages in
excess of $50.2 billion in assets. U.S. Trust is a financial services company
that specializes in asset management, private banking, fiduciary and
securities services. Kenneth J. McAlley, an executive vice president of U.S.
Trust, has been actively engaged in municipal obligation portfolio management
with U.S. Trust for over 10 years and has been responsible for the Fund's day-
to-day investment decisions since the Fund's commencement of operations in
July of 1993. Mr. McAlley is a nationally recognized expert in municipal bond
investment strategy and has been favorably profiled in publications such as
Barrons, Forbes and Financial World.

THE SUB-ADVISORY AGREEMENT. Pursuant to the sub-advisory agreement between VCM
and U.S. Trust, VCM has agreed to pay U.S. Trust a monthly fee at the annual
rate of .20% of the Fund's average daily net assets.

BLANCHARD PRECIOUS METALS FUND, INC.

VCM has retained Cavelti Capital Management, Ltd., of Toronto, Canada to
provide portfolio advisory services to the Fund. Cavelti Capital Mangement,
Ltd. is a Canadian money management firm specializing in bullion and precious
metals mining shares and is a registered investment adviser with the SEC.
Peter C. Cavelti, the company's President, has extensive investment experience
in the field of precious metals and the firm's clients include government
agencies, financial institutions, mining companies and Canadian mutual funds.

THE SUB-ADVISORY AGREEMENT. Pursuant to the sub-advisory agreement between VCM
and Cavelti Capital Management Ltd., VCM has agreed to pay Cavelti Capital
Management Ltd. monthly compensation of the sum of the amounts determined by
applying the following annual rates to the Fund's aggregate daily net assets:
.30% of the Fund's net assets up to the first $150 million; .2625% of the
Fund's net assets in excess of $150 million but less than $300 million, plus
.255% of the Fund's net assets in excess of $300 million.

HOW TO INVEST
- -------------------------------------------------------------------------------

You may purchase shares of any Fund from Federated Securities Corp., the
Funds' principal Distributor. You may also purchase shares from broker-dealers
who have entered into a dealer agreement with the Distributor at net asset
value, which is determined as of the close of trading (normally 4:00 p.m.,
Eastern time) on the New York Stock Exchange. If your order is received after
the above time, your shares will be purchased at the net asset value on the
next business day. Each Fund's

net asset value per share is determined by dividing the value of that Fund's
net assets by the total number of its shares outstanding. Each Fund determines
the net asset value of its shares on each day that the New York Stock Exchange
is open for business and on such other days as there is sufficient trading in
its securities to affect materially its net asset value per share.

For all Funds the minimum initial investment requirement is $3,000 and the
minimum initial investment requirement for qualified pension plans (IRAs,
Keoghs, etc.) is $2,000. The minimum investment requirement for additional
investments in all of the Funds is at least $200 per investment. (The
foregoing minimum investment requirements may be modified or waived at any
time at our discretion.)

PURCHASES BY MAIL

To purchase shares of a Fund by mail, simply send a completed Application
(included with this Prospectus or obtainable from the Fund) to the Blanchard
Group of Funds, P.O. Box 8612, Boston, MA 02266-8612, together with a check
payable to the individual Fund in payment for the shares. If you need
assistance in completing the Application, call 1-800-829-3863.

All purchases must be made in U.S. dollars and checks must be drawn on a
United States bank. Payment for shares may not be made by third party checks;
however, second party checks are acceptable when properly endorsed. We reserve
the right to limit the number of checks for one account processed at one time.
If your check does not clear, your purchase will be cancelled and you could be
liable for any losses or fees incurred. Payments transmitted by check are
accepted subject to collection at full face amount.

Orders by mail are considered received after payment by check is converted
into federal funds. This is generally the next business day after the Transfer
Agent receives the check.

PURCHASES BY WIRE. You may also purchase shares by bank wire. For opening new
accounts in this manner, please call 1-800-829-3863 (toll free) before wiring
your funds, and furnish the following information: the account registration
and address, and your taxpayer identification number (for individuals, a
Social Security number). When making additional investments by wire to your
existing accounts, please provide your account numbers. You must include your
name and telephone number, the amount being wired and the name of the wiring
bank with both new and existing account purchases. Initial purchases by wire
must be followed by a completed Application within seven days.

You should instruct your bank to wire federal funds to: State Street Bank and
Trust Company, ABA #011000028, DDA #0627-975-6, Boston, MA, indicating the
name of the Fund, your account number and the account registration.

AUTOMATIC INVESTMENT PLANS. Regular monthly purchases of shares may be made by
direct deposit of Social Security and certain other government checks into
your account. Fund shares may be purchased at regular intervals selected by
you by automatic transferral of funds from a bank checking account that you
may designate. All such purchases require a minimum of $100 per transaction.
Call 1-800-829-3863 for information and forms required to establish these
Plans.

BY TELEPHONE. This service allows you to purchase additional shares quickly
and conveniently through an electronic transfer of money. When you make an
additional purchase by telephone, Blanchard will automatically debit your
predesignated bank account for the desired amount. To establish the telephone
purchase option on your new account, you must complete the section on the

Application and attach a "voided" check from your bank account. If your
account is already established, please call 1-800-829-3863 to request the
appropriate form. This option will become effective 15 calendar days after the
form is processed.

GENERAL INFORMATION

All ordinary income, dividends and capital gain distributions, if any, are
automatically reinvested at net asset value in additional Fund shares unless
we receive written notice from you, at least 30 days prior to the record day
of such distribution, requesting that your dividends and distributions be
distributed to you in cash. See "Tax Matters."

We reserve the right to suspend the offering of any Fund shares for a period
of time. We also reserve the right to reject any purchase order.

No share certificates will be issued for shares unless requested in writing.
In order to facilitate redemptions and transfers, most shareholders elect not
to receive certificates. Shares are held in unissued form by the Transfer
Agent. Shares for which certificates have been issued cannot be redeemed,
unless the certificates are received together with the redemption request in
proper form. Share certificates are not issued for fractional shares.

INVESTOR SERVICES
- -------------------------------------------------------------------------------

RETIREMENT PLANS

We offer a Prototype Pension and Profit Sharing Plan, including Keogh Plans,
IRAs, SEP-IRA Plans, IRA Rollover Accounts and 403(b) Plans. Plan support
services are available by calling 1-800-829-3863.

AUTOMATIC WITHDRAWAL PLAN

If you purchase $10,000 or more of Fund shares, you may establish an Automatic
Withdrawal Plan to authorize a specified dollar amount to be paid periodically
to a designated payee. Under this Plan, all income dividends and capital gains
distributions will be reinvested in shares in your account at the applicable
payment dates' closing net asset value.

Your specified withdrawal payments are made monthly or quarterly in any amount
you choose, but not less than $100 per month or $300 quarterly. Please note
that any redemptions of your shares, which may result in a gain or loss for
tax purposes, may involve the use of principal, and may eventually use up all
of the shares in your account. Such payments do not provide a guaranteed
annuity and may be terminated for any shareholder by a Fund if, due to
transfer or redemption of shares, the value of the account drops below a
minimum amount deemed acceptable from time-to-time by the Fund. In such a
case, the shareholder will be notified that the withdrawal payments will be
terminated. The cost of administering the Automatic Withdrawal Plan for the
benefit of shareholders is a Fund expense.

EXCHANGE PRIVILEGE

You may exchange your Fund shares for shares of another Fund in the Blanchard
Group of Funds or for Investment Shares of any Virtus Fund at net asset value.
In addition, you may exchange your Fund Shares for shares of Federated
Emerging Market Fund at net asset value. No fees are charged in

connection with any such exchange. Before making an exchange, you should read
the Prospectus concerning the participating Fund into which your exchange is
being made.

To request an exchange by telephone, simply call 1-800-829-3863, prior to 4:00
p.m. (Eastern) time. Exchanges can be made in this manner only if you have not
opted out of the Telephone Exchange Privilege, as described in the New Account
Application accompanying this Prospectus and only if your account registration
has not changed within the last 30 days.

It is the Funds' policy to mail to you at your address of record, within five
business days after any telephone call transaction, a written confirmation
statement of the transaction. All calls will be recorded for your protection.
As a result of the Funds' policy, neither a Fund nor its Transfer Agent will
be responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. Since you may bear
the risk of loss in the event of an unauthorized telephone transaction, you
should verify the accuracy of telephone transactions immediately upon receipt
of your confirmation statement.

Exchanges can only be made between accounts with identical account
registration and in states where shares of the other Funds are qualified for
sale. We do not place any limit on the number of exchanges that may be made
and charge no fee for affecting an exchange. The dollar amount of an exchange
must meet the initial investment requirement of the Fund into which the
exchange is being made. All subsequent exchanges into that Fund must be at
least $1,000. We may modify or suspend the Exchange Privilege at any time upon
60 days' written notice.

Any exchange of shares is, in effect, a redemption of shares in one Fund and a
purchase shares of the other fund. You should consider the possible tax
effects of an exchange. To prevent excessive trading between Funds to the
disadvantage of other shareholders, we reserve the right to modify or
terminate this privilege with respect to any shareholder.

CHECK-WRITING PRIVILEGE

If you are a shareholder of Blanchard Flexible Income Fund or Blanchard Short-
Term Flexible Income Fund, you may elect a service which allows you to write
an unlimited number of checks in any amount of $250 or more which will clear
through the Transfer Agent. There is no charge for this service for regular
checks; special business site checkbooks are assessed a $60 check printing
fee. If the amount of your check is less than $250, the check will be cleared
but you will be assessed a $10 charge. If the check exceeds the value of the
shares in your account, your check will be returned and a $10 fee deducted
from your account. You may not use the Check-Writing Privilege to close out
your account as you will not be able to ascertain the exact account balance of
your account on the date your check clears. To close out your account
completely, you should use the telephone or mail redemption procedures
described below. Stop orders may be placed on checks for a fee of $10. For
further information on this service, please call Investors' Services at 1-800-
829-3863.

The payee of a check may cash or deposit it in a bank; however, checks cannot
be presented in person at a branch office of the Transfer Agent for cash. When
a check is presented to the Transfer Agent for payment, it will cause the Fund
to redeem a sufficient number of shares to cover the amount of the check. You
will continue to earn daily income until the check is presented to the
Transfer Agent for payment.

A COMPLETED NEW ACCOUNT APPLICATION OR SHAREHOLDER PRIVILEGE FORM MUST BE
RECEIVED BY THE TRANSFER AGENT BEFORE THE THESE PRIVILEGES MAY BE USED.

21
HOW TO REDEEM
- -------------------------------------------------------------------------------

You may redeem your shares on any business day at the next determined net
asset value calculated after your redemption request has been accepted by the
Transfer Agent as described below.

BY TELEPHONE. You may redeem your shares by telephone by calling 1-800-829-
3863, prior to 4:00 p.m., Eastern time. All calls will be recorded.
Redemptions of Fund shares can be made in this manner only after you have
executed and filed with the Transfer Agent the telephone redemption
authorization form which may be obtained from your Fund or the Transfer Agent.

You may elect on the telephone redemption authorization form to have a
redemption in any amount of $250 or more mailed either to your registered
address, to your bank account, or to any other person you may designate.
Should you wish to review these instructions, simply complete and file a new
telephone redemption authorization form. There is no charge for this service.
Neither your Fund nor the Transfer Agent will be responsible for any claims,
losses or expenses for acting on telephone instructions that they reasonably
believe to be genuine. See "Investor Services--Exchange Privilege" for
additional information with respect to losses resulting from unauthorized
telephone transactions.

You may also request, by placing a call to the applicable telephone number set
forth above, redemption proceeds to be wired directly to the bank account that
you have designated on the authorization form. The minimum amount that may be
redeemed in this manner is $1,000. A check for proceeds of less than $1,000
will be mailed to your address of record. The Funds do not impose a charge for
this service. However, the proceeds of a wire redemption may be subject to the
usual and customary charges imposed by State Street Bank for the wiring of
funds. In addition, your designated bank may also impose a service charge.

Under extraordinary market conditions, it may be difficult for you to redeem
your shares by telephone. Under these circumstances, you should consider
redeeming your shares by mail, as described below.

BY MAIL. Written redemption requests should be made to the Blanchard Group of
Funds, P.O. Box 8612, Boston, Massachusetts 02266-8612. Where share
certificates have been issued, the certificates must be endorsed and must
accompany the redemption request. Signatures on redemption requests for
amounts in excess of $25,000 and endorsed share certificates submitted for
redemption must be accompanied by signature guarantees from any eligible
guarantor institution approved by the Transfer Agent in accordance with its
Standards, Procedures and Guidelines for the Acceptance of Signature
Guarantees ("Signature Guarantee Guidelines"). Eligible guarantor institutions
generally include banks, broker-dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations. All eligible guarantor institutions must participate in the
Securities Transfer Agents Medallion Program ("STAMP") in order to be approved
by the Transfer Agent pursuant to the Signature Guarantee Guidelines. Copies
of the Signature Guarantee Guidelines and information on STAMP can be obtained
from the Transfer Agent at (800) 462-9102. Signatures on redemption requests
for any amount must be guaranteed (as described above) if the proceeds are not
to be paid to the registered owner at the registered address, or the
registered address has changed within the previous 60 days. The letter of
instruction or a stock assignment must specify the account number and the
exact number of shares or dollar amount to be redeemed. It must be signed by
all registered shareholders in precisely the same way as originally
registered. The letter of instruction must also include any other supporting
legal documents, if required, in the case of estates, trusts,

guardianships, custodianships, corporations, partnerships, pension or profit
sharing plans, or other organizations.

GENERAL INFORMATION

Your redemption request becomes effective when it is received in proper form
by the Funds' Transfer Agent prior to 4:00 p.m. Eastern time or your
redemption will occur on the following business day. We will make payment for
redeemed shares within seven days after receipt by the Transfer Agent.
However, we may delay the forwarding of redemption proceeds on shares which
were recently purchased until the purchase check has cleared, which may take
up to 7 calendar days or more. We may suspend the right of redemption when the
New York Stock Exchange is closed or when trading on the Exchange is
restricted, and under certain extraordinary circumstances in accordance with
the rules of the SEC. Due to the relatively high cost of handling small
investments, we reserve the right upon 60 days' written notice to redeem, at
net asset value, the shares of any shareholder whose account has a value of
less than $1,000, other than as a result of a decline in the net asset value
per share. We do not presently contemplate making such involuntary redemptions
and will not redeem any shares held in tax-sheltered retirement plans in this
category. We also reserve the right upon notice to shareholders to charge a
fee for any services provided herein that are currently free of charge.

DISTRIBUTION OF SHARES OF THE FUNDS
- -------------------------------------------------------------------------------

Federated Securities Corp. is the principal distributor for shares of the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies. Federated
Securities Corp. is a subsidiary of Federated Investors.

DISTRIBUTION PLAN. According to the provisions of a distribution plan adopted
pursuant to Investment Company Act Rule 12b-1, the Distributor may select
brokers and dealers to provide distribution and administrative services as to
shares of the Funds. The Distributor may also select administrators (including
financial institutions, fiduciaries, custodians for public funds and
investment advisers) to provide administrative services. Administrative
services may include, but are not limited to, the following functions:
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding shares; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as each Fund reasonably requests for its shares.

Brokers, dealers, and administrators will receive fees based upon shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the
Boards, provided that for any period the total amount of fees representing an
expense to the Trust or the Company shall not exceed an annual rate of .25 of
1% of the average daily net assets of shares of BFIF, BSTFIF and BFTFBF and
.75 of 1% of the average daily net assets of shares of BGGF and BPMF held in
the accounts during the period for which the brokers, dealers, and
administrators provide services. Any fees paid by the Distributor with respect
to shares of a Fund pursuant to the distribution plan will be reimbursed by
the Trust or the Company from the assets of the shares of that Fund.

The Distributor will, periodically, uniformly offer to pay cash or promotional
incentives in the form of trips to sales seminars at luxury resorts, tickets
or other items to all dealers selling shares of the Funds. Such payments will
be predicated upon the amount of shares of the Funds that are sold by the
dealer. Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of a Fund.

ADMINISTRATIVE ARRANGEMENTS. The Distributor may pay financial institutions a
fee based upon the average net asset value of shares of their customers
invested in the Funds for providing administrative services. This fee, if
paid, will be reimbursed by VCM and not the Funds.

GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings and loan association) from being an
underwriter or distributor of most securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
administrative capacities described above or should Congress relax current
restrictions on depository institutions, the Boards will consider appropriate
changes in the administrative services.

State securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.

ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of Federated
Investors, provides the Funds with certain administrative personnel and
services necessary to operate each Fund. Such services include shareholder
servicing and certain legal and accounting services. Federated Services
Company provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
AVERAGE COMBINED AGGREGATE DAILY
MAXIMUM NET ASSETS OF THE TRUST/CORPORATION
ADMINISTRATIVE FEE AND THE VIRTUS FUNDS
------------------ -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least
$75,000 per Fund. Federated Services Company may voluntarily waive a portion
of its fee.

BROKERAGE TRANSACTIONS. Subject to the supervision of the Board Members and
VCM, decisions to buy and sell specific securities for a Fund are made by its
Portfolio Adviser. The Portfolio Advisers are authorized, subject to most
favorable price and execution, to place portfolio transactions with brokerage
firms that provide assistance in the distribution of Fund shares and/or supply
research. The Board Members have also authorized the Funds to allocate
brokerage to the Portfolio Advisers or an affiliated broker-dealer as well as
to use the Distributor, on an agency basis, or affiliates thereof, to effect
portfolio transactions which are executed on United States and foreign stock
exchanges or which are traded in the over-the-counter market. The Funds have
adopted certain procedures incorporating the standards of Rule 17e-1 of the
1940 Act which require that the commissions paid to a Portfolio Adviser or the
Distributor or to affiliated broker-dealers must be "reasonable and fair
compared to the commission, fee, or other remuneration received, or to be
received, by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." From time to
time, a Fund may purchase portfolio securities directly from dealers acting as
principals,

underwriters or market makers. As these transactions are usually conducted on
a net basis, no brokerage commissions are paid by that Fund. Transactions are
allocated to various dealers selected by VCM or the Portfolio Advisers
primarily on the basis of prompt execution of orders at the most favorable
prices. Transactions may be allocated based on the sale of Fund shares. The
Funds have determined that the foregoing arrangements are in the best interest
of the Funds' shareholders. See "Portfolio Transactions" in each Fund's
Statement of Additional Information for further information.

TAX MATTERS
- -------------------------------------------------------------------------------

Each Fund intends to qualify as a regulated investment company by satisfying
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), including the requirements with respect to
diversification of assets, distribution of income and sources of income. It is
each Fund's policy to distribute to its shareholders all of their investment
income (net of expenses) and any capital gains (net of capital losses) in
accordance with the timing requirements imposed by the Code, so that each Fund
will satisfy the distribution requirement of Subchapter M and not be subject
to Federal income taxes or the 4% excise tax. If a Fund fails to satisfy any
of the Code requirements for qualification as a regulated investment company,
it will be taxed at regular corporate tax rates on all of its taxable income
(including any capital gains) without any deduction for distributions to
shareholders, and distributions to you will be taxable as ordinary dividends
(even if derived from the Fund's net long-term capital gains) to the extent of
the Fund's current and accumulated earnings and profits.

Distributions by a Fund of the excess, if any, of its net long-term capital
gain over its net short-term capital loss that are designated as capital gain
dividends are taxable to shareholders as long-term capital gains, regardless
of the length of time a shareholder has held his shares. Distributions by a
Fund of its net investment income and the excess, if any, of its net short-
term capital gain over its net long-term capital loss are taxable to
shareholders as ordinary income. Depending on a Fund's investments, part or
all of such ordinary income dividends could be treated as: (1) dividends
attributable to interest from obligations of the United States Government
("U.S. Government Interest Dividends") that would be exempt from state and
local taxes; (2) dividends attributable to qualifying dividends ("Qualifying
Dividends") that for corporate shareholders would qualify for the 70%
dividends-received deduction; or (3) dividends attributable to municipal
obligations that would be excluded from regular federal tax and partially
exempt from state and local tax ("Exempt Interest Dividends").

A portion of such dividends from the Blanchard Precious Metals Fund, Inc. and
Blanchard Global Growth Fund may be Qualifying Dividends. However, this
portion cannot exceed the aggregate amount of Qualifying Dividends from
domestic corporations received by such Funds during the year, and
substantially less than 100% of the ordinary income dividends paid by such
Funds may qualify for the deduction.

Distributions by the Blanchard Flexible Tax-Free Bond Fund of its tax-exempt
interest income (net of expenses) that are designated as Exempt Interest
Dividends should be excluded from gross income for federal income tax
purposes. However, you are required to report the receipt of Exempt Interest
Dividends, together with other tax-exempt interest, on your federal income tax
return. In addition, Exempt Interest Dividends may be subject to the federal
alternative minimum tax and to state and

local income tax, and will be taken into account in determining the portion,
if any, of Social Security benefits received which must be included in gross
income for federal income tax purposes.

Investment income that may be received by the Blanchard Global Growth Fund,
Blanchard Precious Metals Fund, Blanchard Flexible Income Fund, and Blanchard
Short-Term Flexible Income Fund from sources within foreign countries may be
subject to foreign taxes withheld at the source. The United States has entered
into tax treaties with many foreign countries which entitle such Funds to a
reduced rate of, or exemption from, taxes on such income. It is impossible to
determine the effective rate of foreign tax in advance since the amount of a
Fund's total assets to be invested in various countries is not known. If more
than 50% of the value of a Fund's total assets at the close of its taxable
year consists of stock or securities of foreign corporations, such Fund may
elect to "pass through" to its shareholders the amount of foreign taxes paid
by the Fund. If the Fund so elects, each shareholder would be required to
include in gross income, even though not actually received, his pro rata share
of the foreign taxes paid by the Fund, and would be treated as having paid his
pro rata share of such foreign taxes and, therefore, be allowed to either
deduct such amount in computing taxable income or use such amount (subject to
various Code limitations) as a foreign tax credit against federal income tax.

Distributions to you will be treated in the same manner for federal income tax
purposes whether you elect to receive them in cash or reinvest them in
additional shares. In general, you take distributions into account in the year
in which they are made. However, you are required to treat certain
distributions made during January as having been paid by a Fund and received
by you on December 31 of the preceding year. A statement setting forth the
federal income tax status (i.e., U.S. Government Interest Dividends,
Qualifying Dividends, Exempt Interest Dividends, or net capital gain
dividends) of all distributions made (or deemed made) during the year will be
sent to you promptly after the end of each year. If you purchase shares of a
Fund just prior to the record date, you will be taxed on the entire amount of
the dividend received, even though the net asset value per share on the date
of such purchase may have reflected the amount of such dividend.

Upon the sale or redemption of shares of a Fund, you will recognize gain or
loss in an amount equal to the difference between the proceeds of the sale or
redemption and your adjusted tax basis in the shares. Any loss realized upon a
taxable disposition of shares within six months from the date of their
purchase will be disallowed to the extent of any exempt-interest dividends
received on the shares and, to the extent not disallowed, will be treated as
long-term capital loss to the extent of any capital gain dividends received on
such shares. All or a portion of any loss realized upon a taxable disposition
of shares of a Fund may be disallowed if other shares of the Fund are
purchased within thirty days before or after such disposition.

If you are a non-resident alien or foreign entity shareholder, ordinary income
dividends paid to you generally will be subject to United States withholding
at a rate of 30% (or a lower rate under an applicable treaty). If you are a
non-United States shareholder, we urge you to consult your own tax advisor
concerning the applicability of United States withholding tax.

Under the back-up withholding rules of the Code, you may be subject to 31%
withholding of federal income tax on ordinary income dividends, capital gain
dividends, and redemption payments made by the Funds. In order to avoid this
back-up withholding, you must provide the Fund with a correct taxpayer
identification number (which, if you are an individual, is usually your Social
Security number), and certify that you are a corporation or otherwise exempt
from or not subject to back-up withholding.

The foregoing discussion of federal income tax consequences is based on tax
laws and regulations in effect on the date of this Prospectus, and is subject
to change by legislative or administrative action. As the foregoing discussion
is for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds that is
contained in the Funds' Statements of Additional Information. In addition, you
should consult with your own tax advisor as to the tax consequences of
investments in the Funds.
PERFORMANCE INFORMATION
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Advertisements and communications to investors regarding the Funds may cite
certain performance and ranking information and may make performance
comparisons to other Funds or to relevant indices, as described below. In
addition, the Funds' Portfolio Advisers and other outside analysts may, from
time to time, report on the market outlook for their investments as well as
comment on the historical reasons for these investments including as a hedge
against inflation. The Funds' performance may be calculated both in terms of
total return and on the basis of current yield over any period of time and may
include a computation of a Fund's distribution rate.

TOTAL RETURN. Cumulative total return data is computed by considering all
elements of return, including reinvestment of dividends and capital gains
distribution, over a stated period of time. Cumulative total return figures
are not annualized and represent the aggregate percentage or dollar value
change over the period in question.

Average annual return will be quoted for at least the one, five and ten year
periods ending on a recent calendar quarter (or if such periods have not yet
elapsed, at the end of a shorter period corresponding to the life of a Fund
for performance purposes). Average annual total return figures are annualized
and, therefore, represent the average annual percentage change over the period
in question.

YIELD INFORMATION. The term "yield" refers to the income generated by an
investment over a one-month or 30-day period. This income is computed by
dividing the net investment income per share earned during such period by the
maximum public offering price per share on the last day of the period, and
then annualizing such 30-day (or one month) yield in accordance with a formula
prescribed by the SEC which provides for compounding on a semi-annual basis.
The Funds may also quote tax-equivalent yield, which shows the taxable yield
that an investor would have to earn before taxes to equal a Fund's tax-free
yield. The tax-equivalent yield is calculated by dividing a Fund's tax-exempt
yield by the result of one minus any combination of the stated federal, state,
or city tax rate. If only a portion of a Fund's income is tax-exempt, only
that portion is adjusted in the calculation.

DISTRIBUTION RATE. The Funds may also quote distribution rates and/or
effective distribution rates in sales literature or other shareholder
communications. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized by dividing the distribution
rate by the ratio used to annualize the distribution and reinvesting the
resulting amount for a full year on the basis of such ratio. The effective
distribution rate will be higher than the distribution rate because of the
compounding effect of the assumed reinvestment. A Fund's distribution rate may
differ from its yield because the distribution rate may contain net investment
income and other items of income (such as returns of capital), while yield
reflects only earned interest and dividend items of income.

COMPARATIVE RESULTS. From time to time in advertisements or sales material, a
Fund may discuss its performance rating and may be compared to the performance
of other mutual funds or mutual fund

indices as published by widely recognized independent mutual fund reporting
services such as Lipper Analytical Services, Inc., CDA and Morningstar, Inc. A
Fund may also discuss the past performance and ranking of its Portfolio
Adviser and compare its performance to various investment indices. The Funds
may use performance information as reported in publications of general
interest, national, financial and industry publications such as Forbes or
Money Magazine and various investment newsletters such as Donoghue's Money
Letter. In addition, the Funds may compare their total return to the total
return of indices of U.S. markets or world markets, to that of other mutual
funds, individual country indices, or other recognized indices.

From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial
comments and/or information from newspapers, magazines, investment newsletters
and other publications such as The Wall Street Journal, Money Magazine,
Forbes, Barron's, USA Today and Mutual Funds Magazine. We may also compare the
historical returns on various investments, performance indexes of those
investments or economic indicators. In addition, the Funds may reprint
articles about a Fund and provide them to prospective shareholders. The
Distributor may also make available economic, financial and investment reports
to shareholders and prospective shareholders. In order to describe these
reports, the Funds may include descriptive information on the reports in
advertising literature sent to the public prior to the mailing of a
prospectus. Performance information may be quoted numerically or may be
presented in a table, graph, chart or other illustration. It should be noted
that such performance ratings and comparisons may be made with funds which may
have different investment restrictions, objectives, policies or techniques
than the Funds, and that such other funds or market indicators may be
comprised of securities that differ significantly from the Funds' investments.

Performance information will vary from time to time and past results are not
necessarily representative of future results. You should remember that a
Fund's performance is a function of portfolio management in selecting the type
and quality of securities in which a Fund may invest, and is affected by
operating, distribution and marketing expenses.

ADDITIONAL INFORMATION ABOUT THE FUNDS
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BLANCHARD FUNDS

Blanchard Funds (the "Trust") is a Massachusetts business trust organized on
January 24, 1986 which currently consists of seven series. All of the series
are non-diversified series of the Trust. Under Massachusetts law, the Trust
and its series are generally not required to hold annual or special
shareholder meetings. However, special meetings of shareholders may be held
for such purposes as electing trustees, changing fundamental policies,
approving an investment management/advisory agreement or approving a
distribution and marketing plan, if any, and, at the request of the
shareholders, to replace trustees. Shareholders holding 10% or more of the
Trust's outstanding shares may call a special meeting of shareholders.
Shareholders may remove trustees from office whenever not less than two-thirds
of the outstanding shares either present a written declaration to the Transfer
Agent or vote at a meeting called for this purpose. In certain circumstances,
shareholders shall be given access to a list of the names and addresses of all
other shareholders, the number of shareholders and the cost of mailing a
request to them.

BLANCHARD PRECIOUS METALS FUND, INC.

BPMF is a non-diversified investment company organized as a Maryland
corporation on June 1, 1987. As such, no annual or special meetings of Fund
shareholders will be held except as may be required by the Maryland General
Corporation Law or the 1940 Act, or as the Board of Directors of the Fund may
determine.

A director of the Fund generally may be removed by the holders of not less
than a majority of the Fund's outstanding shares. In addition, the directors
of the Fund will promptly call a meeting of shareholders for any purpose or
purposes, including to vote on whether to remove any director(s) when
requested to do so in writing by record holders of not less than 10% of the
outstanding shares of the Fund. Finally, in certain circumstances,
shareholders shall be given access to a list of the names and addresses of all
other shareholders or be informed by the Fund of the number of shareholders
and the cost of mailing their request.

ALL FUNDS

Shares of each series of the Trust represent shares of beneficial interest.
Shares of BPMF represent shares of common stock. Each share has equal rights
with respect to voting matters of that series or of BPMF. In the event of
dissolution or liquidation of a series or of BPMF, holders of shares will
receive pro rata, subject to the rights of creditors, the proceeds of the sale
of the assets less its liabilities. There are no preemptive or conversion
rights applicable to the shares of a Fund. Shares of a Fund, when issued, will
be fully paid, non-assessable and transferable. The Board Members may create
additional series of shares without shareholder approval. BPMF and each series
of the Trust is individually responsible only for its own expenses and
operating costs and incurs no liability with respect to the expenses and costs
of any other series or for BPMF, other than those which affect the Blanchard
Group of Funds as a group and are allocated among the series and/or BPMF based
upon their relative average net assets during the year. There is a remote
possibility that one Fund might become liable for any misstatement in the
Prospectus about another Fund.

This Prospectus omits certain information contained in the registration
statement as filed with the SEC. Copies of the registration statement,
including items omitted herein, may be obtained from the SEC by paying the
charges prescribed under its rules and regulations. Each Fund's Statement of
Additional Information included in this registration statement may be obtained
without charge from your Fund.

No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Statements of Additional Information, and information or representations not
herein contained, if given or made, must not be relied upon as having been
authorized by a Fund. This Prospectus does not constitute an offer or
solicitation in any jurisdiction in which such offering may not lawfully be
made.

The Code of Ethics of the Investment Adviser and the Funds prohibits all
affiliated personnel from engaging in personal investment activities which
compete with or attempt to take advantage of the Funds' planned portfolio
transactions. The objective of the Code of Ethics of both the Funds and
Investment Adviser is that their operations be carried out for the exclusive
benefit of the Funds' shareholders. Both organizations maintain careful
monitoring of compliance with the Code of Ethics.

INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, 2500 One PPG Place,
Pittsburgh, Pennsylvania 15222-5401 has been appointed the independent
accountants for the Funds.

CUSTODIAN. Signet Trust Company, Richmond, Virginia is custodian for the
securities and cash of the Funds. Under the Custodian Agreement, Signet Trust
Company holds the Funds' portfolio securities in safekeeping and keeps all
necessary records and documents relating to its duties.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Shareholder Services
Company, Pittsburgh, Pennsylvania, is transfer agent for the Funds and
dividend disbursing agent for the Funds.

SHAREHOLDER INQUIRIES. Shareholder inquiries concerning the status of an
account or information concerning the Funds should be directed to Signet
Financial Services, Inc. at 41 Madison Avenue, 24th Floor, New York, New York
10010, or by calling 1-800-829-3863.

ADDITIONAL INVESTMENT INFORMATION
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MUNICIPAL OBLIGATIONS (BFTFBF)

The two principal classifications of Municipal Obligations which may be held
by the Fund are "general obligation" securities and "revenue" securities.
General obligation securities are secured by the issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.
Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities, or in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds held by the Fund
are in most cases revenue currencies and are not payable from the unrestricted
revenues of the issuer. Consequently, the credit quality of private activity
revenue bonds is usually directly related to the credit standing of the
corporate user of the facility involved.

The Fund's portfolio may also include "moral obligation" securities, which are
normally issued by special-purpose public authorities. If the issuer of moral
obligation securities is unable to meet its debt service obligation from
current revenues, it may draw on a reserve fund the restoration of which is a
moral commitment, but not a legal obligation of the state or municipality
which created the issuer. There is no limitation on the amount of moral
obligation securities that may be held by the Fund.

The Fund may also purchase custodial receipts evidencing the right to receive
either the principal amount or the periodic interest payments or both with
respect to specific underlying Municipal Obligations ("Stripped Municipal
Obligations"). In a typical custodial receipt arrangement, an issuer or a
third party owner of Municipal Obligation deposits such obligations with a
custodian in exchange for two classes of custodial receipts. The two classes
have different characteristics, but, in each case, payments on the two classes
are based on payments received on the underlying Municipal Obligations. One
class has the characteristics of a typical auction mechanism. This class'
interest rate generally is expected to be below the coupon rate of the
underlying Municipal Obligations and interest rate adjustments. The second
class bears interest at a rate that exceeds the interest rate typically borne
by a security of comparable quality and maturity; this rate also is adjusted,
but in this case inversely to changes in the rate of interest of the first
class. If the interest rate on the first class exceeds the coupon rate of the
underlying Municipal Obligations, its interest rate will exceed the rate paid
on the second class. In no event will the aggregate interest paid with respect
to the two classes exceed the interest paid by the underlying Municipal
Obligations. The value of the second class and similar securities should be
expected to fluctuate more than the value of a Municipal Obligation of
comparable quality and maturity and their purchase by the Fund should increase
the volatility of its net assets value and, thus, its price per share. These
custodial receipts are sold in private placements. The Fund

also may purchase directly from issuers, and not in a private placement,
Municipal Obligations having the same characteristics as the custodial
receipts. The Fund intends to purchase Stripped Municipal Obligations only
when the yield thereon will be exempt from Federal income tax to the same
extent as interest on the underlying Municipal Obligations. Stripped Municipal
Obligations are considered illiquid securities subject to the 10% limit
described in "Investment Limitations" in the Statement of Additional
Information. The Fund may purchase and sell municipal bond index and interest
rate future contracts as a hedge against changes in market condition.

RISKS. Municipal bond prices are interest rate sensitive, which means that
their value varies inversely with the market interest rates. Thus, if market
interest rates have increased from the time a bond was purchased, the bond, if
sold, might be sold at a price less than its cost. Similarly, if market
interest rates have declined from the time a bond was purchased, the bond, if
sold, might be sold at a price greater than its cost. (In either instance, if
the bond was held to maturity, no loss or gain normally would be realized as a
result of interim market fluctuations.)

U.S. GOVERNMENT SECURITIES (BSTFIF, BFIF, BGGF)

The term "U.S. Government Securities" refers to debt securities denominated in
U.S. dollars issued or guaranteed by the U.S. government, by various of its
agencies, or by various instrumentalities established or sponsored by the U.S.
government. Certain of these obligations including U.S. Treasury bills, notes
and bonds, mortgage participation certificates guaranteed by the Government
National Mortgage Association ("GNMA") and Federal Housing Administration
debentures, are supported by the full faith and credit of the United States.
Other U.S. Government Securities issued or guaranteed by Federal agencies or
government sponsored enterprises are not supported by the full faith and
credit of the United States. These securities include obligations supported by
the right of the issuer to borrow from the U.S. Treasury, such as obligations
of Federal Home Loan Banks, and obligations supported only by the credit of
the instrumentality, such as Federal National Mortgage Association bonds. When
purchasing securities in the U.S. government market, the Portfolio Advisers
may take full advantage of the entire range of maturities of U.S. Government
Securities and may adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of relative yields of
securities of different maturities and its expectations of future changes in
interest rates. To the extent that a Fund invests in the mortgage market, the
Portfolio Advisers usually will evaluate, among other things, relevant
economic, environmental and security-specific variables such as housing
starts, coupon and age trends. To determine relative value among markets the
Portfolio Advisers may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.

A Fund may seek to increase its current income by writing covered call or put
options with respect to some or all of the U.S. Government Securities held in
its portfolio. In addition, a Fund may at times, through the writing and
purchase of options on U.S. Government Securities, and the purchase and sale
of futures contracts and related options with respect to U.S. Government
Securities, seek to reduce fluctuations in net asset value by hedging against
a decline in the value of U.S. Government Securities owned by that Fund or an
increase in the price of such securities which such Fund plans to purchase,
although it is not the general practice to do so. Significant option writing
opportunities generally exist only with respect to longer term U.S. Government
Securities. Options on U.S. Government Securities and futures and related
options are not considered U.S. Government Securities; accordingly, they have
a different set of risks and features. These practices and related risks are
described in each Fund's Statement of Additional Information.

U.S. Government Securities are considered among the most creditworthy of fixed
income investments. Because of this added safety, the yields available from
U.S. Government Securities are generally lower than the yields available from
corporate debt securities. The value of U.S. Government Securities (like those
of fixed income securities generally) will change as interest rates fluctuate.
During periods of failing U.S. interest rates, the values of outstanding long
term U.S. Government Securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities and the Funds expect that their portfolios of U.S.
Government Securities will be weighted towards the longer maturities at least
to the extent that they have written call options thereon. Although changes in
the value of U.S. Government Securities will not affect investment income from
those securities, they will affect a Fund's net asset value.

INVESTMENT GRADE FIXED INCOME SECURITIES (BSTFIF, BFIF, BGGF)

The Funds may invest in investment grade U.S. fixed income securities. Such
investments may include mortgage related securities that are not U.S.
Government Securities, asset backed securities and fixed income securities
rated Baa or higher by Moody's or BBB by Standard & Poor's. Fixed income
securities rated Baa by Moody's or BBB by Standard & Poor's are considered
investment grade obligations which lack outstanding investment characteristics
and may have speculative characteristics as well. See Appendix A for the
descriptions of these rating categories.

MORTGAGE RELATED SECURITIES. Mortgage related securities issued by financial
institutions (or separate trusts or affiliates of such institutions), even
where backed by U.S. Government Securities, are not considered U.S. Government
Securities. The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes in market yields will affect the
value of these securities as the price of fixed income securities generally
increases when interest rates decline and decreases when interest rates rise.
Prices of longer term securities generally increase or decrease more sharply
than those of shorter term securities in response to interest rate changes. In
addition, prepayment of principal on mortgage pass-through securities may make
it difficult to lock in interest rates for a fixed period of time. To the
extent that mortgage securities are purchased at prices that differ from par,
these prepayments (which are received at par) may make up a significant
portion of the pass-through total return. Generally, mortgage securities yield
more than Treasury securities of the same average life. For more information
on mortgage-related securities, see "Investment Objective and Policies" in
each Fund's Statement of Additional Information.
ASSET-BACKED SECURITIES. In general, asset-backed securities in which a Fund
may invest are issued as debt securities by special purpose corporations.
These securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among
other things, credit card receivables and automobiles. The Funds will invest
in, to the extent available, (i) loan pass-through certificates or
participations representing an undivided ownership interest in pools of
installment sales contracts and installment loans (the "Participations") and
(ii) debt obligations issued by special purpose corporations which hold
subordinated equity interests in such installment sales contracts and
installment loans. The Funds anticipate that a substantial portion of the
asset-backed securities in which they invest will consist of the debt
obligations of such special purpose corporations. Asset-backed securities, in
general, are of a shorter maturity (usually five years) than most conventional
mortgage-backed securities and historically have been less likely to
experience

substantial prepayments. Furthermore, the effect of prepayments on securities
that have shorter maturities, such as asset-backed securities, is much smaller
than the effect of prepayments on securities having longer maturities, such as
mortgage-backed securities. The yield characteristics of asset-backed
securities differ from more traditional debt securities in that interest and
principal payments are paid more frequently, usually monthly, and principal
may be prepaid at any time. As a result, if a Fund purchases an asset-backed
security at a discount, similar to conventional mortgage-backed securities, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Conversely, if a Fund purchases an asset-backed security at a
premium, faster than expected prepayments will reduce, while slower than
expected prepayments will increase, yield to maturity. Prepayments may result
from a number of factors, including trade-ins and liquidations due to default,
as well as the receipt of proceeds from physical damage, credit, life and
disability insurance policies. The rate of prepayments on asset-backed
securities may also be influenced by a variety of economic and social factors,
including general measures of consumer confidence; accordingly, from time to
time, substantial amounts of prepayment may be available for reinvestment by a
Fund and will be subject to the prevailing interest rates at the time of
prepayment.

Asset-backed securities often contain elements of credit support to lessen the
effect of the potential failure by obligors to make timely payments on
underlying assets. Credit support falls into two categories: (i) liquidity
protection and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying asset. Liquidity protection ensures that the
pass through of payments due on the installment sales contracts and
installments on loans which comprise the underlying pool occurs in a timely
fashion. Protection against losses resulting from ultimate default enhances
the likelihood of ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or sponsor from
third parties; through various means of structuring the transaction, or
through a combination of such approaches. The Funds will not pay any
additional fees for such credit support. However, the existence of credit
support may increase the market price of the security. For more information on
asset-backed securities, see "Investment Objective and Policies" in each
Fund's Statement of Additional Information.

HIGH YIELD/HIGHER-RISK SECURITIES (BSTFIF, BFIF)

Lower rated fixed income securities, including debt securities, convertible
securities and preferred stock and unrated corporate fixed income securities,
commonly referred to as "junk bonds," are considered speculative and involve
greater risk of default or price changes due to changes in the issuer's
creditworthiness than higher rated fixed income securities.

Convertible securities are bonds, debentures, notes, preferred stock or other
securities which may be converted or exchanged by the holder into shares of
the underlying common stock at a stated exchange ratio. A convertible security
may also be subject to redemption by the issuer but only after a date and
under certain circumstances (including a specified price) established on
issue. Adjustable rate preferred stocks are preferred stocks which adjust
their dividend rates quarterly based on specified relationships to certain
indexes of U.S. Treasury Securities. A Fund may continue to hold securities
obtained as a result of the conversion of convertible securities held by such
Fund when the Portfolio Adviser believes retaining such securities is
consistent with the Fund's investment objective.

Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of the
issuers. Higher yields are generally available from securities in the lower
categories of recognized rating agencies, i.e., Ba or lower by Moody's or BB
or lower by Standard & Poor's. A Fund may invest in any security which is
rated by Moody's or Standard & Poor's, or in any unrated security which the
Portfolio Advisers determine is of suitable quality. Securities in the rating
categories below Baa as determined by Moody's and BBB as determined by
Standard & Poor's are considered to be of poor standing and predominantly
speculative. The rating services descriptions of these rating categories,
including the speculative characteristic of the lower categories, are set
forth in Appendix A.

Securities ratings are based largely on the issuer's historical financial
information and the rating agencies' investment analysis at the time of
rating. Consequently, the rating assigned to any particular security is not
necessarily a reflection of the issuer's current financial condition, which
may be better or worse than the rating would indicate. Although the Funds'
Portfolio Advisers will consider security ratings when making investment
decisions in the High Yield Market, they will perform their own investment
analysis and will not rely principally on the ratings assigned by the rating
services. A Portfolio Adviser's analysis generally may include, among other
things, consideration of the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity
schedules, and its responsiveness to changes in business conditions and
interest rates. It also considers relative values based on anticipated cash
flow, interest or dividend coverage, asset and earnings prospects.

CERTAIN INVESTMENT STRATEGIES AND POLICIES
- -------------------------------------------------------------------------------

OPTIONS AND FUTURES TRANSACTIONS (BSTFIF, BFIF, BPMF, BGGF)

GENERAL. The successful use of these investment techniques depends on the
ability of Fund management to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures
contracts, options or forward contracts or may realize losses and thus be in a
worse position than if such strategies had not been used. Unlike many
exchange-traded futures contracts and options on futures contracts, there are
no daily price fluctuation limits with respect to options on currencies and
forward contracts, and adverse market movements could therefore continue to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of such instruments and movements in the price of the
securities and currencies hedged or used for cover will not be perfect and
could produce unanticipated losses. A Fund's ability to dispose of its
positions in futures contracts, options and forward contracts will depend on
the availability of liquid markets in such instruments. Markets in options and
futures with respect to a number of fixed income securities and currencies are
relatively new and still developing. It is impossible to predict the amount of
trading interest that may exist in various types of futures contracts, options
and forward contracts. If a secondary market does not exist with respect to an
option purchased or written by a Fund over-the-counter, it might not be
possible to effect a closing transaction in the option (i.e., dispose of the
option) with the result that (i) an option purchased by the Fund would have to
be exercised in order for the Fund to realize any profit and (ii) the Fund may
not be able to sell currencies or portfolio securities covering an option
written by the Fund until the option expires or it delivers the underlying
futures contract or currency upon exercise. Therefore, no assurance can be
given that the Funds will be able to

utilize these instruments effectively for the purposes set forth above. The
selection of futures and option strategies requires skills different from
those needed to select portfolio securities; however, the Portfolio Advisers
do have experience in the use of futures and options. Furthermore, a Fund's
ability to engage in options and futures transactions may be limited by tax
considerations. See "Tax Matters" in each Fund's Statement of Additional
Information.

OPTIONS ON PORTFOLIO SECURITIES. (BSTFIF, BFIF) A Fund, in seeking to generate
high current income, may write covered call options on certain of its
portfolio securities at such time and from time to time as Fund management
shall determine to be appropriate and consistent with the investment objective
of the Fund. A covered call option means that the Fund owns the security on
which the option is written. Generally, the Funds expect that options written
by them will be traded on recognized securities exchanges. In certain
instances, however, a Fund may purchase and sell options in the over-the-
counter market ("OTC Options"). A Fund's ability to close option positions
established in the over-the-counter market may be more limited than in the
case of exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would fail to meet their
obligations to the Fund. In addition, the staff of the SEC has taken the
position that OTC Options and the assets used as "cover" should be treated as
illiquid securities. There is no fixed limit on the percentage of a Fund's
assets upon which options may be written.

The Funds will receive a premium (less any commissions) from the writing of
such contracts, and it is believed that the total return to the Funds can be
increased through such premiums consistent with each Fund's investment
objective. The writing of option contracts is a highly specialized activity
which involves investment techniques and risks different from those ordinarily
associated with investment companies, although the Funds believe that the
writing of covered call options listed on an exchange or traded in the over-
the-counter market, where the Fund owns the underlying security, tends to
reduce such risks. The writer forgoes the opportunity to profit from an
increase in market price of the underlying security above the exercise price
so long as the option remains open. See each Fund's Statement of Additional
Information for more information.

FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. (BSTFIF, BFTFBF, BFIF,
BGGF) A Fund may enter into contracts for the purchase or sale for future
delivery of interest rate instruments, fixed-income securities, foreign
currencies, or contracts based on financial indices including any index of
U.S. Government Securities, foreign government securities or corporate debt
securities ("futures contracts") and may purchase and write put and call
options to buy or sell futures contracts ("options on futures contracts"). A
"sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities or foreign currencies called for by the contract at
a specified price on a specified date. A "purchase" of a futures contract
means the incurring of a contractual obligation to acquire the securities or
foreign currencies called for by the contract at a specified price on a
specified date. Options on futures contracts to be written or purchased by a
Fund will be traded on U.S. or foreign exchanges or over-the-counter. See
"Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies" below and in
each Fund's Statement of Additional Information for further discussion of the
use, risks and costs of futures contracts and options on futures contracts.

Although most futures contracts call for making or taking delivery of the
underlying securities, these obligations are typically cancelled or closed out
before the scheduled settlement date. The closing is accomplished by
purchasing (or selling) an identical futures contract to offset a short (or
long) position.

Such an offsetting transaction cancels the contractual obligations established
by the original futures transaction. Other financial futures contracts call
for cash settlements rather than delivery of securities.

If the price of an offsetting futures transaction varies from the price of the
original futures transaction, the Funds will realize a gain or loss
corresponding to the difference. That gain or loss will tend to offset the
unrealized loss or gain on the hedged securities transaction, but may not
always or completely do so.

In contrast to the purchase or sale of a security, the full purchase price of
the futures contract is not paid or received by a Fund upon its purchase or
sale. Instead, the Funds will deposit in a segregated custodial account an
amount of cash or U.S. Treasury bills equal to approximately 5% of the value
of the contract. This amount is known as initial margin. The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract
assuming all contractual obligations have been satisfied. Subsequent payments
to and from the broker, called variation margin, will be made on a daily basis
as the price of the underlying security fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
"mark to the market." For example, when a Fund has purchased a futures
contract and the price of the underlying security has risen, that position
will have increased in value and the Fund will receive from the broker a
variation margin payment equal to that increase in value. Conversely, where a
Fund has purchased a futures contract and the price of the underlying security
has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, a Fund may elect to terminate the
position by taking an opposite position. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
that Fund, and the Fund realizes a loss or gain. No assurance can be given
that the Funds will be able to take an opposite position.

The Funds will not (i) enter into any futures contracts or options on futures
contracts if immediately thereafter the aggregate of margin deposits on all
the outstanding futures contracts of a Fund and premiums paid on outstanding
options on futures contracts would exceed 5% of the market value of the total
assets of the Fund, or (ii) enter into any futures contracts or options on
futures contracts if the aggregate of the market value of the outstanding
futures contracts of a Fund and the market value of the currencies and futures
contracts subject to outstanding options written by the Fund would exceed 50%
of the market value of the total assets of that Fund.

OPTIONS ON FOREIGN CURRENCIES. (BSTFIF, BFIF, BGGF) The Funds may purchase and
write put and call options on foreign currencies to increase a Fund's gross
income and for the purpose of protecting against declines in the U.S. dollar
value of foreign currency denominated portfolio securities and against
increases in the U.S. dollar cost of such securities to be acquired. As in the
case of other kinds of options, however, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received, and the Funds could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates although, in the event of rate
movements adverse to a Fund's position, it may forfeit the entire amount of
the premium plus related transaction costs. Options on foreign currencies to
be written or purchased by a

Fund are traded on U.S. and foreign exchanges or over-the-counter. There is no
specific percentage limitation on a Fund's investments in options on foreign
currencies. See each Fund's Statement of Additional Information for further
discussion on the use, risks and costs of options on foreign currencies.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. (BSTFIF, BFIF, BGGF) The Funds
will purchase or sell forward foreign currency exchange contracts ("forward
contracts") as part of their portfolio investment strategy. A forward contract
is an obligation to purchase or sell a specific currency for an agreed price
at a future date which is individually negotiated and privately traded by
currency traders and their customers. A Fund may enter into a forward
contract, for example, when it enters into a contract for the purchase or sale
of a security denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally, for example,
when a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward sale contract to sell an
amount of that foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency, or when a
Fund believes that the U.S. dollar may suffer a substantial decline against
foreign currency, it may enter into a forward purchase contract to buy that
foreign currency for a fixed dollar amount ("position hedge"). In this
situation, a Fund may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where the
Fund believes that the U.S. dollar value of the currency to be sold pursuant
to the forward contract will fall whenever there is a decline in the U.S.
dollar value of the currency in which portfolio securities of the Fund are
denominated ("cross-hedge"). The Funds' custodian will place cash not
available for investment or U.S. Government Securities or other high quality
debt securities in a separate account of a Fund having a value equal to the
aggregate amount of that Fund's commitments under forward contracts entered
into with respect to position hedges and crosshedges. If the value of the
securities placed in a separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to
such contracts. As an alternative to maintaining all or part of the separate
account, a Fund may purchase a call option permitting the Fund to purchase the
amount of foreign currency being hedged by a forward sale contract at a price
no higher than the forward contract price or a Fund may purchase a put option
permitting the Fund to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the forward
contract price. Unanticipated changes in currency prices may result in poorer
overall performance for a Fund than if it had not entered into such contracts.
Pursuant to the sub-advisory agreements, the Portfolio Advisers, where
permitted by law, will purchase and sell foreign exchange in the interbank
dealer market for a fee on behalf of a Fund, subject to certain procedures and
reporting requirements adopted by the Board Members.

ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES. The market
prices of futures contracts may be affected by certain factors. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.

In addition, futures contracts in which the Funds may invest may be subject to
commodity exchange imposed limitations on fluctuations in futures contract
prices during a single day. Such regulations are referred to as "daily price
fluctuation limits" or "daily limits." During a single trading day no trades
may be executed at prices beyond the daily limit. Once the price of a futures
contract has increased or decreased by an amount equal to the daily limit,
positions in those futures cannot be taken or liquidated unless both a buyer
and seller are willing to effect trades at or within the limit. Daily limits,
or regulatory intervention in the commodity markets, could prevent a Fund from
promptly liquidating unfavorable positions and adversely affect operations and
profitability.

Options on foreign currencies and forward foreign currency exchange contracts
("forward contracts") are not traded on contract markets regulated by the
Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.

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

The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing member,
impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.

In addition, futures contracts and related options and forward contracts and
options on foreign currencies may be traded on foreign exchanges, to the
extent permitted by the CFTC. Such transactions are subject to the risk of
governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in a Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States,
(d) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (e) lesser trading
volume.

OTHER INVESTMENT POLICIES

REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. Under a
repurchase agreement, a Fund acquires a debt instrument for a relatively short
period (usually not more than one week) subject to the obligation of the
seller to repurchase and the Fund to resell such debt instrument at a fixed
price. The resale price is in excess of the purchase price in that it reflects
an agreed-upon market interest rate effective for the period of time during
which that Fund's money is invested. The Funds' repurchase agreements will at
all times be fully collateralized in an amount at least equal to the purchase
price including accrued interest earned on the underlying securities. The
instruments held as collateral are valued daily, and as the value of
instruments declines, the Funds will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, a Fund may incur a loss. If such a defaulting seller were
to become insolvent and subject to liquidation or reorganization under
applicable bankruptcy or other laws, disposition of the underlying securities
could involve certain costs or delays pending court action. Finally, it is not
certain whether the Funds would be entitled, as against a claim of the seller
or its receiver, trustee in bankruptcy or creditors, to retain the underlying
securities. Repurchase agreements are considered by the staff of the SEC to be
loans by a Fund.

LENDING OF PORTFOLIO SECURITIES. (BSTFIF, BFTFBF, BFIF) In order to generate
additional income, each Fund may lend its portfolio securities in an amount up
to 33 1/3% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities not affiliated with
Sheffield. The borrower at all times during the loan must maintain cash or
cash equivalent collateral or provide to the Fund an irrevocable letter of
credit equal in value to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the Fund
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or a letter of credit. As with other extensions of credit, there
are risks of delay in recovery or even loss of rights in the collateral should
the borrower of any loaned securities fail financially.

WHEN-LSSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS. (BFTFBF) The
Fund may purchase eligible securities on a "when issued" basis and may
purchase or sell securities on a "forward commitment" basis. The Fund does not
intend to engage in "when issued" purchases and forward commitments for
speculative purposes, but only in furtherance of its investment objective. The
Fund will establish a segregated account with its custodian bank in which it
will maintain cash or other high quality debt securities determined daily to
be equal in value to the commitments for "when-issued" securities.

In addition, the Fund may acquire "stand-by commitments" with respect to
Municipal Obligations that it holds. Under a "stand-by commitment," a dealer
agrees to purchase, at the Fund's option, specified Municipal Obligations at a
specified price. The Fund will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. "Stand-by commitments" acquired by the Fund
would be valued at zero in determining the Fund's net asset value.

MONEY MARKET INSTRUMENTS. (BFTFBF, BPMF, BGGF, BFIF, BSTFIF) Money market
instruments include, but are not limited to, the following instruments:
government securities; commercial paper; bank certificates of deposit and
bankers' acceptances; and repurchase agreements related to any of the

foregoing. A Fund will only purchase commercial paper if it is rated Prime-1
or Prime-2 by Moody's or A-1 or A-2 by Standard & Poor's or, if not rated, is
considered by Fund management to be of equivalent quality.

Under a defensive strategy, BSTFIF and BFIF may concentrate their investments
in securities issued by banks. Such investments may include certificates of
deposit, time deposits, bankers' acceptances, and obligations issued by bank
holding companies, as well as repurchase agreements entered into with banks.

ILLIQUID SECURITIES. (BSTFIF, BFIF, BGGF, BFTFBF, BPMF) The Funds will not
invest in illiquid securities if immediately after such investment more than
10% of a Fund's total assets (taken at market value) would be invested in such
securities. See each Fund's Statement of Additional Information. For this
purpose, illiquid securities include (a) securities that are illiquid by
virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed illiquid for purposes of this limitation.

Rule 144A under the Securities Act of 1933 allows a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act of 1933 applicable to resales
of certain securities to qualified institutional buyers. The Portfolio
Advisers anticipate that the market for certain restricted securities such as
institutional commercial paper will expand further as a result of this
regulation and the development of automated systems for the trading, clearance
and settlement of unregistered security foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.

The Portfolio Adviser will monitor the liquidity of restricted securities in
each Fund's portfolio under the supervision of the Board Members. In reaching
liquidity decisions, the Portfolio Advisers will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wanting to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).

NON-DIVERSIFICATION. All of the Funds' portfolios are "non-diversified" which
means the Funds are not limited in the proportion of assets that may be
invested in the securities of a single issuer.

However, each Fund intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Code, which will relieve
the Funds of any liability for Federal income tax to the extent its earnings
are distributed to shareholders. See "Tax Matters." To so qualify, among other
requirements, each Fund will limit its investments so that, at the close of
each fiscal quarter, (i) not more than 25% of the market value of a Fund's
total assets will be invested in the securities of a single issuer, and (ii)
with respect to 50% of the market value of its total assets, not more than 5%
of the market value will be invested in the securities of a single issuer and
a Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of the Funds' requirements to maintain
diversification for tax purposes, the issuer of a loan participation will be
the

underlying borrower. In cases where a Fund does not have recourse directly
against the borrower, both the borrower and each agent bank and co-lender
interposed between the Fund and the borrower will be deemed issuers of the
loan participation for tax diversification purposes. A Fund's investments in
U.S. Government Securities are not subject to these limitations. Since the
Funds may invest in a smaller number of individual issuers than diversified
investment companies, an investment in the Funds may, under certain
circumstances, present greater risks to an investor than an investment in a
diversified company.

PORTFOLIO TURNOVER. The Funds may engage in active short-term trading to
benefit from yield disparities among different issues of securities, to seek
short-term profits during periods of fluctuating interest rates, or for other
reasons. Such trading will increase a Fund's rate of turnover and the possible
incidence of short-term capital gain taxable as ordinary income. VCM
anticipates that the annual turnover in each Fund will not be in excess of
200%. An annual turnover rate of 200% occurs, for example, when the dollar
equivalent of all of the securities in a Fund's portfolio are replaced twice
in a period of one year. A high rate of portfolio turnover involves
correspondingly greater expenses than a lower rate, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities, which expenses must be borne
by that Fund and its shareholders. High portfolio turnover rate also may
result in the realization of substantial net short-term capital gains. In
order to continue to qualify as a regulated investment company for Federal tax
purposes, less than 30% of the annual gross income of a Fund must be derived
from the sale of securities held by the Fund for less than three months. See
"Tax Matters."

RISK FACTORS AND SPECIAL CONSIDERATIONS

FOREIGN INVESTMENTS. (BSTFIF, BFIF, BGGF) Foreign investments involve certain
risks that are not present in domestic securities. Because the Funds intend to
purchase securities denominated in foreign currencies, a change in the value
of any such currency against the U.S. dollar will result in a corresponding
change in the U.S. dollar value of a Fund's assets and a Fund's income
available for distribution. In addition, although a portion of a Fund's
investment income may be received or realized in such currencies, the Code
requires that each Fund compute and distribute its income in U.S. dollars.
Therefore, if the exchange rate of any such currency declines after the Fund's
income has been earned and translated into U.S. dollars but before payment, a
Fund could be required to liquidate securities to make such distributions.
Similarly, if an exchange rate depreciates between the time a Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any
such currency of such expenses at the time they were incurred. Under the Code,
changes in an exchange rate which occur between the time a Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time a Fund actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable taxable net investment income.
Similarly, dispositions of certain debt securities (by sale, at maturity or
otherwise) at a U.S. dollar amount which is higher or lower than the Fund's
original U.S. dollar cost may result in foreign exchange gains or losses,
which will increase or decrease distributable taxable net investment income.

legal restriction at the time of investment, there is no assurance that
currency controls will not be imposed subsequently. In addition, the values of
foreign fixed-income investments will fluctuate in response to changes in U.S.
and foreign interest rates.

There may be less information publicly available about a foreign issuer than
about a U.S. issuer, and foreign issuers are not generally subject to
accounting, auditing and financial reporting standards and practices
comparable to those in the United States. The securities of some foreign
issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions, custodial expenses and
other fees are also generally higher than for securities traded in the United
States.

In addition, with respect to certain foreign countries, there is a possibility
of expropriation of assets, confiscatory taxation, political or financial
instability and diplomatic developments which could adversely affect the value
of investments in those countries. The Portfolio Advisers do not expect to
invest the Funds' assets in countries where they believe such events are
likely to occur.

Income received by a Fund from sources within foreign countries may be reduced
by withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. The Portfolio Advisers will attempt to minimize such taxes by timing of
transactions and other strategies, but there is no assurance that such efforts
will be successful. Any such taxes paid by a Fund will reduce its net income
available for distribution to shareholders.
Investors should recognize that investing in debt obligations and other fixed-
income securities of issuers in emerging countries involves certain special
considerations and risk factors, including those set forth below, which are
not typically associated with investing in debt obligations and other fixed-
income securities of U.S. issuers.

Trading volume in emerging country securities markets is substantially less
than in the United States. Further, securities of some emerging country
issuers are less liquid and more volatile than securities of comparable U.S.
issuers. Commissions for trading on emerging country stock exchanges are
generally higher than commissions for trading on U.S. exchanges, although the
Funds will endeavor to achieve the most favorable net results on their
portfolio transactions and may, in certain instances, be able to purchase
portfolio investments on other stock exchanges where commissions are
negotiable.

Issuers in emerging countries are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and disclosure
requirements comparable to those applicable to U.S. issuers. Consequently,
there may be less publicly available information about an emerging country
issuer than about a U.S. issuer. Further, there is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
issuers than in the United States.

The Funds may invest in unlisted emerging country debt obligations and other
fixed-income securities, including investments in new and early stage issuers,
which may involve a high degree of business and financial risk that can result
in substantial losses. Because of the absence of any trading market for these
investments, a Fund may take longer to liquidate these positions than would be
the case for publicly traded securities. Although these securities may be
resold in privately negotiated transactions, the prices realized on these
sales couId be less than those originally paid by the Fund. Further, issuers
whose securities are not publicly traded may not be subject to public
disclosure and other investor protection requirements applicable to publicly
traded securities.

The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are dependent upon international
trade and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the countries
with which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.

With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries
or the value of a Fund's investments in those countries. In addition, it may
be difficult to obtain and enforce a judgment in a court outside of the United
States.

From time to time, BGGF may invest in Eastern Europe as investment
opportunities emerge in those markets, if the Portfolio Adviser deems it
prudent in light of then existing social, economic and political conditions.
Investing in the securities of issuers in Eastern Europe involves certain
additional considerations not usually associated with investing in securities
of issuers in more developed capital markets, including the following: (i)
political and economic considerations, such as greater risks of expropriation
and nationalization and less social, political and economic stability; (ii)
the small size of the markets for such securities, the low or nonexistent
volume of trading, the lack of liquidity and price volatility; (iii)
restrictions on investing in issuers or industries deemed sensitive to
relevant national interests; and (iv) the absence of developed legal
structures governing private and foreign investments and private property.
Applicable accounting and financial reporting standards in Eastern Europe may
be substantially different from U.S. accounting standards and, in certain
Eastern European countries, no reporting standards may exist. Consequently,
substantially less information is available to investors in Eastern Europe,
and the information that is available may not be conceptually comparable to,
or prepared on the same basis as, that available in more developed capital
markets, which may make it difficult to assess the financial status of
particular companies. Upon the accession to power of Communist regimes
approximately 40 years ago, the governments of a number of Eastern European
countries expropriated a large amount of property. The claims of many property
owners against those governments were never finally settled. There can be no
assurance that the Fund's investments in Eastern Europe, if any, would not
also be appropriated, nationalized or otherwise confiscated, in which case the
Fund would lose its entire investment in the country involved. In addition,
any change in the leadership or policies of Eastern European countries may
halt the expansion of or reverse the liberalization of foreign investment
policies now occurring.

PRECIOUS METALS AND PRECIOUS METALS SECURITIES. (BPMF, BGGF) Investment in
securities of precious metals mining, exploration and processing companies
involves certain risks. Selective investment in such securities, however, may
offer a greater return than shares of domestic industrial issuers. The market
action of such securities has tended to move against, or independently of, the
market trend of industrial securities; therefore, the addition of securities
of companies involved in precious metals operations to an investor's portfolio
may increase the return and may reduce overall fluctuations in portfolio
value. Thus, an investment in a Fund should be considered part of an overall
investment program rather than as a complete investment program in itself.

Prices of precious metals mining securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals.
This is due to the fact that the costs of mining precious metals remain
relatively fixed, so that an increase or decrease in the price of precious
metals has a direct and greater than proportional effect on the profitability
of precious metals mining companies. Investments tied to precious metals
characteristically involve high risk because of precious metals' price
volatility. The price of precious metals is affected by factors such as
cyclical economic conditions, political events and monetary policies of
various countries (see "Investment Objective and Policies--Additional
Information Regarding Precious Metals and Precious Metals Securities" in each
Fund's Statement of Additional Information for historic price information on
gold bullion). During periods of rising precious metals prices, investments in
Precious Metals Securities will tend to be emphasized with respect to a Fund.

The mining of gold is highly concentrated in a few countries. Currently, the
five largest producers of gold are the Republic of South Africa, certain
republics of the former Soviet Union, Canada, the United States and Australia.
Economic and political conditions prevailing in these countries may have a
direct effect on the production and marketing of newly produced gold and sales
of central bank gold holdings. At any given time, a substantial portion of the
investments of a Fund may be concentrated in one or a few foreign countries.
See "Investment Objective and Policies--Additional Information Regarding
Precious Metals and Precious Metals Securities" in each Fund's Statement of
Additional Information for further details on this subject.

RISK FACTORS-LOWER RATED FIXED INCOME SECURITIES. (BSTFIF) Lower quality fixed
income securities generally produce a higher current yield than do fixed
income securities of higher ratings. However, these fixed income securities
are considered speculative because they involve greater price volatility and
risk than do higher rated fixed income securities, and yields on these fixed
income securities will tend to fluctuate over time. Although the market value
of all fixed income securities varies as a result of changes in prevailing
interest rates (e.g., when interest rates rise, the market value of fixed
income securities can be expected to decline), values of lower rated fixed
income securities tend to react differently than the values of higher rated
fixed income securities. The prices of lower rated fixed income securities are
less sensitive to changes in interest rates than higher rated fixed income
securities. Conversely, lower rated fixed income securities also involve a
greater risk of default by the issuer in the payment of principal and income
and are more sensitive to economic downturns and recessions than higher rated
fixed income securities. The financial stress resulting from an economic
downturn could have a greater negative effect on the ability of issuers of
lower rated fixed income securities to service their principal and interest
payments, to meet projected business goals and to obtain additional financing
than on more creditworthy issuers. In the event of an issuer's default in
payment of principal or interest on such securities, or any other fixed income
securities in a Fund's portfolio, the net asset value of that Fund will be
negatively affected. Moreover, as the market for lower rated fixed income
securities is a relatively new one, a severe economic downturn might increase
the number of defaults, thereby adversely affecting the value of all
outstanding lower rated fixed income securities and disrupting the market for
such securities. Fixed income securities purchased by the Fund as part of an
initial underwriting present an additional risk due to their lack of market
history. These risks are exacerbated with respect to fixed income securities
rated Caa or lower by Moody's or CCC or lower by Standard & Poor's. Unrated
fixed income securities generally carry the same risks as do lower rated fixed
income securities.

Lower quality debt securities are typically traded among a smaller number of
broker-dealers rather than in a broad secondary market. Purchasers of lower
quality debt securities tend to be institutions, rather than individuals, a
factor that further limits the secondary market. To the extent that no
established retail secondary market exists, many lower quality debt securities
may not be as liquid as Treasury and investment grade bonds. The ability of
the Fund to sell lower quality debt securities will be adversely affected to
the extent that such securities are thinly traded or illiquid. Moreover, the
ability of the Fund to value lower quality debt securities becomes more
difficult, and judgment plays a greater role in valuation, as there is less
reliable, objective data available with respect to such securities that are
thinly traded or illiquid. Unrated debt securities are not necessarily of
lower quality than rated debt securities, but they may not be attractive to as
many buyers.

Because investors may perceive that there are greater risks associated with
the lower quality debt securities of the type in which the Funds may invest,
the yields and prices of such securities may tend to fluctuate more than those
for higher quality debt securities. Changes in perception of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
in the lower quality segments of the debt securities market than do changes in
higher quality segments of the debt security market, resulting in greater
yield and price volatility. The speculative characteristics of lower rated
debt securities are set forth in Appendix A.

The Fund's Portfolio Adviser believes that the risks of investing in such high
yielding debt securities may be minimized through careful analysis of
prospective issuers. Although the opinions of ratings services such as Moody's
and Standard & Poor's are considered in selecting securities in which the Fund
may invest, the Portfolio Adviser evaluates the safety of the principal and
the interest payments of the security, not their market value risk.
Additionally credit rating agencies may experience slight delays in updating
ratings to reflect current events. The Portfolio Adviser relies, primarily on
its own credit analysis. This may suggest, however, that the achievement of
the Fund's investment objective is more dependent on the Portfolio Adviser's
proprietary credit analysis, than is otherwise the case for a Fund that
invests exclusively in higher quality debt securities. Once the rating of a
portfolio security or the quality determination ascribed by the Portfolio
Adviser to an unrated debt security has been downgraded, the Portfolio Adviser
will consider all circumstances deemed relevant in determining whether to
continue to hold the security.

APPENDIX A
- -------------------------------------------------------------------------------

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S BOND RATINGS:

Investment grade debt securities are those rating categories indicated by an
asterisk (*).

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

*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 fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

*A: Bonds 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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

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

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

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

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

NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security 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 issue ranks in the lower end of its generic rating
category.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S BOND RATINGS:

Investment grade debt securities are those rating categories indicated by an
asterisk (*).

*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.

*AA: Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.

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

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

BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.

BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.

B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied "BB" or
"BB-" rating.

CCC: Debt rated "CCC" has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "C" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.

CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.

C: The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.

C1: The rating "C1" is reserved for income bonds on which no interest is being
paid.

D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.

PLUS (+) OR MINUS (-): 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.
NR: Bonds may lack a S&P rating because no public rating has been requested,
because there is insufficient information on which to base a rating, or
because S&P does not rate a particular type of obligation as a matter of
policy.

[This Page Intentionally Left Blank]

The Blanchard Group of Funds are available through Signet Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., who is compensated for this service.

Investment products are not deposits, obligations of, or guaranteed by
any bank. They are not insured by the FDIC. They involve risk, including
the possible loss of principal invested.

BLANCHARD

(2096) 00/01/05/06/07PC0896
G01386-01 (8/96)

STATEMENT OF ADDITIONAL INFORMATION

BLANCHARD GLOBAL GROWTH FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
This Statement is not a prospectus but should be read in conjunction
with the current prospectus dated August 31, 1996 (the "Prospectus"),
pursuant to which Blanchard Global Growth Fund (the "FUND") is offered.
Please retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

Investment Objective and Policies 2
Investment Restrictions 12
Portfolio Transactions 14
Computation of Net Asset Value 15
Performance Information 16
Additional Purchase and Redemption Information 17
Tax Matters 17
Blanchard Funds Management 23
Management Services 27
Portfolio Management Services 28
Administrative Services 28
Distribution Plan 28
Description of the FUND 29
Shareholder Reports 30
Appendix A A-31

Manager
Virtus Capital Management, Inc.

Distributor
Federated Securities Corp.

Custodian
Signet Trust Company

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1996

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and policies of the FUND are set forth in the
FUND's Prospectus which refers to the following investment strategies and
additional information:

Options and Futures Strategies

Through the writing and purchase of options and the purchase and
sale of stock index futures contracts, interest rate futures contracts,
foreign currency futures contracts and related options on such futures
contracts, Virtus Capital Management, Inc. ("VCM") may at times seek to
hedge against a decline in the value of securities included in the FUND's
portfolio or an increase in the price of securities which it plans to
purchase for the FUND or to reduce risk or volatility while seeking to
enhance investment performance. Expenses and losses incurred as a result
of such hedging strategies will reduce the FUND's current return.

The ability of the FUND to engage in the options and futures
strategies described below will depend on the availability of liquid
markets in such instruments. Markets in options and futures with respect
to stock indices, U.S. Government securities and foreign currencies are
relatively new and still developing. Although a FUND will not enter into
an option or futures position unless a liquid secondary market exists for
such option or futures contract is believed by FUND management to exist.
There is no assurance that the FUND will be able to effect closing
transactions at any particular time or at an acceptable price. Reasons for
the absence of a liquid secondary market on an Exchange include the
following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an Exchange on opening
transactions or closing transactions or both; (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange;
(v) the facilities of an Exchange or the Options Clearing Corporation
("OCC") may not at all times be adequate to handle current trading volume;
or (vi) one or more Exchanges could, for economic or other reasons, decide
or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market thereon would cease to exist, although outstanding options on that
Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.

Low initial margin deposits made upon the opening of a futures
position and the writing of an option involve substantial leverage. As a
result, relatively small movements in the price of the contract can result
in substantial unrealized gains or losses. However, to the extent the FUND
purchases or sells futures contracts and options on futures contracts and
purchases and writes options on securities and securities indexes for
hedging purposes, any losses incurred in connection therewith should, if
the hedging strategy is successful, be offset, in whole or in part, by
increases in the value of securities held by the FUND or decreases in the
prices of securities the FUND intends to acquire. It is impossible to
predict the amount of trading interest that may exist in various types of
options or futures. Therefore, no assurance can be given that the FUND
will be able to utilize these instruments effectively for the purposes
stated below. Furthermore, the FUND's ability to engage in options and
futures transactions may be limited by tax considerations. Although the
FUND will only engage in options and futures transactions for limited
purposes, it will involve certain risks which are described in the
Prospectus. The FUND will not engage in options and futures transactions
for leveraging purposes.

Writing Covered Options on Securities

The FUND may write covered call options and covered put options
on optionable securities (stocks, bonds, foreign exchange, related futures,
options and options on futures) of the types in which it is permitted to
invest in seeking to attain its objective. Call options written by the
FUND give the holder the right to buy the underlying securities from the
FUND at a stated exercise price; put options give the holder the right to
sell the underlying security to the FUND at a stated price.

The FUND may write only covered options, which means that, so
long as the FUND is obligated as the writer of a call option, it will own
the underlying securities subject to the option (or comparable securities
satisfying the cover requirements of securities exchanges). In the case of
put options, the FUND will maintain, in a segregated account, cash or
short-term U.S. Government securities with a value equal to or greater than
the exercise price of the underlying securities or will hold a purchased
put option with a higher strike price than the put written. The FUND may
also write combinations of covered puts and calls on the same underlying
security.

The FUND will receive a premium from writing a put or call
option, which increases the FUND's return in the event the option expires
unexercised or is closed out at a profit. The amount of the premium will
reflect, among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the
option and the volatility of the market price of the underlying security.
By writing a call option, the FUND limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the FUND assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its market value at the time it is exercised
resulting in a potential capital loss if the purchase price is greater than
the underlying securities current market value minus the amount of the
premium received, unless the security subsequently appreciates in value.

The FUND may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it
purchases an option having the same terms as the option written. The FUND
will realize a profit or loss from such transaction if the cost of such
transaction is less or more, respectively, than the premium received from
the writing of the option. In the case of a put option, any loss so
incurred may be partially or entirely offset by the premium received from a
simultaneous or subsequent sale of a different put option. Because
increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in
whole or in part by unrealized appreciation of the underlying security
owned by the FUND.

Options written by the FUND will normally have expiration dates
not more than one year from the date written. The exercise price of the
options may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities
at the times the options are written. The FUND may engage in buy-and-write
transactions in which the FUND simultaneously purchases a security and
writes a call option thereon. Where a call option is written against a
security subsequent to the purchase of that security, the resulting
combined position is also referred to as buy-and-write. Buy-and-write
transactions using in-the-money call options may be utilized when it is
expected that the price of the underlying security will remain flat or
decline moderately during the option period. In such a transaction, the
FUND's maximum gain will be the premium received from writing the option
reduced by any excess of the price paid by the FUND for the underlying
security over the exercise price. Buy-and-write transactions using at-the-
money call options may be utilized when it is expected that the price of
the underlying security will remain flat or advance moderately during the
option period. In such a transaction, the FUND's gain will be limited to
the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected
that the premiums received from writing the call option plus the
appreciation in market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. In any of the foregoing situations, if the market price of
the underlying security declines, the amount of such decline will be offset
wholly or in part by the premium received and the FUND may or may not
realize a loss.

To the extent that a secondary market is available on the
Exchanges, the covered call option writer may liquidate his position prior
to the assignment of an exercise notice by entering a closing purchase
transaction for an option of the same series as the option previously
written. The cost of such a closing purchase, plus transaction costs, may
be greater than the premium received upon writing the original option, in
which event the writer will have incurred a loss in the transaction.

Purchasing Put and Call Options on Securities
The FUND may purchase put options to protect its portfolio
holdings in an underlying security against a decline in market value. Such
hedge protection is provided during the life of the put option since the
FUND, as holder of the put option, is able to sell the underlying security
at the put exercise price regardless of any decline in the underlying
security's market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put
options in this manner, the FUND will reduce any profit it might otherwise
have realized in the underlying security by the premium paid for the put
option and by transaction costs.

The FUND may also purchase call options to hedge against an
increase in prices of securities that it wants ultimately to buy. Such
hedge protection is provided during the life of the call option since the
FUND, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying
security's market price. In order for a call option to be profitable, the
market price of the underlying security must rise sufficiently above the
exercise price to cover the premium and transaction costs. By using call
options in this manner, the FUND will reduce any profit it might have
realized had it bought the underlying security at the time it purchased the
call option by the premium paid for the call option and by transaction
costs.

Purchase and Sale of Options and Futures on Stock Indices

The FUND may purchase and sell options on stock indices and stock
index futures as a hedge against movements in the equity markets.

Options on stock indices are similar to options on specific
securities except that, rather than the right to take or make delivery of
the specific security at a specific price, an option on a stock index gives
the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of that stock index is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the
closing price of the index and the exercise price of the option expressed
in dollars multiplied by a specified multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount. Unlike options on specific securities, all settlements of options
on stock indices are in cash and gain or loss depends on general movements
in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100
Index, the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value
Index, the National Over-the-Counter Index and other standard broadly based
stock market indices. Options are also traded in certain industry or
market segment indices such as the Oil Index, the Computer Technology Index
and the Transportation Index.

A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of securities is made.

If Mellon Capital Management Corporation (`MCM''), the FUND's
portfolio adviser, expects general stock market prices to rise, they might
purchase a call option on a stock index or a futures contract on that index
as a hedge against an increase in prices on particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the
price of the particular equity securities intended to be bought may also
increase, but that increase would be offset in part by the increase in the
value of the FUND's index option or futures contract resulting from the
increase in the index. If, on the other hand, MCM expects general stock
market prices to decline, the value of some or all of the equity securities
in the FUND's portfolio may also be expected to decline, but that decrease
would be offset in part by the increase in the value of the FUND's position
in put options acquired as a hedge against a potential decline.

Purchase and Sale of Interest Rate Futures

The FUND may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar
interest rate futures contracts on foreign bonds for the purpose of hedging
fixed income and interest sensitive securities against the adverse effects
of anticipated movements in interest rates.

The FUND may purchase futures contracts in anticipation of a
decline in interest rates when it is not fully invested in a particular
market in which it intends to make investments to gain market exposure that
may in part or entirely offset an increase in the cost of securities it
intends to purchase. The FUND does not consider purchases of futures
contracts to be a speculative practice under these circumstances. In a
substantial majority of these transactions, the FUND will purchase
securities upon termination of the futures contract.

The FUND may sell U.S. dollar and non-U.S. dollar interest rate
futures contracts in anticipation of an increase in the general level of
interest rates. Generally, as interest rates rise, the market value of the
fixed income securities held by the FUND will fall, thus reducing the net
asset value of the FUND. This interest rate risk can be reduced without
employing futures as a hedge by selling long-term fixed income securities
and either reinvesting the proceeds in securities with shorter maturities
or by holding assets in cash. This strategy, however, entails increased
transaction costs to the FUND in the form of dealer spreads and brokerage
commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of the FUND's short position in the
futures contracts will also tend to increase, thus offsetting all or a
portion of the depreciation in the market value of the FUND's investments
which are being hedged. While the FUND will incur commission expenses in
entering and closing out futures positions (which is done by taking an
opposite position from the one originally entered into, which operates to
terminate the position in the futures contract), commissions on futures
transactions are lower than transaction costs incurred in the purchase and
sale of portfolio securities.

Options on Stock Index Futures Contracts and Interest Rate Futures
Contracts

The FUND may purchase and write call and put options on stock
index and interest rate futures contracts. The FUND may use such options
on futures contracts in connection with its hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or
stock indices or purchasing and selling the underlying futures. For
example, the FUND may purchase put options or write call options on stock
index futures or interest rate futures, rather than selling futures
contracts, in anticipation of a decline in general stock market prices or
rise in interest rates, respectively, or purchase call options or write put
options on stock index or interest rate futures, rather than purchasing
such futures, to hedge against possible increases in the price of equity
securities or debt securities, respectively, which the FUND intends to
purchase.

Purchase and Sale of Currency Futures Contracts and Related Options

In order to hedge its portfolio and to protect it against
possible variations in foreign exchange rates pending the settlement of
securities transactions, the FUND may buy or sell foreign currencies or may
deal in forward currency contracts. The FUND may also invest in currency
futures contracts and related options. If a fall in exchange rates for a
particular currency is anticipated, the FUND may sell a currency futures
contract or a call option thereon or purchase a put option on such futures
contract as a hedge. If it is anticipated that exchange rates will rise,
the FUND may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency the FUND intends to
purchase. These futures contracts and related options thereon will be used
only as a hedge against anticipated currency rate changes, and all options
on currency futures written by the FUND will be covered.

A currency futures contract sale creates an obligation by the
FUND, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a specified price. A currency
futures contract purchase creates an obligation by the FUND, as purchaser,
to take delivery of an amount of currency at a specified future time at a
specified price. Although the terms of currency futures contracts specify
actual delivery or receipt, in most instances the contracts are closed out
before the settlement date without the making or taking of delivery of the
currency. Closing out of a currency futures contract is effected by
entering into an offsetting purchase or sale transaction. Unlike a
currency futures contract, which requires the parties to buy and sell
currency on a set date, an option on a currency futures contract entitles
its holder to decide on or before a future date whether to enter into such
a contract or let the option expire.

The FUND will write (sell) only covered put and call options on
currency futures. This means that the FUND will provide for its
obligations upon exercise of the option by segregating sufficient cash or
short-term obligations or by holding an offsetting position in the option
or underlying currency future, or a combination of the foregoing. The FUND
will, so long as it is obligated as the writer of a call option on currency
futures, own on a contract-for-contract basis an equal long position in
currency futures with the same delivery date or a call option on stock
index futures with the difference, if any, between the market value of the
call written and the market value of the call or long currency futures
purchased maintained by the FUND in cash, Treasury bills, or other high-
grade short-term obligations in a segregated account with its custodian.
If at the close of business on any day the market value of the call
purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high-grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option times
the number of options written by the FUND. In the case of put options on
currency futures written by the FUND, the FUND will hold the aggregate
exercise price in cash, Treasury bills, or other high-grade short-term
obligations in a segregated account with its custodian, or own put options
on currency futures or short currency futures, with the difference, if any,
between the market value of the put written and the market value of the
puts purchased or the currency futures sold maintained by the FUND in cash,
Treasury bills or other high-grade short-term obligations in a segregated
account with its custodian. If at the close of business on any day the
market value of the put options purchased or the currency futures sold by
the FUND falls below 100% of the market value of the put options written by
the FUND, the FUND will so segregate an amount of cash, Treasury bills or
other high-grade short-term obligations equal in value to the difference.

If other methods of providing appropriate cover are developed,
the FUND reserves the right to employ them to the extent consistent with
applicable regulatory and exchange requirements.
In connection with transactions in stock index options, stock
index futures, interest rate futures, foreign currency futures and related
options on such futures, the FUND will be required to deposit as "initial
margin" an amount of cash and short-term U.S. Government securities
generally equal to from 5% to 10% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and
from the broker to reflect changes in the value of the futures contract.

Options on Foreign Currencies

The FUND may purchase and write options on foreign currencies to
enhance investment performance and for hedging purposes in a manner similar
to that in which futures contracts on foreign currencies, or forward
contracts, will be utilized as described above. For example, a decline in
the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their
value in the foreign currency remains constant. In order to protect
against such diminutions in the value of portfolio securities, the FUND may
purchase put options on the foreign currency. If the value of the currency
does decline, the FUND will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.

Conversely, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected, thereby
increasing the cost of such securities, the FUND may purchase call options
thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of
other types of options, however, the benefit to the FUND deriving from
purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency
exchange rates do not move in the direction or to the extent anticipated,
the FUND could sustain losses on transactions in foreign currency options
which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.

Also, where the FUND anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call
option on the relevant currency. If the expected decline occurs, the
option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.

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

The FUND intends to write covered call options on foreign
currencies. A call option written on a foreign currency by the FUND is
"covered" if the FUND owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign
currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian, which acts as
the FUND's custodian, or by a designated sub-custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A call option is
also covered if the FUND has a call on the same foreign currency and in the
same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price or the call
written or (b) is greater than the exercise price of the call written if
the difference is maintained by the FUND in cash, U.S. Government
Securities and other high-grade liquid debt securities in a segregated
account with its custodian or with a designated sub-custodian.

Mortgage and Asset-Backed Securities

Subject to the approval of the Board of Trustees of the FUND, the
FUND may invest in foreign mortgage-backed and asset-backed securities.
The FUND will only purchase mortgage-backed and asset-backed securities
which, in its opinion, equate generally to U.S. standards of "investment
grade" obligations.

Mortgage-backed securities are securities that directly or
indirectly represent a participation in, or are secured by and payable
from, mortgage loans on real property, including pass-through securities
and collateralized mortgage obligations. The yield and credit
characteristics of mortgage-backed securities differ in a number of
respects from traditional debt securities.

Asset-backed securities have similar structural characteristics
to mortgage-backed securities. However, the underlying assets are not
mortgage loans or interests in mortgage loans but include assets such as
motor vehicle installment sales or installment loan contracts, leases of
various types of real and personal property, and receivables from revolving
credit (credit card) agreement.

Repurchase Agreements
Repurchase agreements are transactions by which the FUND
purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon price on an agreed upon date within a number
of days (usually not more than seven days) from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to
pay the agreed upon price, which obligation is in effect secured by the
value (at least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delay and costs to the FUND in connection
with bankruptcy proceedings) it is the policy of the FUND to limit
repurchase agreements to those member banks of the Federal Reserve System
and primary dealers in U.S. Government securities who are believed by the
FUND's Trustees to present minimum credit risk. Repurchase agreements
maturing in more than seven days are considered, for the purposes of the
FUND's investment restrictions, to be illiquid securities. No more than
10% of the FUND's net assets may be held in illiquid securities (see
"Investment Restrictions").

Forward Foreign Currency Exchange Contracts

The value of the assets of the Foreign Securities, Precious
Metals Securities and Bullion, Emerging Markets and Foreign Fixed Income
Securities investment sectors of the FUND as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency
exchange rates and exchange control regulations, and the FUND may incur
costs in connection with conversions between various currencies.

The FUND may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the FUND
from adverse changes in the relationship between the U.S. dollar and
foreign currencies. A forward contract is an obligation to purchase or
sell a specific currency for an agreed price at a future date which is
individually negotiated and privately traded by currency traders and their
customers. The FUND may enter into a forward contract, for example, when
it enters into a contract for the purchase or sale of a security
denominated in a foreign currency in order to "lock in" the U.S. dollar
price of the security ("transaction hedge"). Additionally, for example,
when the FUND believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward sale contract
to sell an amount of that foreign currency approximating the value of some
or all of the FUND's securities denominated in such foreign currency, or
when the FUND believes that the U.S. dollar may suffer a substantial
decline against foreign currency, it may enter into a forward purchase
contract to buy that foreign currency for a fixed dollar amount ("position
hedge"). In this situation, the FUND may, in the alternative, enter into a
forward contract to sell a different foreign currency for a fixed U.S.
dollar amount where it believes that the U.S. dollar value of the currency
to be sold pursuant to the forward contract will fall whenever there is a
decline in the U.S. dollar value of the currency in which portfolio
securities of the sector are denominated ("cross-hedge"). If the FUND
enters into a position hedging transaction, cash not available for
investment or U.S. Government Securities or other high quality debt
securities will be placed in a segregated account in an amount sufficient
to cover the FUND's net liability under such hedging transactions. If the
value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so that the
value of the account will equal the amount of the FUND's commitment with
respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, the FUND may purchase a
call option permitting it to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward
contract price or the FUND may purchase a put option permitting it to sell
the amount of foreign currency subject to a forward purchase contract at a
price as high or higher than the forward contract price. Unanticipated
changes in currency prices would result in lower overall performance for
the FUND than if it had not entered into such contracts.

While the pursuit of foreign currency gain is not a primary
objective of the FUND, the FUND may, from time to time, hold foreign
currency to realize such gains. (These gains constitute non-qualifying
income that is subject to the 10% limitation with respect to the "Income
Requirements" of Subchapter M of the Internal Revenue Code of 1986, as
amended, which is discussed herein under "Dividends, Capital Gains
Distributions and Tax Matters".)

The FUND will enter into forward foreign currency exchange
contracts as described hereafter. When the FUND enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it
may desire to establish the U.S. dollar cost or proceeds. By entering into
a forward contract in U.S. dollars for the purchase or sale of the amount
of foreign currency involved in an underlying security transaction, the
FUND will be able to protect itself against a possible loss between trade
and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to
limit potential gains which might result from a positive change in such
currency relationships.

When MCM believes that the currency of a particular foreign country
may suffer a substantial decline against the U.S. dollar, it may enter into
a forward contract to sell an amount of foreign currency approximating the
value of some or all of the FUND's portfolio securities denominated in such
foreign currency. The forecasting of short-term currency market movement is
extremely difficult and the successful execution of a short-term hedging
strategy is highly uncertain. Under normal circumstances consideration of
the prospect for currency parities will be incorporated into the longer
term investment decisions made with regard to overall strategies. However,
the Trustees of the FUND believe that it is important to have the
flexibility to enter into such forward contracts when MCM determines that
the best interests of the FUND will be served.

Generally, the FUND will not enter into a forward foreign
currency exchange contract with a term of greater than one year. At the
maturity of the contract, the FUND may either sell the portfolio security
and make delivery of the foreign currency, or may retain the security and
terminate the obligation to deliver the foreign currency by purchasing an
"offsetting" forward contract with the same currency trader obligating the
FUND to purchase, on the same maturity date, the same amount of foreign
currency.

It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of the contract.
Accordingly, it may be necessary for the FUND to purchase additional
foreign currency on the spot market (and bear the expense of such purchase)
if the market value of the security is less than the amount of foreign
currency the FUND is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may
be necessary to sell on the spot market some of the foreign currency
received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the FUND is obligated to deliver.

If the FUND retains the portfolio security and engages in an
offsetting transaction, the FUND will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract
prices. If the FUND engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between entering
into a forward contract for the sale of a foreign currency and the date the
FUND enters into an offsetting contract for the purchase of the foreign
currency, the FUND will realize a gain to the extent the price of the
currency the FUND has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the FUND will
suffer a loss to the extent the price of the currency the FUND has agreed
to purchase exceeds the price of the currency the FUND has agreed to sell.

The FUND's dealing in forward foreign currency exchange contracts
will be limited to the transactions described above. Of course, the FUND
is not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed
appropriate by the Sector Managers. It also should be realized that this
method of protecting the value of the FUND's portfolio securities against
the decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit
any potential gain which might result should the value of such currency
increase.

Additional Risks of Futures Contracts and Related Options, Forward Foreign
Currency Exchange Contracts and Options on Foreign Currencies

The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the securities and futures markets. Second, from the
point of view of speculators, the deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
also cause temporary price distortions.

In addition, futures contracts in which the FUND may invest may
be subject to commodity exchange imposed limitations on fluctuations in
futures contract prices during a single day. Such regulations are referred
to as "daily price fluctuation limits" or "daily limits." During a single
trading day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract has increased or decreased by an
amount equal to the daily limit, positions in those futures cannot be taken
or liquidated unless both a buyer and seller are willing to effect trades
at or within the limit. Daily limits, or regulatory intervention in the
commodity markets, could prevent the FUND from promptly liquidating
unfavorable positions and adversely affect operations and profitability.

Options on foreign currencies and forward foreign currency
exchange contracts ("forward contracts") are not traded on contract markets
regulated by the Commodity Futures Trading Commission ("CFTC") and are not
regulated by the SEC. Rather, forward currency contracts are traded
through financial institutions acting as market-makers. Foreign currency
options are traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject
to SEC regulation. In the forward currency market, there are no daily
price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Moreover, a trader
of forward contracts could lose amounts substantially in excess of its
initial investments, due to the collateral requirements associated with
such positions.

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

The purchase and sale of exchange-traded foreign currency
options, however, are subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exercise and
settlement of such options must be made exclusively through the OCC, which
has established banking relationships in applicable foreign countries for
this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.

In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign
exchanges, to the extent permitted by the CFTC. Such transactions are
subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies or securities. The value of such positions
also could be adversely affected by (a) other complex foreign political and
economic factors, (b) lesser availability than in the United States of data
on which to make trading decisions, (c) delays in the FUND's ability to act
upon economic events occurring in foreign markets during nonbusiness hours
in the United States and the United Kingdom, (d) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (e) lesser trading volume.

Illiquid Securities

The FUND has adopted the following investment policy, which may
be changed by the vote of the Board of Trustees. The FUND will not invest
in illiquid securities if immediately after such investment more than 10%
of the FUND's total assets (taken at market value) would be invested in
such securities. For this purpose, illiquid securities include (a)
securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (b)
participation interests in loans that are not subject to puts, (c) covered
call options on portfolio securities written by the FUND over-the-counter
and the cover for such options and (d) repurchase agreements not terminable
within seven days.

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

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

During the coming year, the FUND may invest up to 10% of its
total assets in restricted securities issued under Section 4(2) of the
Securities Act, which exempts from registration "transactions by an issuer
not involving any public offering". Section 4(2) instruments are
restricted in the sense that they can only be resold through the issuing
dealer and only to institutional investors; they cannot be resold to the
general public without registration.

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

FUND management will monitor the liquidity of restricted
securities in the FUND's portfolio under the supervision of the FUND's
Trustees. In reaching liquidity decision, FUND management will consider,
inter alia, the following factors: (1) the frequency of trades and quotes
for the security; (2) the number of dealers wishing to purchase or sell
security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics
of the transfer).

Regulatory Matters

In connection with its proposed futures and options transactions,
the FUND has filed with the Commodity Futures Trading commission ("CFTC") a
notice of eligibility for exemption from the definition of (and therefore
from CFTC regulation as) a "commodity pool operator" under the Commodity
Exchange Act. The FUND has represented in its notice of eligibility that:

(i) it will not purchase or sell futures or options on
futures contracts or stock indices if as a result the
sum of the initial margin deposits on its existing
futures contracts and related options positions and
premiums paid for options on futures contracts or stock
indices would exceed 5% of the FUND's assets; and

(ii) with respect to each futures contract purchased or long
position in an option contract, the FUND will set aside
in a segregated account cash or cash equivalents in an
amount equal to the market value of such contracts less
the initial margin deposit.
The Staff of Securities and Exchange Commission ("Commission")
has taken the position that the purchase and sale of futures contracts and
the writing of related options may involve senior securities for the
purposes of the restrictions contained in Section 18 of the Investment
Company Act of 1940 on investment companies issuing senior securities.
However, the Staff has issued letters declaring that it will not recommend
enforcement action under Section 18 if an investment company:

(i) sells futures contracts to offset expected declines in
the value of the investment company's portfolio
securities, provided the value of such futures
contracts does not exceed the total market value of
those securities (plus such additional amount as may be
necessary because of differences in the volatility
factor of the portfolio securities vis a vis the
futures contracts);

(ii) writes call options on futures contracts, stock indexes
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding long futures position, by its ownership
of portfolio securities which correlate with the
underlying stock index, or otherwise;

(iii) purchases futures contracts, provided the investment
company establishes a segregated account ("cash
segregated account") consisting of cash or cash
equivalents in an amount equal to the total market
value of such futures contracts less the initial margin
deposited therefor; and

(iv) writes put options on futures contracts, stock indices
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding short futures position, by establishing a
cash segregated account in an amount equal to the value
of its obligation under the option, or otherwise.

The FUND will conduct its purchases and sales of futures
contracts and writing of related options transactions in accordance with
the foregoing.

Additional Information Regarding Precious Metals and Precious Metals
Securities

The production and marketing of gold and precious metals may be
affected by the action of certain governments and changes in existing
governments. For example, the mining of gold is highly concentrated in a
few countries. In current order of magnitude of production of gold
bullion, the five largest producers of gold are the Republic of South
Africa, certain republics of the former Soviet Union, Canada, Brazil and
the United States. Economic and political conditions prevailing in these
countries may have a direct effect on the production and marketing of newly
produced gold and sales of central bank gold holdings. It is expected that
a majority of gold mining companies in which the FUND will invest will be
located within the United States and Canada.

Prices of Precious Metals Securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals.
This is due to the fact that the costs of mining precious metals remain
relatively fixed, so that an increase or decrease in the price of precious
metals has a direct and greater than proportional effect on the
profitability of precious metals mining companies. Investments tied to
precious metals characteristically involve high risk because of precious
metals' price volatility. The price of precious metals is affected by
factors such as cyclical economic conditions, political events and monetary
policies of various countries. During periods of rising precious metals
prices, the Fund will tend to emphasize investments in Precious Metals
Securities.

Under South African law, the only authorized sales agent for gold
produced in South Africa is the Reserve Bank of South Africa, which through
its retention policies controls the time and place of any sale of South
African bullion. The South African Ministry of Mines determines gold
mining policy. South Africa depends predominantly on gold sales for the
foreign exchange necessary to finance its imports, and its sales policy is
necessarily subject to national economic and political developments.

Investments in Emerging Countries

The Emerging Markets sector of the FUND may invest indirectly in
securities of emerging country issuers through sponsored or unsponsored
American Depository Receipts ("ADRs"), Global Depository Receipts ("GDRs")
and other types of Depository Receipts (which, together with ADRs and GDRs,
are hereinafter referred to as "Depository Receipts"). Depository Receipts
may not necessarily be denominated in the same currency as the underlying
securities into which they may be converted. In addition, the issuers of
the stock of unsponsored Depository Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be
a correlation between such information and the market value of the
Depository Receipts.

Investing in emerging country securities involves certain
considerations not typically associated with investing in securities of
U.S. companies, including (1) restrictions on foreign investment and on
repatriation of capital invested in emerging countries, (2) currency
fluctuations, (3) the cost of converting foreign currency into U.S.
dollars, (4) potential price volatility and lesser liquidity of shares
traded on emerging country securities markets and (5) political and
economic risks, including the risk of nationalization or expropriation of
assets and the risk of war. In addition, accounting, auditing, financial
and other reporting standards in emerging countries are not equivalent to
U.S. standards and, therefore, disclosure of certain material information
may not be made and less information may be available to investors
investing in emerging countries than in the United States. There is also
generally less governmental regulation of the securities industry in
emerging countries than in the United States. Moreover, it may be more
difficult to obtain a judgment in a court outside the United States.
Interest and dividends paid on securities held by the FUND and gains from
the disposition of such securities may be subject to withholding taxes
imposed by emerging market countries. Historical experience indicates that
the markets of developing countries have been more volatile than the
markets of developed countries; however, securities traded in such markets
often have provided higher rates of return to investors. VCM believes that
these characteristics may be expected to continue in the future.

Portfolio Turnover

Generally, the FUND's portfolio turnover rate is not expected to
exceed 100%. A 100% portfolio turnover rate would occur if 100% of the
securities owned by the FUND were sold and either repurchased or replaced
by it within one year. However, the Fund may experience a temporary
increase in portfolio turnover and incur some additional transaction costs
as a result of the restructuring approved by the Fund's shareholders on
January 15, 1992 as the new portfolio managers invest Fund assets
transferred to their management. The FUND's portfolio turnover rate is,
generally, the percentage computed by dividing the lesser of FUND's
purchases or sales exclusive of short-term securities and bullion, by the
average value of the FUND's total investments exclusive of short-term
securities and bullion. The portfolio turnover rates for the fiscal years
ended April 30, 1996, 1995 and 1994, were 91%, 221% and 166%, respectively.
The Fund's portfolio's turnover rate for the fiscal years ended April 30,
1995 and 1994 was higher than normal due to volatile foreign markets. High
Portfolio turnover involves correspondingly greater brokerage commissions,
other transaction costs, and a possible increase in short-term capital
gains or losses. Shareholders are taxed on any such net gains at ordinary
income rates. Because any capital gains realized would be distributed to
shareholders at year-end, shareholders should consider the impact of such
distributions on their own tax position.

INVESTMENT RESTRICTIONS

Investment restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority (as defined in the
Investment Company Act of 1940, as amended) of the outstanding shares of
the FUND. As used in the Prospectus and the Statement of Additional
Information, the term "majority of the outstanding shares" of the FUND
means, respectively, the vote of the lesser of (i) 67% or more of the
shares of the FUND present at a meeting, if the holders of more than 50% of
the outstanding shares of the FUND are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the FUND. The following
are the FUND's investment restrictions set forth in their entirety.

1. As a non-diversified management investment company, the FUND
has the following restrictions: (a) with respect to 50% of the FUND's
total assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of the
U.S. Government, its agencies and instrumentalities) and (b) with respect
to the other 50% of the FUND's total assets, the FUND may not invest more
than 25% of the market value of its total assets in a single issuer (except
the securities of the U.S. Government, its agencies and instrumentalities).
These two restrictions, hypothetically, could give rise to the FUND having
as few as twelve issuers.
2. The FUND will not purchase a security if, as a result: (a)
it would own more than 10% of any class or of the outstanding voting
securities of any single company; (b) more than 5% of its total assets
would be invested in the securities of companies (including predecessors)
that have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any one
industry as such industries are defined in the SIC/SEC Industries Code; or
(d) more than 5% of total assets would be invested in warrants or rights.

3. The FUND may borrow money from a bank solely for temporary
or emergency purposes (but not in an amount equal to more than 10% of the
market value of its total assets). The FUND will not purchase additional
securities while borrowing is in excess of 5% of the market value of its
total assets.

4. The FUND will not make loans of money or securities other
than (a) through the purchase of publicly distributed debt securities in
accordance with its investment objective and (b) through repurchase
agreements.

5. The FUND may not invest more than 5% of its total assets in
the securities of other investment companies or purchase more than 3% of
any other investment company's voting securities.

6. The FUND may not knowingly purchase or otherwise acquire
securities which are subject to legal or contractual restrictions on resale
or for which there is no readily available market if, as a result thereof,
more than 10% of the net assets of the FUND (taken at market value) would
be invested in such securities, including repurchase agreements in excess
of 7 days.

7. The FUND may not pledge, mortgage or hypothecate its assets,
except that to secure borrowings permitted by Restriction 3 above, the FUND
may pledge securities having a value at the time of pledge not exceeding
10% of the market value of the FUND's total assets.

8. The FUND may not purchase or sell commodity contracts,
except for stock, bond, currency and other financial futures contracts.
(see `Investment Objective and Policies- Forward Foreign currency Exchange
Contracts').

9. The FUND may not buy or sell any securities or other
property on margin, except for such short term credits as are necessary for
the clearance of transactions, and except for margin payments in connection
with the use of stock, bond, currency and other financial futures
contracts; and the FUND may not engage in short sales.

10. The FUND may not invest in companies for the purpose of
exercising control or management.

11. The FUND may not underwrite securities issued by others
except to the extent that the FUND may be deemed an underwriter when
purchasing or selling portfolio securities.

12. The FUND may not purchase or retain securities of any issuer
(other than the shares of the FUND) if to the FUND's knowledge, those
officers and Trustees of the FUND and the officers and directors of VCM,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.

13. The FUND may not purchase or sell real estate (although it
may purchase securities secured by real estate interests or interests
therein, or issued by companies or investment trusts which invest in real
estate or interests therein).
14. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs; provided, however, that if
consistent with the objective of the FUND, the FUND may purchase securities
of issuers whose principal business activities fall within such areas.

15. The FUND may not issue senior securities.

In order to permit the sale of shares of the FUND in certain
states, the FUND may make commitments more restrictive than the
restrictions described above. Should the FUND determine that any such
commitment is no longer in the best interests of the FUND and its
shareholders it will revoke the commitment by terminating sales of its
shares in the state(s) involved. Pursuant to one such commitment, the
Trust has agreed that the FUND will not: (1) invest in warrants, valued at
the lower of cost or market, in excess of 5% of the value of the FUND's net
assets, and no more than 2% of such value may be warrants which are not
listed on the New York or American Stock Exchanges; and (2) make direct
investments in oil, gas or other mineral leases.

Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of
portfolio securities or other changes in total assets will not be
considered a violation of such restrictions.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities are
placed on behalf of the FUND by MCM subject to the supervision of VCM and
the Trustees and pursuant to authority contained in the Investment Advisory
Contract and the Sub-Advisory Agreement between the FUND and VCM and VCM
and MCM. In selecting such brokers of dealers, MCM will consider various
relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character
of the markets for the security to be purchased or sold, the execution
efficiency, settlement capability, financial condition of the broker-dealer
firm, the broker-dealer's execution services rendered on a continuing basis
and the reasonableness of any commissions.

In addition to meeting the primary requirements of execution and
price, brokers or dealers may be selected who provide research services, or
statistical material or other services to the FUND or to MCM for the FUND's
use. Those services may include economic studies, industry studies,
security analysis or reports, sales literature and statistical services
furnished either directly to the FUND or to MCM. Such allocation shall be
in such amounts as VCM shall determine and MCM shall report regularly to
VCM who will in turn report to the Trustees on the allocation of brokerage
for such services. The Trustees must determine that such services are
reasonable and necessary to the FUND's normal operations.

The receipt of research from broker-dealers may be useful to MCM
in rendering investment management services to their other clients, and
conversely, such information provided by brokers or dealers who have
executed orders on behalf of MCMs' other clients may be useful to MCM in
carrying out their obligations to the FUND.

MCM is authorized, subject to its best efforts to obtain best
price and execution, to place portfolio transactions with brokerage firms
that have provided assistance in the distribution of shares of the FUND and
are authorized to use Federated Securities Corp. (the `Distributor''), and
MCM or its affiliated broker-dealers on an agency basis, to effect a
substantial amount of the portfolio transactions which are executed on the
New York or American Stock Exchanges, Regional Exchanges and Foreign
Exchanges where relevant, or which are traded in the Over-the Counter
market. Any profits resulting from brokerage commissions earned by the
Distributor as a result of FUND transactions will accrue to the benefit of
the shareholders of the Distributor who are shareholders of VCM. The
Investment Advisory Contract does not provided for any reduction in the
advisory fee as a result of profits resulting from brokerage commissions
effected through the Distributor. In addition, the Sub-Advisory Agreement
between VCM and MCM does not provide for any reduction in the advisory fee
as a result of profits resulting from brokerage commissions effected
through MCM or its affiliated brokerage firms.

The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the Investment Company Act of 1940
(the `1940 Act'') which requires that the commissions paid the Distributor
or to MCM or its affiliated broker-dealers must be `reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time.''The Rule
and the procedures also contain review requirements and require VCM to
furnish reports to the Trustees and to maintain records in connection with
such reviews.

Brokers or dealers who execute portfolio transactions on behalf
of the FUND may receive commissions which are in excess of the amount of
commissions which other brokers or dealers would have charged for effecting
such transactions; provided, VCM determines in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing brokers or dealers viewed in
terms of a particular transaction or VCM's overall responsibilities to the
FUND. For the years ended April 30, 1996, 1995, 1994, the FUND incurred
brokerage commission expenses of $166,428, $488,175, and $583,706,
respectively, from the purchase and sale of portfolio securities, of which
$40,660, $173,599, and $121,292, respectively, or approximately 24%, 36%,
and 21%,respectively, was paid to Shufro, Rose & Ehrman, a Sector Manager
of the FUND, for effecting 10%, 46%, and 27% respectively, of the FUND's
aggregate dollar amount of transactions involving the payment of
commissions. Shufro, Rose & Ehrman operates under standards which would
allow it to receive no more than the remuneration which would be expected
to be received by an unaffiliated broker in a commensurate arms-length
transaction which is executed on the New York or American Stock Exchanges.
Moreover, in effecting portfolio transactions through Shufro, Rose &
Ehrman, the cost of the brokerage commissions to the FUND in some cases is
less than that available from unaffiliated brokers. The reliability of
Shufro, Rose & Ehrman and the value of its expected contribution to the
FUND, viewed either in terms of a particular transaction or the portfolio
manager's overall responsibilities to the FUND, is also taken into
consideration in selecting Shufro, Rose & Ehrman to serve as the FUND's
broker. In addition, of the aggregate brokerage commissions incurred for
the year ended April 30, 1993 (which represents approximately 5% of total
commissions paid in 1993 was also paid to Morgan Stanley Asset Management
Limited, a former Sector Manager of the FUND.

It may happen that the same security will be held by other
clients of VCM or of the portfolio managers. When the other clients are
simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in accordance with a formula
considered by VCM to be equitable to each, taking into consideration such
factors as size of account, concentration of holdings, investment
objectives, tax status, cash availability, purchase cost, holding period
and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the
security as far as the FUND is concerned. In other cases, however, the
ability of the FUND to participate in volume transactions will produce
better executions for the FUND.

COMPUTATION OF NET ASSET VALUE
The net asset value of the FUND is determined at 4:00 p.m.
(Eastern Time) on each day that the New York Exchange is open for business
and on such other days as there is sufficient trading in the FUND's
securities to affect materially the net asset value per share of the FUND.
The FUND will be closed on New Years Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

Market or fair values of the FUND's portfolio securities are
determined as follows:

according to the last reported sales price on a recognized
securities exchange, if available. (If a security is traded on more than
one exchange, the price on the primary market for that security, as
determined by the Adviser or sub-adviser, is used.);
according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
at fair value as determined in good faith by the Trustees.

Prices provided by independent pricing services may be determined
without relying exlusively on quoted prices and may consider: institutional
trading in similar groups of securities; yield; quality ; coupon rate;
maturity; type of issue; trading characteristics; and other market data.

The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at
the mean between the bid and asked prices.

TRADING IN FOREIGN SECURITIES

Trading in foreign securities may be completed at times which
vary from the closing of the New York Stock Exchange. In computing the net
asset value, the FUND values foreign securities at the latest closing price
on the exchange on which they are traded immediately prior to the closing
of the New York Stock Exchange. Certain foreign currency exchange rates are
determined when such rates are made available to the FUND at times prior to
the close of the New York Stock Exchange. Foreign securities quoted in
foreign currencies are translated into U. S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the New
York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual calculation
may be done by others.

PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the FUND
to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return
basis combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the SEC, funds advertising performance must include
total return quotes calculated according to the following formula:

P(1 + T)n = ERV

Where P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods or at
the end of the 1, 5 or 10 year periods (or fractional
portion thereof)

Under the foregoing formula the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication,
and will cover one, five, and ten year periods or a shorter period dating
from the effectiveness of the FUND's registration statement. In
calculating the ending redeemable value, the pro rata share of the account
opening fee is deducted from the initial $1,000 investment and all
dividends and distributions by the FUND are assumed to have been reinvested
at net asset value as described in the prospectus on the reinvestment dates
during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and
10 year periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value.

The FUND's average annual total rate of return figures,
reflecting the initial investment of $1,000 and reinvestment of all
dividends and distributions, net of the pro rata share of the account
opening fee, for the one and five year periods ended April 30, 1996 and for
the period from June 1, 1986 (commencement of operations) to April 30,
1996, were 19.68%, 8.55% and 8.75%, respectively.

The FUND may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the FUND's performance with
other measures of investment return. For example, in comparing the FUND's
total return with data published by Lipper Analytical Services, Inc. or the
Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average, the
FUND calculates its aggregate total return for the specified periods of
time by assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment date. Percentage increases are
determined by subtracting the initial net asset value of the investment
from the ending net asset value and by dividing the remainder by the
beginning net asset value. The FUND does not, for these purposes, deduct
the pro rata share of the account opening fee, which was in effect until
December, 1994 from the initial value invested. The FUND will, however,
disclose the pro rata share of the account opening fee and will disclose
that the performance data does not reflect such non-recurring charge and
that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules and all
advertisements containing performance data will include a legend disclosing
that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The FUND reserves the right to close an account that has dropped
below $1,000 in value for a period of three months or longer other than as
a result of a decline in the net asset value per share. Shareholders are
notified at least 60 days prior to any proposed redemption and are invited
to add to their account if they wish to continue as a shareholder of the
FUND, however, the FUND does not presently contemplate making such
redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.

The FUND has elected to be governed by Rule 18f-1 of the 1940
Act, under which the FUND is obligated to redeem the shares of any
shareholder solely in cash up to the lesser of 1% of the net asset value of
the FUND or $250,000 during any 90-day period. Should any shareholder's
redemption exceed this limitation, the FUND can, at its sole option, redeem
the excess in cash or in portfolio securities. Such securities would be
selected solely by the FUND and valued as in computing net asset value. In
these circumstances a shareholder selling such securities would probably
incur a brokerage charge and there can be no assurance that the price
realized by a shareholder upon the sale of such securities will not be less
than the value used in computing net asset value for the purpose of such
redemption.

TAX MATTERS

The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

The FUND has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the FUND is not subject
to federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains
over capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that
are described below. Distributions by the FUND made during the taxable
year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.

In addition to satisfying the Distribution Requirement, a
regulated investment company must: (1) derive at least 90% of its gross
income from dividends, interest, certain payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies (to the extent such currency gains are
directly related to the regulated investment company's principal business
of investing in stock or securities) and other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies (the "Income Requirement"); and (2) derive less than 30% of its
gross income (exclusive of certain gains on designated hedging transactions
that are offset by realized or unrealized losses on offsetting positions)
from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). However, foreign currency
gains, including those derived from options, futures and forwards, will not
in any event be characterized as Short-Short Gain if they are directly
related to the regulated investment company's investments in stock or
securities (or options or futures thereon). Because of the Short-Short
Gain Test, the FUND may have to limit the sale of appreciated securities
that it has held for less than three months. However, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss,
since the recognition of a loss before the expiration of the three-month
holding period is disregarded for this purpose. Interest (including
original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income
that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this
purpose.

In general, gain or loss recognized by the FUND on the
disposition of an asset will be a capital gain or loss. However, gain
recognized on the disposition of a debt obligation purchased by the FUND at
a market discount (generally, at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of the
market discount which accrued while the FUND held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on
the disposition of a debt obligation denominated in a foreign currency or
an option with respect thereto (but only to the extent attributable to
changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract,
option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to
Code Section 1256 (unless the FUND elects otherwise), will generally be
treated as ordinary income or loss.

In general, for purposes of determining whether capital gain or
loss recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (ii) the asset is otherwise held by the FUND as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and the FUND grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto) or (iii)
the asset is stock and the FUND grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only
in the case of clause (i) above. In addition, the FUND may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.

Any gain recognized by the FUND on the lapse of, or any gain or
loss recognized by the FUND from a closing transaction with respect to, an
option written by the FUND will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the FUND will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.

Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special
tax treatment as "Section 1256 contracts." Section 1256 contracts are
treated as if they are sold for their fair market value on the last
business day of the taxable year, even though a taxpayer's obligations (or
rights) under such contracts have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any
gain or loss recognized as a consequence of the year-end deemed disposition
of Section 1256 contracts is taken into account for the taxable year
together with any other gain or loss that was previously recognized upon
the termination of Section 1256 contracts during that taxable year. Any
capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss.
The FUND, however, may elect not to have this special tax treatment apply
to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the FUND that are not Section 1256 contracts. The Internal
Revenue Service (the "IRS") has held in several private rulings (and
Treasury Regulations now provide) that gains arising from Section 1256
contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.

The FUND may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies
("PFICs") for federal income tax purposes. If the FUND invests in a PFIC,
it may elect to treat the PFIC as a qualifying electing fund (a "QEF") in
which event the FUND will each year have ordinary income equal to its pro
rata share of the PFIC's ordinary earnings for the year and long-term
capital gain equal to its pro rata share of the PFIC's net capital gain for
the year, regardless of whether the FUND receives distributions of any such
ordinary earning or capital gain from the PFIC. If the FUND does not
(because it is unable to, chooses not to or otherwise) elect to treat the
PFIC as a QEF, then in general (i) any gain recognized by the FUND upon
sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the FUND from the PFIC will be
allocated ratably over the FUND's holding period of its interest in the
PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is
received shall be included in the FUND's gross income for such year as
ordinary income (and the distribution of such portion by the FUND to
shareholders will be taxable as an ordinary income dividend, but such
portion will not be subject to tax at the FUND level), (iii) the FUND shall
be liable for tax on the portions of such gain or excess distribution so
allocated to prior years in an amount equal to, for each such prior year,
(A) the amount of gain or excess distribution allocated to such prior year
multiplied by the highest corporate tax rate in effect for such prior year
plus (B) interest on the amount determined under clause (A) for the period
from the due date for filing a return for such prior year until the date
for filing a return for the year in which the gain is recognized or the
excess distribution is received at the rates and methods applicable to
underpayments of tax for such period, and (iv) the distribution by the FUND
to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the FUND thereon) will
again be taxable to the shareholders as an ordinary income dividend.

Under recently proposed Treasury Regulations the FUND can elect
to recognize as gain the excess, as of the last day of its taxable year, of
the fair market value of each share of PFIC stock over the FUND's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain
will be included by the FUND as ordinary income, such gain will not be
subject to the Short-Short Gain Test, and the FUND's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If the FUND makes such election in the first taxable year it holds
PFIC stock, the FUND will include ordinary income from any mark to market
gain, if any, and will not incur the tax described in the previous
paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred
in the succeeding year. As of April 30, 1996, the FUND did not have
foreign currency losses to defer. At April 30, 1996, the Fund did not have
a net capital loss carryover.

In addition to satisfying the requirements described above, the
FUND must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the FUND's taxable year, at least 50% of the value of the FUND'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 the FUND has not invested more than 5% of the value of
the FUND's total assets in securities of such issuer and as to which the
FUND does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its 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 the FUND controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put)
with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward
currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument.

If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the
FUND's current and accumulated earnings and profits. Such distributions
generally will be eligible for the dividends-received deduction in the case
of corporate shareholders.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of
capital gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having
a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it
is subject to income tax for any taxable year ending in such calendar year.

For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net
capital gain) by the amount of any net ordinary loss for the calendar year;
and (2) exclude foreign currency gains and losses incurred after October 31
of any year (or after the end of its taxable year if it has made a taxable
year election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).

The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the FUND may in certain
circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.

FUND DISTRIBUTIONS

The FUND anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and
treated as dividends for federal income tax purposes, but they will qualify
for the 70% dividends-received deduction for corporate shareholders only to
the extent discussed below.

The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to
distribute any such amounts. Net capital gain is distributed and
designated as a capital gain dividend will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder
has held his shares or whether such gain was recognized by the FUND prior
to the date on which the shareholder acquired his shares. The Code
provides, however, that under certain conditions only 50% of the capital
gain recognized upon the FUND's disposition of "small business" stock will
be subject to tax.

Ordinary income dividends paid by the FUND with respect to a
taxable year will qualify for the 70% dividends-received deduction
generally available to corporations (other than corporations, such as S
corporations, which are not eligible for the deduction because of their
special characteristics and other than for purposes of special taxes such
as the accumulated earnings tax and the personal holding company tax) to
the extent of the amount of qualifying dividends received by the FUND from
domestic corporations for the taxable year. A dividend received by the
FUND will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the FUND has held for less
than 46 days (91 days in the case of certain preferred stock), excluding
for this purpose under the rules of Code Section 246(c) (3) and (4): (i)
any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any
period during which the FUND has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor
of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that
the FUND is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is
paid is treated as debt-financed under the rules of Code Section 246A.
Moreover, the dividends-received deduction for a corporate shareholder may
be disallowed or reduced (i) if the corporate shareholder fails to satisfy
the foregoing requirements with respect to its shares of the FUND or (ii)
by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain
other items).

Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate
taxpayers on the excess of the taxpayer's alternative minimum taxable
income ("AMTI") over an exemption amount. In addition, under the Superfund
Amendments and Reauthorization Act of 1986, a tax is imposed for taxable
years beginning after 1986 and before 1996 at the rate of 0.12% on the
excess of a corporate taxpayer's AMTI (determined without regard to the
deduction for this tax and the AMT net operating loss deduction) over $2
million. For purposes of the corporate AMT and the environmental super
fund tax (which are discussed above), the corporate dividends-received
deduction is not itself an item of tax preference that must be added back
to taxable income or is otherwise disallowed in determining a corporation's
AMTI. However, corporate shareholders will generally be required to take
the full amount of any dividend received from the FUND into account
(without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate
preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted
current earnings over its AMTI (determined without regard to this item and
the AMT net operating loss deduction)) includable in AMTI.

Investment income that may be received by the FUND from sources
within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the FUND to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the FUND's assets to be invested
in various countries is not known. If more than 50% of the value of the
FUND's total assets at the close of its taxable year consist of the stock
or securities of foreign corporations, the FUND may elect to "pass through"
to the FUND's shareholders the amount of foreign taxes paid by the FUND.
If the FUND so elects, each shareholder would be required to include in
gross income, even though not actually received, his pro rata share of the
foreign taxes paid by the FUND, but would be treated as having paid his pro
rate share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject
to various Code limitations) as a foreign tax credit against federal income
tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income
his pro rata share of such foreign taxes plus the portion of dividends
received from the FUND representing income derived from foreign sources.
No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should
consult his own tax adviser regarding the potential application of foreign
tax credits.

Distributions by the FUND that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital
to the extent of (and in reduction of) the shareholder's tax basis in his
shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the FUND will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the FUND (or of another fund).
Shareholders receiving a distribution in the form of additional shares will
be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder
purchases shares of the FUND reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be
taxable to the shareholder as dividends in the manner described above,
although such distributions economically constitute a return of capital to
the shareholder.

Ordinarily, shareholders are required to take distributions by
the FUND into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
FUND) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year.

The FUND will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
IRS for failure to report the receipt of interest or dividend income
properly, or (3) who has failed to certify to the FUND that it is not
subject to backup withholding or that it is a corporation or other "exempt
recipient."

SALE OR REDEMPTION OF SHARES

A shareholder will recognize gain or loss on the sale or
redemption of shares of the FUND in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of
the FUND within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the
sale or redemption of shares of the FUND will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-
term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) (discussed above in connection with
the dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower
than the maximum rate applicable to ordinary income. Capital losses in any
year are deductible only to the extent of capital gains plus, in the case
of a noncorporate taxpayer, $3,000 of ordinary income.

FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder"), depends on
whether the income from the FUND is "effectively connected" with a U.S.
trade or business carried on by such shareholder.

If the income from the FUND is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or
lower applicable treaty rate, if any) upon the gross amount of the
dividend. Furthermore, such a foreign shareholder may be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate) on the gross
income resulting from the FUND's election to treat any foreign taxes paid
by it as paid by its shareholders, but may not be allowed a deduction
against this gross income or a credit against this U.S. withholding tax for
the foreign shareholder's pro rata share of such foreign taxes which it is
treated as having been paid. Such a foreign shareholder would generally be
exempt from U.S. federal income tax on gains realized on the sale of shares
of the FUND and capital gain dividends.

If the income from the FUND is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and any gains realized upon the sale of
shares of the FUND will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at
a reduced treaty rate) unless such shareholders furnish the FUND with
proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the FUND, including the applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS

The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued
thereunder as in effect on the date of this Statement of Additional
Information. 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.

Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies often differ
from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting an investment in the
FUND under their particular circumstances.

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.

JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND;
Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and
Director, Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or
Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue,
Executive Vice President of the Trust.

THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.

JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND; President,
Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in
Southwest Florida; formerly, President,
Naples Property Management, Inc. and
Northgate Village Development
Corporation; Director or Trustee of the
Funds.

WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker,
Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.

JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..

LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh
Medical Center - Downtown; Member, Board
of Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.

EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly,
Counsel, Horizon Financial, F.A.,
Western Region; Director or Trustee of
the Funds. .

EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated
Management, Federated Research,
Federated Research Corp., Federated
Global Research Corp. and Passport
Research, Ltd.; Executive Vice President
and Director, Federated Securities
Corp.; Trustee, Federated Shareholder
Services Company; Trustee or Director of
some of the Funds; President, Executive
Vice President and Treasurer of some of
the Funds.

PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.

GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney, Member of
Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee
of the Funds.

JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA TRUSTEE OF THE FUND; President, Law
Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.
WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the
Funds. .

MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA TRUSTEE OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.

J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated
Management, and Federated Research:;
President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.;Trustee, Federated
Shareholder Services Company, and
Federated Shareholder Services;
Director, Federated Services Company;
President or Executive Vice President of
the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of
Johm F. Donahue, Chairman and Trustee of
the Trust.

JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT, AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research
Corp.; Trustee, Federated Shareholder
Services Company; Director, Federated
Services Company; President and Trustee,
Federated Shareholder Services;
Director, Federated Securities Corp.;
Executive Vice President and Secretary
of the Funds.

RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive
Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the
Funds.

* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.

@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.

THE FUNDS

As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:

111 Corcoran Funds; Annuity Management Series; Arrow Funds; Automated
Government Money Trust; Blanchard Funds; Blanchard Precious Metals Fund,
Inc.; Cash Trust Series II; Cash Trust Series, Inc. ; DG Investor Series;
Edward D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income Fund,
Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated GNMA
Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust;
Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-
Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.; High
Yield Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series.

FUND OWNERSHIP

As of August 15, 1996, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
To the best knowledge of the FUND, as of August 15, 1996, no shareholder
owned 5% or more of the outstanding shares of the FUND.

OFFICERS AND TRUSTEES COMPENSATION

NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM PAID TO TRUSTEES
THE TRUST+ FROM THE FUND AND
FUND COMPLEX*

John F. Donahue, $0 $0 for the Fund
Chairman and Trustee Complex
THOMAS G. BIGLEY, $1008.23 $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, JR., $1129.96 $3441.37 for the
TRUSTEE Fund Complex
WILLIAM J. COPELAND, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
JAMES E. DOWD, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. ELLIS, $1008.23 $3145.78 for the
M.D., TRUSTEE Fund Complex
EDWARD L. FLAHERTY, $1129.96 $3441.37 for the
JR., TRUSTEE Fund Complex
EDWARD C. GONZALES, $0 $0 for the Fund
PRESIDENT AND Complex
TRUSTEE
PETER E. MADDEN, $1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, JR., $1008.23 $3145.78 for the
J.D., S.J.D., Fund Complex
TRUSTEE
WESLEY W. POSVAR, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $1008.23 $3145.78 for the
TRUSTEE Fund Complex

+ As of December 31, 1995, Blanchard Funds was comprised of 11 portfolios.
* The total compensation is provided for the Fund Complex, which consists
of the Blanchard Precious Metals Fund, The Virtus Funds, and the
Trust. The information is provided for Blanchard Funds and Blanchard
Precious Metals Fund, Inc. for the fiscal year ended 4/30/96, and for
The Virtus Funds for the fiscal year ended 9/30/95.

MANAGEMENT SERVICES

MANAGER TO THE TRUST

The Trust's manager is Virtus Capital Management, Inc. ("VCM"),
which is a division of Signet Trust Company, a wholly-owned subsidiary of
Signet Banking Corporation. Because of the internal controls maintained by
Signet Bank to restrict the flow of non-public information, Fund
investments are typically made without any knowledge of Signet Bank's or
its affiliates' lending relationships with an issuer.

The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained in the
purchase, holding, or sale of any security or for anything done or omitted
by it, except acts or omissions involving willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.

MANAGEMENT FEES
For its services, VCM receives an annual management fee as
described in the prospectus. For the fiscal years ended April 30, 1996,
1995, and 1994, the aggregate amount paid or accrued by the FUND to the
prior manager was $171,279, $983,753, and $943,678, respectively. For the
fiscal year ended April 30, 1996, the aggregate amount paid or accrued by
the FUND to VCM was $612,141.

PORTFOLIO MANAGEMENT SERVICES

Pursuant to a sub-advisory agreement which became effective on
May 28, 1996, (the "Sub-Advisory Agreement") between VCM and MCM, VCM has
delegated to MCM the authority and responsibility to make and execute
decisions for the FUND within the framework of the FUND's investment
policies, subject to review by VCM and the Board of Trustees of the FUND.
Under the terms of the Sub-Advisory Agreement, MCM has discretion to
purchase and sell securities, except as limited by the FUND's investment
objective, policies and restrictions.

The Sub-Advisory Agreement provides for the payment to MCM, by
VCM, an annual fee based on the FUND's daily net assets. For a detailed
description of the Sub-Advisory Agreement see `Portfolio Advisory
Services''in the FUND's prospectus.

For the fiscal years ended April 30, 1996, 1995, and 1994, the
aggregate amounts paid by the prior manager to the prior Portfolio Manager
under prior Sub-Advisory Agreements were as follows: Shufro Rose & Ehrman
- - $118,521, $90,508, and $104,023; Investment Advisers, Inc. - $15,149,
$22,423, and $5,641, and, respectively; Cavelti Capital Management, Inc. -
$11,507, $23,596, and $10,558, respectively; Morgan Stanley Asset
Management Limited (replaced by Fiduciary International, Inc.) - $62,865,
$63,586 and $165,781, respectively; Fiduciary International, Inc. -
$75,315, $108,636, and $91,814, and Morgan Stanley Asset Management Inc.
(replaced by Martin Currie Inc.) $55,912 (for the fiscal period ended April
30, 1993).

The Sub-Advisory Agreement provides that MCM's fee shall be
reduced proportionately based on the ratio of MCM's fee to VCM's fee in the
event VCM's fee is reduced as a result of a state expense limitation.

The Sub-Advisory Agreement, dated December 1, 1996, was approved
by the FUND's Trustees on November 14, 1995 and the FUND's shareholders on
May 24, 1996. The Sub-Advisory Agreement provides that it may be
terminated without penalty by either the FUND or the MCM at any time by the
giving of 60 days' written notice to the other and terminates automatically
in the event of "assignment", as defined in the Investment Company Act.
The Sub-Advisory Agreement provides that, unless sooner terminated, it
shall continue in effect for an initial two year period and from year to
year thereafter only so long as such continuance is specifically approved
at least annually by either the Board of Trustees of the FUND or by a vote
of the majority of the outstanding voting securities of the FUND, provided,
that in either event, such continuance is also approved by the vote of the
majority of the Trustees who are not parties to the Sub-Advisory Agreement
or "interested persons" of such parties cast in person at a meeting called
for the purpose of voting on such approval.

CUSTODIAN

Signet Trust Company is custodian for the securities and cash of
the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary recores
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net asets of
each of the six respective portfolios and .025 of 1% on average net assets
in excess of $10 million. There is a $20 fee imposed on each transaction.
The custodian fee received during any fiscal year shall be at least $1,000
per Fund.

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of
Federated Investors, provides administrative personnel and services to the
Funds for the fees set forth in the prospectus.

DISTRIBUTION PLAN

The Trust has adopted a Plan for Shares of the Fund pursuant to
Rule 12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940. The Plan provides that the
Funds' Distributor shall act as the Distributor of shares, and it permits
the payment of fees to brokers and dealers for distribution and
administrative services and to administrators for administrative services.
The Plan is designed to (i) stimulate brokers and dealers to provide
distribution and administrative support services to the Fund and its
shareholders and (ii) stimulate administrators to render administrative
support services to the Fund and its shareholders. These services are to
be provided by a representative who has knowledge of the shareholders'
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments
of client account cash balances; answering routine client inquiries
regarding the Funds; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as
the Trust reasonably requests. For the fiscal year ended April 30, 1996,
the Fund accrued payments under the Plan amounting to $586,707.

Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and
effective administrative system; (2) a more efficient use of assets of
shareholders by having them rapidly invested in the Fund with a minimum of
delay and administrative detail; and (3) an efficient and reliable records
system for shareholders and prompt responses to shareholder requests and
inquiries concerning their accounts.

By adopting the Plan, the then Board of Trustees expected that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in seeking to achieve
its investment objectives. By identifying potential investors in shares
whose needs are served by the Fund's objectives, and properly servicing
these accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.

DESCRIPTION OF THE FUND

Shareholder and Trustee Liability. The FUND is a series of an
entity of the type commonly known as a "Massachusetts business trust".
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
The FUND's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations for the FUND and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the FUND or the Trustees. The
Declaration of Trust provides for indemnification out of the FUND property
of any shareholder held personally liable for the obligations of the FUND.

The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders for
any act or obligation of the FUND and satisfy any judgment thereon. Thus,
the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the FUND itself
would be unable to meet its obligations. VCM believes that, in view of the
above, the risk of personal liability to shareholders is remote. The
Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the
conduct of his office.

Voting Rights. The FUND's capital consists of shares of
beneficial interest. Shares of the FUND entitle the holders to one vote
per share. The shares have no preemptive or conversion rights. The voting
and dividend rights and the right of redemption are described in the
Prospectus. Shares are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability" above. The shareholders have
certain rights, as set forth in the Declaration of Trust, to call a meeting
for any purpose, including the purpose of voting on removal of one or more
Trustees.

The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of a
majority of the outstanding shares of the FUND. The FUND may also be
terminated upon liquidation and distribution of its assets, if approved by
a majority shareholder vote of the FUND. Shareholders of the FUND shall be
entitled to receive distributions as a class of the assets belonging to the
FUND. The assets of the FUND received for the issue or sale of the shares
of the FUND and all income earnings and the proceeds thereof, subject only
to the rights of creditors, are specially allocated to the FUND, and
constitute the underlying assets of the FUND.

SHAREHOLDER REPORTS

Shareholders will receive reports semi-annually showing the
investments of the FUND and other information. In addition, shareholders
will receive annual financial statements audited by the FUND's independent
accountants.

The financial statements for the fiscal period ended April 30,
1996, are incorporated herein by reference from the Fund's Annual Report
dated April 30, 1996. A copy of the Annual Report for the Fund may be
obtained without charge by contacting Signet Financial Services, Inc. at 1-
800-829-3863.

APPENDIX A

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:

Investment grade debt securities are those rating categories indicated by
an asterisk (*).

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

*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 fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.

*A: Bond 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 other good and bad times over the
future. Uncertainty of position characterizes bonds in this class.

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

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

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

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

NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security 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 issue ranks in the lower end of its
generic rating category.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:

Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months.

Issuers rated PRIME-1 or P-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations. Prime-1 or P-1 repayment capacity will normally be evidenced
by the following characteristics:

- Leading market positions in well-established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.

- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.

- Well-established access to a range of financial markets and
assured sources of alternate liquidity.

Issuers rated PRIME-2 or P-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
BOND RATINGS:

Investment grade debt securities are those rating categories indicated by
an asterisk (*).

*AAA: Debt rated AAA have the highest rating assigned by S&P to
a debt obligation. capacity to pay interest and repay principal is
extremely strong.

*AA: Debt rated AA have a very strong capacity to pay interest;
and repay principal and differ from the higher rated issues only in small
degree.

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

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

BB, B, CCC, CC, C: Debt rated "BB," "B," "CCC," "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

BB: Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments. The "BB" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BBB-"
rating.

B: Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The
"B" Rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.

CCC: Debt rated "CCC" has a currently identifiable vulnerability
to default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the capacity to pay interest and repay
principal. The "C" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B-" rating.

CC: The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.

C: The rating "C" is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.

C1: The rating "C1" is reserved for income bonds on which no
interest is being paid.

D: Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal or principal payments
are not made on the date due even if the applicable grace period has not

expired, unless S&P believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.

PLUS (+) OR MINUS (-): 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.

NR: Bonds may lack a S&P rating because no public rating has
been requested, because there is insufficient information on which to base
a rating, or because S&P does not rate a particular type of obligation as a
matter of policy.

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:

S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no
more than 365 days.

A: Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety.

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

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

A-3: Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations
carrying the higher designations.

STATEMENT OF ADDITIONAL INFORMATION

BLANCHARD PRECIOUS METALS FUND, INC.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement of Additional Information is not a prospectus but should
be read in conjunction with the current prospectus dated August 31, 1996
(the "Prospectus"), pursuant to which Blanchard Precious Metals Fund, Inc.
(the "FUND") is offered. Please retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

Investment Objective and Policies ........................ 2
Investment Restrictions .................................. 9
Computation of Net Asset Value.............................11
Performance Information12
Portfolio Transaction 12
Dividends, Capital Gains Distributions
and Tax Matters 14
The Management of the Fund.................................19
Management Services 23
Portfolio Management Services..............................24
Custodian 24
Administrative Services24
Distribution Plan 24
Description of the FUND25
Shareholder Reports 25

Manager
Virtus Capital Management, Inc.

Portfolio Adviser
Cavelti Capital Management, Ltd.

Distributor

Federated Securities Corp.

Custodian
Signet Trust Company

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1996

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and policies of the FUND are set forth in the
FUND's Prospectus which refers to the following investment strategies and
additional information:

OPTIONS AND FUTURES STRATEGIES

enhance investment performance. Expenses and losses incurred as a result
of such hedging strategies will reduce the FUND's current return.

The ability of the FUND to engage in the options and futures
strategies described below will depend on the availability of liquid
markets in such instruments. Markets in options and futures with respect
to stock indices, U.S. Government securities and foreign currencies are
relatively new and still developing. Although the FUND will not enter into
an option or futures position unless a liquid secondary market for such
option or futures contract is believed by FUND management to exist, there
is no assurance that the FUND will be able to effect closing transactions
at any particular time or at an acceptable price. Reasons for the absence
of a liquid secondary market on an Exchange include the following: (i)
there may be insufficient trading interest in certain options; (ii)
restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances
may interrupt normal operations on an Exchange; (v) the facilities of an
Exchange or the Options Clearing Corporation ("OCC") may not at all times
be adequate to handle current trading volume; or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular
class or series of options), in which event the secondary market thereon
would cease to exist, although outstanding options on that Exchange that
had been issued by the OCC as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.

WRITING COVERED OPTIONS ON SECURITIES

The FUND may write covered call options and covered put options
on optionable securities of the types in which it is permitted to invest
from time to time as Cavelti Capital Management, Ltd., the FUND's portfolio
adviser (the "Portfolio Manager"), determines is appropriate in seeking to
attain its objective. Call options written by the FUND give the holder the
right to buy the underlying securities from the FUND at a stated exercise

price; put options give the holder the right to sell the underlying
security to the FUND at a stated price.

The FUND will receive a premium from writing a put or call
option, which increases the FUND's return in the event the option expires
unexercised or is closed out at a profit. The amount of the premium will
reflect, among other things, the relationship of the market price of the
underlying security to the exercise price of the option, the term of the
option and the volatility of the market price of the underlying security.
By writing a call option, the FUND limits its opportunity to profit from
any increase in the market value of the underlying security above the
exercise price of the option. By writing a put option, the FUND assumes
the risk that it may be required to purchase the underlying security for an
exercise price higher than its market value at the time it is exercised
resulting in a potential capital loss if the purchase price is less than
the underlying security's current market value minus the amount of the
premium received, unless the security subsequently appreciates in value.

PURCHASING PUT AND CALL OPTIONS ON SECURITIES

The FUND may purchase put options to protect its portfolio
holdings in an underlying security against a decline in market value. Such
hedge protection is provided during the life of the put option since the
FUND, as holder of the put option, is able to sell the underlying security
at the put exercise price regardless of any decline in the underlying
security's market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs. By using put
options in this manner, the FUND will reduce any profit it might otherwise
have realized in the underlying security by the premium paid for the put
option and by transaction costs.

PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES

The FUND may purchase and sell options on stock indices and stock
index futures as a hedge against movements in the equity markets.

on stock indices are in cash and gain or loss depends on general movements
in the stocks included in the index rather than price movements in
particular stocks. Currently, index options traded include the S&P 100
Index, the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value
Index, the National Over-the-Counter Index and other standard broadly based
stock market indices.

If the Portfolio Manager expects general stock market prices to
rise, it might purchase a call option on a stock index or a futures
contract on that index as a hedge against an increase in prices of
particular equity securities it wants ultimately to buy. If in fact the
stock index does rise, the price of the particular equity securities
intended to be purchased may also increase, but that increase would be
offset in part by the increase in the value of the FUND's index option or
futures contract resulting from the increase in the index. If, on the
other hand, the Portfolio Manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the
index. If that index does in fact decline, the value of some or all of the
equity securities in the FUND's portfolio may also be expected to decline,
but that decrease would be offset in part by the increase in the value of
the FUND's position in such put option or futures contract.

PURCHASE AND SALE OF INTEREST RATE FUTURES

The FUND may purchase and sell interest rate futures contracts on
U.S. Treasury bills, notes and bonds for the purpose of hedging fixed
income and interest sensitive securities against the adverse effects of
anticipated movements in interest rates.

The FUND may sell interest rate futures contracts in anticipation
of an increase in the general level of interest rates. Generally, as
interest rates rise, the market value of the fixed income securities held
by the FUND will fall, thus reducing the net asset value of the FUND. This
interest rate risk can be reduced without employing futures as a hedge by
selling long-term fixed income securities and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in
cash. This strategy, however, entails increased transaction costs to the
FUND in the form of dealer spreads and brokerage commissions.

The sale of interest rate futures contracts provides an
alternative means of hedging against rising interest rates. As rates
increase, the value of the FUND's short position in the futures contracts
will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the FUND's investments which are being
hedged. While the FUND will incur commission expenses in selling and
closing out futures positions (which is done by taking an opposite position
which operates to terminate the position in the futures contract),
commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.

OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES
CONTRACTS

PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS

In order to hedge its portfolio and to protect it against
possible variations in foreign exchange rates pending the settlement of
securities transactions, the FUND may buy or sell foreign currencies or may
deal in forward currency contracts. The FUND may also invest in currency
futures contracts and related options. If a decline in exchange rates for
a particular currency is anticipated, the FUND may sell a currency futures
contract or a call option thereon or purchase a put option on such futures
contract as a hedge. If it is anticipated that exchange rates will rise,
the FUND may purchase a currency futures contract or a call option thereon
or sell (write) a put option to protect against an increase in the price of
securities denominated in a particular currency the FUND intends to
purchase. These futures contracts and related options thereon will be used

only as a hedge against anticipated currency rate changes, and all options
on currency futures written by the FUND will be covered.

grade short-term obligations in a segregated account with its custodian.
If at the close of business on any day the market value of the call
purchased by the FUND falls below 100% of the market value of the call
written by the FUND, the FUND will so segregate an amount of cash, Treasury
bills or other high grade short-term obligations equal in value to the
difference. Alternatively, the FUND may cover the call option through
segregating with the custodian an amount of the particular foreign currency
equal to the amount of foreign currency per futures contract option
multiplied by the number of options written by the FUND. In the case of
put options on currency futures written by the FUND, the FUND will hold the
aggregate exercise price in cash, Treasury bills, or other high grade
short-term obligations in a segregated account with its custodian, or own
put options on currency futures or short currency futures, with the
difference, if any, between the market value of the put written and the
market value of the puts purchased or the currency futures sold maintained
by the FUND in cash, Treasury bills or other high grade short-term
obligations in a segregated account with its custodian. If at the close of
business on any day the market value of the put options purchased or the
currency futures sold by the FUND falls below 100% of the market value of
the put options written by the FUND, the FUND will so segregate an amount
of cash, Treasury bills or other high grade short-term obligations equal in
value to the difference.

If other methods of providing appropriate cover are developed,
the FUND reserves the right to employ them to the extent consistent with
applicable regulatory and exchange requirements.

In connection with transactions in stock index options, stock
index futures, interest rate futures, foreign currency futures and related

options on such futures, the FUND will be required to deposit as "initial
margin" an amount of cash and short-term U.S. Government securities equal
to from 5% to 10% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The value of the FUND's assets as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange
rates and exchange control regulations, and the FUND may incur costs in
connection with conversions between various currencies. The FUND will
conduct its foreign currency exchange transactions either on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties at a price set at the time of the contract. These contracts are
traded directly or indirectly between currency traders (usually large
commercial banks) and their customers. While the pursuit of foreign
currency gain is not a primary objective of the FUND, the FUND may, from
time to time, hold foreign currency to realize such gains. (These gains
constitute non-qualifying income that is subject to the 10% limitation with
respect to the "Income Requirement" of Subchapter M of the Internal Revenue
Code of 1986, as amended, which is discussed herein under "Dividends,
Capital Gains Distributions and Tax Matters.")

When the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of
foreign currency approximating the value of some or all of the FUND's
portfolio securities denominated in such foreign currency. The forecasting
of short-term currency market movement is extremely difficult and the
successful execution of a short-term hedging strategy is highly uncertain.
The FUND does not intend to enter into such forward contracts on a regular
or continuous basis, and will not do so if, as a result, the FUND would
have more than 25% of the value of its total assets committed to such
contracts. The FUND will also not enter into such forward contracts or
maintain a net exposure in such contracts where the FUND would be obligated
to deliver an amount of foreign currency in excess of the value of the
FUND's portfolio securities or other assets denominated in that currency.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions
made with regard to overall strategies. However, the Trustees of the FUND

believe that it is important to have the flexibility to enter into such
forward contracts when the Portfolio Manager determines that the best
interests of the FUND will be served. The FUND's custodian bank will
segregate cash or marketable high grade debt securities in an amount not
less than the value of the FUND's total assets committed to foreign
currency exchange contracts entered into under this type of transaction.
If the value of the securities segregated declines, additional cash or
securities will be added on a daily basis, i.e., marked-to-market, so that
the segregated amount will not be less than the amount of the FUND's
commitments with respect to such contracts.

received upon the sale of the portfolio security if its market value
exceeds the amount of foreign currency the FUND is obligated to deliver.

The FUND's dealing in forward foreign currency exchange contracts
will be limited to the transactions described above. Of course, the FUND
is not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed
appropriate by the Portfolio Manager. It also should be realized that this
method of protecting the value of the FUND's portfolio securities against
the decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which one can achieve at some future point in time. Additionally,
although such contracts tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit

any potential gain which might result should the value of such currency
increase.

ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS AND FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS

In addition, futures contracts in which the FUND may invest may
be subject to commodity exchange imposed limitations on fluctuations in
futures contract prices during a single day. Such regulations are referred
to as "daily price fluctuation limits" or "daily limits". During a single
trading day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract has increased or decreased by an
amount equal to the daily limit, positions in those futures cannot be taken
or liquidated unless both a buyer and seller are willing to effect trades
at or within the limit. Daily limits, or regulatory intervention in the
commodity markets, could prevent the FUND from promptly liquidating
unfavorable positions and adversely affect operations and profitability.

Forward foreign currency exchange contracts ("forward contracts")
are not traded on contract markets regulated by the Commodity Futures
Trading Commission ("CFTC") and are not regulated by the SEC. Rather,
forward contracts are traded through financial institutions acting as
market-makers. In the forward currency market, there are no daily price
fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Moreover, a trader of
forward contracts could lose amounts substantially in excess of its initial
investments, due to the collateral requirements associated with such
positions.

In addition, futures contracts and related options, and forward
contracts may be traded on foreign exchanges, to the extent permitted by
the CFTC. Such transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies or
securities. The value of such positions also could be adversely affected
by (a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in the FUND's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States
and the United Kingdom, (d) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States, and (e) lesser trading volume.

REPURCHASE AGREEMENTS

Repurchase agreements are transactions by which the FUND
purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon price on an agreed upon date within a number

of days (usually not more than seven days) from the date of purchase. The
resale price reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to
pay the agreed upon price, which obligation is in effect secured by the
value (at least equal to the amount of the agreed upon resale price and
marked-to-market daily) of the underlying security. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delay and costs to the FUND in connection
with bankruptcy proceedings) it is the policy of the FUND to limit
repurchase agreements to those member banks of the Federal Reserve System
and primary dealers in U.S. Government securities who are believed by the
FUND's Directors to present minimum credit risk. Repurchase agreements
maturing in more than seven days are considered, for the purposes of the
FUND's investment restrictions, to be illiquid securities. No more than
10% of the FUND's net assets may be held in illiquid securities (see
"Investment Restrictions").

RATINGS OF DEBT INSTRUMENTS

The four highest ratings of Moody's Investors Service, Inc.
("Moody's") for U.S. corporate and municipal bonds are Aaa, Aa, A and Baa.
Bonds rated Aaa are judged by Moody's to be of the best quality. Bonds
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.
Moody's states that Aa bonds are rated lower than the best bonds because
margins of protection or other elements make their long-term risks appear
somewhat larger than the long-term risks for Aaa bonds. Bonds which are

rated A by Moody's possess many favorable investment attributes and are
considered "upper medium grade obligations." Factors giving security to
principal and interest of A rated bonds are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future. Bonds that are rated Baa 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 have
speculative characteristics as well.

The four highest ratings of Standard & Poor's Corporation ("S&P")
for U.S. bonds are AAA, AA, A and BBB. Bonds rated AAA have the highest
rating assigned by S&P to an obligation. Capacity to pay interest and
repay principal is extremely strong. Bonds rated AA have a very strong
capacity to pay interest and repay principal and differ from the highest
rated issues only in a small degree. Bonds rated A have a strong capacity
to pay principal and interest, although they are somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions.
Bonds rated BBB are considered on the borderline between definitely sound
obligations and obligations where the speculative element begins to
predominate.

RATINGS OF COMMERCIAL PAPER

Commercial paper rated A-1 by S&P has the following
characteristics: liquidity ratios are adequate to meet cash requirements;
the issuer has access to at least two additional channels of borrowing;
basic earnings and cash flow have an upward trend with allowance made for

unusual circumstances; the issuer's industry is well established and the
issuer has a strong position within the industry and the reliability and
quality of management are unquestioned. Relative strength or weakness of
the above factors determines whether the issuer's commercial paper is rated
A-1, A-2 or A-3.

The rating P-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6)
trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet
such obligations.

REGULATORY MATTERS

In connection with its proposed futures and options transactions,
the FUND has filed with the Commodity Futures Trading Commission ("CFTC") a
notice of eligibility for exemption from the definition of (and therefore
from CFTC regulation as) a "commodity pool operator" under the Commodity
Exchange Act. The FUND has represented in its notice of eligibility that:

(i) it will not purchase or sell futures or options on futures
contracts or stock indices if as a result the sum of the initial

margin deposits on its existing futures contracts and related
options positions and premiums paid for options on futures
contracts or stock indices would exceed 5% of the FUND's assets;
and

The Staff of the SEC has taken the position that the purchase and
sale of futures contracts and the writing of related options may involve
senior securities for the purposes of the restrictions contained in Section
18 of the Investment Company Act of 1940 (the "1940 Act") on investment
companies issuing senior securities. However, the staff has issued letters
declaring that it will not recommend enforcement action under Section 18 if
an investment company:

(i) sells futures contracts to offset expected declines in the value
of the investment company's portfolio securities, provided the
value of such futures contracts does not exceed the total market
value of those securities (plus such additional amount as may be
necessary because of differences in the volatility factor of the
portfolio securities vis-a-vis the futures contracts);

(ii) writes call options on futures contracts, stock indexes or other
securities, provided that such options are covered by the
investment company's holding of a corresponding long futures

position, by its ownership of portfolio securities which
correlate with the underlying stock index or otherwise;

(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account")
consisting of cash or cash equivalents in an amount equal to the
total market value of such futures contracts less the initial
margin deposited therefor; and

(iv) writes put options on futures contracts, stock indices or other
securities, provided that such options are covered by the
investment company's holding of a corresponding short futures
position, by establishing a cash segregated account in an amount
equal to the value of its obligation under the option, or
otherwise.

The FUND will conduct its purchases and sales of futures
contracts and writing of related options transactions in accordance with
the foregoing.

ADDITIONAL INFORMATION REGARDING PRECIOUS METALS AND PRECIOUS METALS
SECURITIES

The production and marketing of gold and precious metals may be
affected by the action of certain governments and changes in existing
governments. For example, the mining of gold is highly concentrated in a
few countries. In current order of magnitude of production of gold
bullion, the five largest producers of gold are the Republic of South
Africa, the Union of Soviet Socialist Republics, Canada, Brazil and the

United States. Economic and political conditions prevailing in these
countries may have a direct effect on the production and marketing of newly
produced gold and sales of central bank gold holdings. It is expected that
a majority of gold mining companies in which the FUND will invest will be
located within the United States and Canada.

Prices of Precious Metals Securities can be volatile and tend to
experience greater volatility than the prices of physical precious metals.
This is due to the fact that the costs of mining precious metals remain
relatively fixed, so that an increase or decrease in the price of precious
metals has a direct and greater than proportional effect on the
profitability of precious metals mining companies. Investments tied to
precious metals characteristically involve high risk because of precious
metals' price volatility. The price of precious metals is affected by
factors such as cyclical economic conditions, political events and monetary
policies of various countries. During periods of rising precious metals
prices, the FUND will tend to emphasize investments in Precious Metals
Securities.

PORTFOLIO TURNOVER

As a result of its investment policies, the FUND expects to
engage in a substantial number of portfolio transactions. However, the
FUND's portfolio turnover rate is not expected to exceed 100%. A 100%
portfolio turnover rate would occur if 100% of the securities owned by the
FUND were sold and either repurchased or replaced by it within one year.
The FUND's portfolio turnover rate is, generally, the percentage computed
by dividing the lesser of FUND's purchases or sales exclusive of short-term
securities and bullion, by the average value of the FUND's total

investments exclusive of short-term securities and bullion. The portfolio
turnover rates for the fiscal years ended April 30, 1996 and 1995, were
176% and 116%, respectively. High portfolio turnover involves
correspondingly greater brokerage commissions, other transaction costs, and
a possible increase in short-term capital gains or losses. Shareholders
are taxed on any such net gains at ordinary income rate.

INVESTMENT RESTRICTIONS

Investment restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority (as defined in the
1940 Act) of the outstanding shares of the FUND. As used in the Prospectus
and the Statement of Additional Information, the term "majority of the
outstanding shares" of the FUND means respectively the vote of the lesser
of (i) 67% or more of the shares of the FUND present at a meeting, if the
holders of more than 50% of the outstanding shares of the FUND are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of
the FUND. The following are the FUND's investment restrictions.

These two restrictions, hypothetically, could give rise to the FUND having
as few as twelve issuers.

2. The FUND will not purchase a security if, as a result: (a)
it would own more than 10% of any class or of the outstanding voting
securities of any single company; (b) more than 5% of its total assets
would be invested in the securities of companies (including predecessors)
that have been in continuous operation for less than 3 years; (c) 25% or
more of its total assets would be concentrated in companies within any one
industry except the FUND may invest 25% or more of its assets in Precious
Metals Securities as defined in the Prospectus and (d) more than 5% of
total assets would be invested in warrants or rights or invest more than 2%
of its total assets if such warrants are not listed on the New York Stock
Exchange.

3. The FUND may borrow money from a bank solely for temporary
or emergency purposes (but not in an amount equal to more than 10% of the
market value of its total assets). The FUND will not purchase securities
while borrowing is in excess of 5% of the market value of its total assets.

5. The FUND may not invest more than 10% of its total assets in
the securities of other investment companies or purchase more than 3% of
any other investment company's voting securities.

6. The FUND may not knowingly purchase or otherwise acquire
securities which are subject to legal or contractual restrictions on resale
or for which there is no readily available market if, as a result thereof,
more than 10% of the assets of the FUND (taken at market value) would be
invested in such securities, including repurchase agreements with maturity
dates in excess of 7 days.

8. The FUND may not purchase or sell commodity contracts,
except for futures contracts and related options as described under
"Investment Objective and Policies" in the Prospectus and this Statement of
Additional Information.

9. The FUND may not buy any securities or other property on
margin (except for options and futures trading and for such short term
credits as are necessary for the clearance of transactions) or engage in
short sales.

10. The FUND may not invest in companies for the purpose of
exercising control or management.

11. The FUND may not underwrite securities issued by others
except to the extent that the FUND may be deemed an underwriter in the
resale of any portfolio securities.

12. The FUND may not purchase or retain securities of any issuer
(other than the shares of the FUND) if to the FUND's knowledge, those
officers and Directors of the FUND and the officers and directors of VCM,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.

14. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs; provided, however, that if
consistent with the objectives of the FUND, the FUND may purchase
securities of issuers whose principal business activities fall within such
areas.

15. The FUND may not issue senior securities.

Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of

portfolio securities or other changes in total assets will not be
considered a violation of such restrictions.

COMPUTATION OF NET ASSET VALUE

The net asset value of the FUND is determined at 4:00 p.m.
(Eastern Time) on each day that the New York Stock Exchange is open for
business and on such other days as there is sufficient trading in the
FUND's securities to affect materially the net asset value per share of the
FUND. The FUND will be closed on New Years Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

Market or fair values of the FUND's portfolio securities are
determined as follows:

at fair value as determined in good faith by the Directors.

The FUND will value futures contracts, options and put options on
futures at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Directors determine in
good faith that another method of valuing options positions is necessary to
appraise their fair value. Over-the-counter put options will be valued at
the mean between the bid and asked prices.

The Fund will value bullion at the closing spot price based
onexchange quotations.

TRADING IN FOREIGN SECURITIES

York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Directors, although the actual calculation
may be done by others.

PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the FUND
to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated in
terms of total return, rather than in terms of yield. The total return
basis combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the SEC, funds advertising performance must include
total return quotes calculated according to the following formula:

P(1 + T)n = ERV

Where P = a hypothetical initial payment of $1,000
T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)

Under the foregoing formula, the time periods used in advertising
will be based on rolling calendar quarters, updated to the last day of the
most recent quarter prior to submission of the advertising for publication,
and will cover one, five, and ten year periods or a shorter period dating
from the effectiveness of the FUND's registration statement. In
calculating the ending redeemable value, the pro rata share of the account
opening fee is deducted from the initial $1,000 investment and all
dividends and distributions by the FUND are assumed to have been reinvested
at net asset value as described in the prospectus on the reinvestment dates
during the period. Total return, or "T" in the formula above, is computed
by finding the average annual compounded rates of return over the 1, 5 and
10 year periods (or fractional portion thereof) that would equate the
initial amount invested to the ending redeemable value.

The FUND's average annual total return figures, reflecting the
initial investment and reinvestment of all dividends and distributions, net
of the pro rata share of the account opening fee, for the one and five year
periods ended April 30, 1996 and the life of fund (June 22, 1988 to April
30, 1995) were 37.03%, 16.71% and 4.90%, respectively.

total return with data published by Lipper Analytical Services, Inc. or the
Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average, the
FUND calculates its aggregate total return for the specified periods of
time by assuming the reinvestment of each dividend or other distribution at
net asset value on the reinvestment dates. Percentage increases are
determined by subtracting the initial net asset value of the investment
from the ending net asset value and by dividing the remainder by the
beginning net asset value. The FUND does not, for these purposes, deduct
the pro rata share of the account opening fee which was in effect until
December 1994 from the initial value invested. The FUND will, however,
disclose the pro rata share of the account opening fee and will disclose
that the performance data does not reflect such non-recurring charge and
that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under SEC rules and all
advertisements containing performance data will include a legend disclosing
that such performance data represent past performance and that the
investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities are
placed on behalf of the FUND by the Portfolio Manager subject to the
supervision of VCM and the Board of Directors and pursuant to authority
contained in the Investment Advisory Contract and Sub-Advisory Agreements
between the FUND and VCM, and VCM and the Portfolio Manager. In selecting

such brokers or dealers, the Portfolio Manager will consider various
relevant factors, including, but not limited to the best net price
available, the size and type of the transaction, the nature and character
of the markets for the security to be purchased or sold, the execution
efficiency, settlement capability, and financial condition of the broker-
dealer firm, the broker-dealer's execution services rendered on a
continuing basis and the reasonableness of any commissions.

In addition to meeting the primary requirements of execution and
price, brokers or dealers may be selected who provide research services, or
statistical material or other services to the FUND or to the Portfolio
Manager for the FUND's use, which in the opinion of the Board of Directors
are reasonable and necessary to the FUND's normal operations. Those
services may include economic studies, industry studies, security analysis
or reports, sales literature and statistical services furnished either
directly to the FUND or to the Portfolio Manager. Such allocation shall be
in such amounts as VCM shall determine and the Portfolio Manager shall
report regularly to VCM who will in turn report to the Board of Directors
on the allocation of brokerage for such services.

The receipt of research from broker-dealers may be useful to the
Portfolio Manager in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers
who have executed orders on behalf of the Portfolio Manager's other clients
may be useful to the Portfolio Manager in carrying out its obligations to
the FUND. The receipt of such research may not reduce the Portfolio
Manager's normal independent research activities.

The Portfolio Manager is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are
authorized to use Federated Securities Corp. (the "Distributor"), and the
Portfolio Manager or their affiliated broker-dealers on an agency basis, to
effect a substantial amount of the portfolio transactions which are
executed on the New York or American Stock Exchanges, Regional Exchanges
and Foreign Exchanges where relevant, or which are traded in the Over-the-
Counter market. Any profits resulting from brokerage commissions earned by
the Distributor as a result of FUND transactions will accrue to the benefit
of the shareholders of the Distributor who are also shareholders of VCM.
The Investment Advisory Contract does not provide for any reduction in the
management fee as a result of profits resulting from brokerage commissions
effected through the Distributor. In addition, the Sub-Advisory Agreement
between VCM and the Portfolio Manager does not provide for any reduction in
the advisory fees as a result of profits resulting from brokerage
commissions effected through the Portfolio Manager or any affiliated
brokerage firms. For the years ended April 30, 1996, 1995, and 1994, the
FUND incurred brokerage commission expenses of $514,423, $395,000, and
$654,000, respectively from the purchase and sale of portfolio securities.

The Board of Directors had adopted certain procedures
incorporating the standards of Rule 17e-1 issued under the Investment
Company Act of 1940 (the "1940 Act") which requires that the commissions
paid the Distributor or to the Portfolio Manager or to their affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during
a comparable period of time." The Rule and the procedures also contain

review requirements and require VCM to furnish reports to the Directors and
to maintain records in connection with such reviews.

Brokers or dealers who execute portfolio transactions on behalf
of the FUND may receive commissions which are in excess of the amount of
commission which other brokers or dealers would have charged for effecting
such transactions provided the Portfolio Manager determines in good faith
that such commissions are reasonable in relation to the value of the
brokerage and/or research services provided by such executing brokers or
dealers viewed in terms of a particular transaction or VCM's overall
responsibilities to the FUND.

It may happen that the same security will be held by other
clients of VCM or of the Portfolio Manager. When the other clients are
simultaneously engaged in the purchase or sale of the same security, the
prices and amounts will be allocated in accordance with a formula
considered by VCM to be equitable to each, taking into consideration such
factors as size of account, concentration of holdings, investment
objectives, tax status, cash availability, purchase cost, holding period
and other pertinent factors relative to each account. In some cases this
system could have a detrimental effect on the price or volume of the
security as far as the FUND is concerned. In other cases, however, the
ability of the FUND to participate in volume transactions will produce
better execution results for the FUND.

DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX MATTERS

The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.

Qualification as a Regulated Investment Company

The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to
federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains
over capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that
are described below. Distributions by the FUND made during the taxable
year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and
gains of the taxable year and can therefore satisfy the Distribution
Requirement.

If the FUND has a net capital loss (i.e., the excess of capital losses
over capital gains) for any year, the amount thereof may be carried forward

up to eight years and treated as a short-term capital loss which can be
used to offset capital gains in such years.

In addition to satisfying the Distribution Requirement, a regulated
investment company must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
Requirement"); and (2) derive less than 30% of its gross income (exclusive
of certain gains on designated hedging transactions that are offset by
realized or unrealized losses on offsetting positions) from the sale or
other disposition of stock, securities or foreign currencies (or options,
futures or forward contracts thereon) held for less than three months (the
"Short-Short Gain Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or
options or futures thereon). Because of the Short-Short Gain Test, the
FUND may have to limit the sale of appreciated securities that it has held
for less than three months. However, the Short-Short Gain Test will not
prevent the FUND from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding
period is disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a
security held for less than three months will not be treated as gross

income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is
attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.

In general, gain or loss recognized by the FUND on the disposition of
an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued while the FUND held the debt obligation. In addition, under the
rules of Code Section 988, gain or loss recognized on the disposition of a
debt obligation denominated in a foreign currency or an option with respect
thereto (but only to the extent attributable to changes in foreign currency
exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar
financial instrument, or of foreign currency itself, except for regulated
futures contracts or non-equity options subject to Section 1256, will
generally be treated as ordinary income or loss.

the asset is stock and the FUND grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only
in the case of clause (i) above. In addition, the FUND may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.

Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an
option written by the FUND will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the FUND will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.

Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts and options
on stock indexes and futures contracts) will be subject to special tax
treatment as "Section 1256 contracts." Section 1256 contracts are treated
as if they are sold for their fair market value on the last business day of
the taxable year, even though a taxpayer's obligations (or rights) under
such contracts have not terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss
recognized as a consequence of the year-end deemed disposition of
Section 1256 contracts is taken into account for the taxable year together
with any other gain or loss that was previously recognized upon the

termination of Section 1256 contracts during that taxable year. Any
capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss (except for
Section 1256 forward foreign currency contracts, which are subject to the
Section 988 Rules). The FUND may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the FUND that are not Section 1256
contracts. The Internal Revenue Service has held in several private
rulings that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held
for not less than three months if the gains arise as a result of a
constructive sale under Code Section 1256.

PFIC, (ii) the portion of such gain or excess distribution so allocated to
the year in which the gain is recognized or the excess distribution is
received shall be included in the FUND's gross income for such year as
ordinary income (and the distribution of such portion by the FUND to
shareholders will be taxable as an ordinary income dividend, but such
portion will not be subject to tax at the FUND level), (iii) the FUND shall
be liable for tax on the portions of such gain or excess distribution so
allocated to prior years in an amount equal to, for each such prior year,
(A) the amount of gain or excess distribution allocated to such prior year
multiplied by the highest corporate tax rate in effect for such prior year
plus (B) interest on the amount determined under clause (A) for the period
from the due date for filing a return for such prior year until the date
for filing a return for the year in which the gain is recognized or the
excess distribution is received at the rates and methods applicable to
underpayments of tax for such period, and (iv) the distribution by the FUND
to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the FUND thereon) will
again be taxable to the shareholders as an ordinary income dividend.

Under recently proposed Treasury Regulations a Fund can elect to
recognize as gain the excess, as of the last day of its taxable year, of
the fair market value of each share of PFIC stock over the Fund's adjusted
tax basis in that share ("mark to market gain"). Such mark to market gain
will be included by the Fund as ordinary income, such gain will not be
subject to the Short-Short Gain Test, and the Fund's holding period with
respect to such PFIC stock commences on the first day of the next taxable
year. If the Fund makes such election in the first taxable year it holds
PFIC stock, the Fund will include ordinary income from any mark to market

gain, if any, and will not incur the tax described in the previous
paragraph.

Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred
in the succeeding year.

In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the FUND's taxable year, at least 50% of the value of the FUND'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 the FUND has not invested more than 5% of the value of
the FUND's total assets in securities of such issuer and as to which the
FUND does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its 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 the FUND controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put)
with respect to a security is treated as issued by the issuer of the
security not the issuer of the option. However, with regard to forward

currency contracts, there does not appear to be any formal or informal
authority which identifies the issuer of such instrument.

Although the FUND's management and the Portfolio Manager will endeavor
to manage the FUND's portfolio so that the FUND's investment in Physical
Precious Metals Investments (as defined in the Prospectus) does not result
in its failure to satisfy the asset diversification test or the source of
income requirement described above, the FUND's management reserves the
right to depart from this policy whenever, in its sole judgment, it is
deemed in the best interests of the FUND and its shareholders to do so. If
for any taxable year the FUND does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the FUND's current and accumulated
earnings and profits. Such distributions generally will be eligible for
the dividends-received deduction in the case of corporate shareholders.
According to an Internal Revenue Service announcement of Treasury
regulations to be promulgated, if the FUND qualifies and elects to be taxed
as a regulated investment company after not qualifying as a regulated
investment company for more than one year, the FUND will be subject to
federal income tax on the amount of the net unrealized gain on its assets
at the time of requalification (or, if the FUND so elects, at the time such
net unrealized gain is recognized during the following ten year period).

Excise Tax on Regulated Investment Companies

A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to

98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year ended on October 31 of such calendar year
(or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a `taxable
year election')). The balance of such income must be distributed during
the next calendar year. For the foregoing purposes, a regulated investment
company is treated as having distributed any amount on which it is subject
to income tax for any taxable year ending in such calendar year.

For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain)
by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determine ordinary taxable income for the succeeding calendar year).

The FUND intends to make sufficient distributions or deemed
distributions of its investment company taxable income for each taxable
year. Such distributions will be taxable to shareholders as ordinary
income and treated as dividends for federal income tax purposes, but they
will qualify for the 70% dividends-received deduction for corporations only
to the extent discussed below.

The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to
distribute any such amounts. Met capital gain distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term

capital gain, regardless of the length of time the shareholder has held his
or her shares or whether such gain was recognized by the FUND prior to the
date on which the shareholder acquired his shares.

Ordinary income dividends paid by the FUND with respect to a taxable
year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as `S''
corporations, which are not eligible for the deduction because of their
special characteristics and other than for purposes of special taxes such
as the accumulated earnings tax and the personal holding company tax) to
the extent of the amount of qualifying dividends received by the FUND from
domestic corporations for the taxable year. A dividend received by the
FUND will not be treated as a qualifying dividend (1) if it has been
received with respect to any share of stock that the FUND has held for less
than 46 days (91 days in the case of certain preferred stock), excluding
for this purpose under the rules of Code Section 246(c)(3) and (4): (i)
any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any
period during which the FUND has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor
of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical stock; (2) to the extent that
the FUND is under an obligation (pursuant to a short sale or otherwise) to
make related payments with respect to positions in substantially similar or
related property; or (3) to the extent the stock on which the dividend is
paid is treated as debt-financed under the rules of Code Section 246A.
Moreover, the dividends-received deduction for a corporate shareholder may
be disallowed or reduced (I) if the corporate shareholder fails to satisfy

the foregoing requirements with respect to its shares of the FUND of (ii)
by application of Code Section 246(b) which in general limits the
dividends-received deduction to 70% of the shareholder's taxable income
(determined without regard to the dividends-received deduction and certain
other items).

Alternative Minimum Tax (`ATM'') is imposed in addition to, but only
to the extent it exceeds, the regular tax and is computed at the rate of
26% (or 28% for taxable income in excess of $175,000) for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income (`AMTI'') over an exemption amount. In
addition, under the Superfund Amendments and Reauthorization Act of 1986, a
tax is imposed for taxable years beginning after 1986 and before 1996 at
the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. The corporate dividends received deduction is
not itself an item of tax preference that must be added back to taxable
income or is otherwise disallowed in determining a corporate's AMTI.
However, corporate shareholders will generally be required to take the full
amount of any dividend received from the FUND into account (without a
dividends-received deduction) in determining its adjusted current earnings,
which are used in computing an additional corporate preference item (i.e.,
75% of the excess of a corporate taxpayer's adjusted current earnings over
its AMTI (determined without regard to this item and the AMT net operating
loss deduction)) includable in AMTI.

which entitle the FUND to a reduced rate of, or exemption from, taxes on
such income. It is impossible to determine the effective rate of foreign
tax in advance since the amount of the FUND's assets to be invested in
various countries is not known. If more than 50% of the value of the
FUND's total assets at the close of its taxable year consists of the stock
or securities of foreign corporations, the FUND may elect to `pass
through''to the FUND's shareholders the amount of foreign taxes paid by
the FUND. If the FUND so elects, each shareholder would be required to
include in gross income, even though not actually received, his pro rata
share of the foreign taxes paid by the FUND, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be
allowed to either deduct such amount in computing taxable income or use
such amount (subject to various Code limitations) as a foreign tax credit
against federal income tax (but not both). For purposes of the foreign tax
credit limitation rules of the Code, each shareholder would treat as
foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the FUND representing income derived
from foreign sources. No deduction for foreign taxes could be claimed by
an individual shareholder who does not itemize deductions. Each
shareholder should consult his own tax advisor regarding the potential
application of foreign tax credits.

Distributions by the FUND will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the FUND (or of another fund).
Shareholders receiving a distribution in the form of additional shares will
be treated as receiving a distribution in the form of additional shares
will be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder
purchases shares of the FUND reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be
taxable to the shareholder as dividends in the manner described above,
although such distributions economically constitute a return of capital to
the shareholder.

Ordinarily, shareholders are required to take distributions by the
FUND into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
FUND) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year.

number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the FUND that
it is not subject to backup withholding or that it is a corporation or
other `exempt recipient.''

Sale or Redemption of Shares

A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the
precedes of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of the FUND within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares
of the FUND will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares
held for six months or less will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) (discussed above in connection with the dividends-
received deduction for corporations) generally will apply in determining
the holding period of shares. Long-term capital gains of noncorporate
taxpayers are currently taxed at a maximum rate 11.6% lower than the
maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

Foreign Shareholders

Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation,
or foreign partnership (`foreign shareholder''), depends on whether the
income from the FUND is `effectively connected'' with a U.S. trade or
business carried on by such shareholder.

If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or
lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate) on the gross income resulting
from deduction against this gross income or a credit against this U.S.
withholding tax for the foreign shareholder's pro rata share of such
foreign taxes which it is treated as having been paid. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of the FUND and capital gain dividends.

If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of
shares of the FUND will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

In the case of foreign noncorporate shareholder, the FUND may be
required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at

a reduced treaty rate) unless such shareholders furnish the FUND with
proper notification of its foreign status.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in
the FUND, including the applicability of foreign taxes.

Effect of Future Legislation; Local Tax Considerations

The foregoing general discussion of U.S. federal income tax
consequences is bases on the Code and the Treasury Regulation issued
thereunder as in effect on the date of this Statement of Additional
Information. Future legislative or administrative changes or court
decisions may significantly change the conclusions expresses herein, and
any such changes or decisions may have a retroactive effect with respect to
the transactions contemplated herein.

Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ
from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting an investment in the
FUND under their particular circumstances.

THE MANAGEMENT OF THE FUND

Officers and Directors are listed with their addresses, birthdates, and
present positions with Blanchard Precious Metals Fund, and principal
occupations.

JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND DIRECTOR OF THE FUND;
Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and
Director, Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or
Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue,
Executive Vice President of the Trust.

THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA DIRECTOR OF THE FUND; Chairman of the
Board,
BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;

Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.

JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL DIRECTOR OF THE FUND;
President, Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in
Southwest Florida; formerly, President,
Naples Property Management, Inc. and
Northgate Village Development
Corporation; Director or Trustee of the
Funds
.

WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA DIRECTOROF THE FUND; Director and Member
of the
BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker,
Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank

Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.
.
JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA DIRECTOR OF THE FUND; Attorney-at-
law; Director,
BIRTHDATE: MAY 18, 1922 The Emerging Germany Fund, Inc.;
Director or Trustee of the Funds..

LAWRENCE D. ELLIS, M.D.*
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA DIRECTOR OF THE FUND; Professor of
Medicine,
BIRTHDATE: OCTOBER 11, 1932 University of Pittsburgh; Medical
Director, University of Pittsburgh
Medical Center - Downtown; Member, Board
of Directors, University of Pittsburgh
Medical Center; formerly, Hematologist,
Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Director or
Trustee of the Funds.

EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA DIRECTOR OF THE FUND; Attorney of
Counsel, Miller,

BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly,
Counsel, Horizon Financial, F.A.,
Western Region; Director or Trustee of
the Funds. .

EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND DIRECTOR OF THE
BIRTHDATE: OCTOBER 22, 1930 FUND;Vice Chairman, Treasurer, and
Trustee, Federated Investors; Vice
President, Federated Advisers, Federated
Management, Federated Research,
Federated Research Corp., Federated
Global Research Corp. and Passport
Research, Ltd.; Executive Vice President
and Director, Federated Securities
Corp.; Trustee, Federated Shareholder
Services Company; Trustee or Director of
some of the Funds; President, Executive
Vice President and Treasurer of some of
the Funds.

PETER E. MADDEN
225 FRANKLIN STREET
BOSTON, MA DIRECTOR OF THE FUND; Consultant; Former
State

BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.

GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674
PITTSBURGH, PA DIRECTOR OF THE FUND; Attorney,
Member of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee
of the Funds.

JOHN E. MURRAY, JR., J.D., S.J.D.
DUQUESNE UNIVERSITY
PITTSBURGH, PA DIRECTOR OF THE FUND;
President, Law Professor,
BIRTHDATE: DECEMBER 20, 1932 Duquesne University; Consulting Partner,
Mollica, Murray and Hogue; Director or
Trustee of the Funds.

WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH

PITTSBURGH, PA DIRECTOR OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the
Funds. .

MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA DIRECTOR OF THE FUND; Public
BIRTHDATE: JUNE 21, 1935 Relations/Marketing/Conference Planning,
Manchester Craftsmen's Guild; Restaurant
Consultant, Frick Art & History Center;
Conference Coordinator, University of
Pittsburgh Art History Department;
Director or Trustee of the Funds.

J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER

PITTSBURGH, PA EXECUTIVE VICE PRESIDENT OF THE FUND;
President
BIRTHDATE: APRIL 11, 1949 and Trustee, Federated Investors,
Federated Advisers, Federated
Management, and Federated Research:;
President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.;Trustee, Federated
Shareholder Services Company, and
Federated Shareholder Services;
Director, Federated Services Company;
President or Executive Vice President of
the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and Trustee of
the Trust.

JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA EXECUTIVE VICE PRESIDENT AND SECRETARY
BIRTHDATE: OCTOBER 26, 1938 OF THE FUND; Executive Vice President,
Secretary, and Trustee, Federated
Investors; Trustee, Federated Advisers,
Federated Management, and Federated
Research; Director, Federated Research
Corp. and Federated Global Research

Corp.; Trustee, Federated Shareholder
Services Company; Director, Federated
Services Company; President and Trustee,
Federated Shareholder Services;
Director, Federated Securities Corp.;
Executive Vice President and Secretary
of the Funds.

RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND; Executive
Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the
Funds.

* This Director is deemed to be an "interested person" of the
Corporation as defined in the Investment Company Act of 1940, as
amended.

@ Member of the Executive Committee. The Executive Committee of the
Board of Directors handles the responsibilities of the Board of
Directors between meetings of the Board.

THE FUNDS

As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:

Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series.

FUND OWNERSHIP

As of August 15, 1996, Officers and Directors own less than 1% of
the outstanding shares of each Fund.
To the best knowledge of the FUND, as of August 15, 1996, the
following shareholders owned 5% or more of the outstanding shares of the
FUND: Charles Schwab & Co. Inc., San Francisco, California, owned
approximately 509,341 shares (5.19%) and National Financial Services Corp.,
New York, New York, owned approximately 496,188 shares (5.06%).

OFFICERS AND DIRECTORS COMPENSATION

AGGREGATE TOTAL COMPENSATION PAID
NAME, COMPENSATION TO DIRECTORS FROM
POSITION WITH FROM CORPORATION
CORPORATION CORPORATION AND FUND COMPLEX*

John F. Donahue, $0 $0 for the Fund Complex
Chairman and Director

Thomas G. Bigley, Director $99.55 $2647.78 for the Fund
Complex
John T. Conroy, Jr., Director $108.41 $3441.37 for the
Fund Complex

William J. Copeland, Director $108.41 $3441.37 for the
Fund Complex
James E. Dowd, Director $108.41 $3441.37 for the Fund
Complex
Lawrence D. Ellis, M.D., $99.55 $3145.78 for the Fund
Complex
Director
Edward L. Flaherty, Jr., Director $108.41 $3441.37 for the
Fund Complex
Edward C. Gonzales, President $0 $0 for the Fund
Complex
and Director
Peter E. Madden, Director $99.55 $2846.78 for the Fund
Complex
Gregor F. Meyer, Director $99.55 $3145.78 for the Fund
Complex
John E. Murray, Jr., J.D., $99.55 $3145.78- for the
Fund Complex
S.J.D., Director
Wesley W. Posvar, Director $99.55 $3145.78 for the Fund
Complex
Marjorie P. Smuts, $99.55 $3145.78 for the Fund Complex
Director

*The total compensation is provided for the Fund Complex, which consists of
the Blanchard Funds, The Virtus Funds, and the Corporation. The information
is provided for Blanchard Precious Metals Fund, Inc. and Blanchard Funds
for the fiscal year ended 4/30/96, and for The Virtus Funds for the fiscal
year ended 9/30/95.

MANAGEMENT SERVICES

MANAGER OF THE FUND

The Fund's Manager is Virtus Capital Management, Inc. (`VCM''),
which is a division of Signet Trust Company, a wholly-owned subsidiary of
Signet Banking Corporation. Because of the internal controls maintained by
Signet Bank to restrict the flow of non-public information, Fund
investments are typically made without any knowledge of Signet Bank's or
its affiliates' lending relationships with an issuer.

The Manager shall not be liable to the Fund, or any shareholder
of any of the Fund for any losses that may be sustained in the purchase,
holding, or sale of any security or for anything done or omitted by it,
except acts or omissions involving willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties imposed upon it by its
contract with the Fund.

MANAGEMENT FEES

For its services, VCM receives an annual management fee as
described in the prospectus. VCM became the FUND's Manager on July 12,
1995. Prior to July 12, 1995, Sheffield Management Company served as the
FUND's Manager. For the fiscal year ended April 30, 1996, VCM earned
$675,300 and Sheffield Management Company earned $165,642. For the fiscal
years ended April 30, 1995, and 1994, the aggregate amounts paid or accrued
by the Fund to the Sheffield Management Company under the then existing
management agreement were $765,766, and $602,610, respectively. The prior
manager was not required to reimburse the Fund for any expenses during the
years ended April 30, 1995, and 1994.

PORTFOLIO MANAGEMENT SERVICES

Pursuant to a sub-advisory agreement (the `Sub-Advisory
Agreement') between VCM and the portfolio manager, Cavelti Capital
Management, Ltd. (the `Portfolio Manager''), VCM has delegated to the
Portfolio Manager the authority and responsibility to make and execute
decisions for the Fund within the framework of the Fund's investment
policies, subject to review by VCM and the Board of Directors of the Fund.
Under the terms of the Sub-Advisory Agreement, the Portfolio Manager has
discretion to purchase and sell securities, except as limited by the Fund's
investment objective, policies and restrictions.

The Sub-Advisory Agreement provides for the payment to the
Portfolio Manager, by VCM, of monthly compensation based on the Fund's
average daily net assets for providing investment advice to the Fund and
managing the investment of the assets of the Fund. These fees are
determined by applying the following annual rates to the Fund's average
daily net assets: .30% of the Fund's net assets up to the first $150

million; .2625% of the Fund's net assets in excess of $150 million but less
than $300 million; and .225% of the Fund's net assets in excess of $300
million. The Agreement provides that the Portfolio Manager's fee shall be
reduced proportionately based on the ratio of the Portfolio Manager's fee
to VCM's fee in the event VCM's fee is reduced as a result of a state
expense limitation. For the fiscal years ended April 30, 1996, 1995, and
1994, the aggregate amounts paid or accrued by the prior manager to the
Portfolio Manager under the Sub-Advisory Agreement were $263,638, $227,033,
$170,058, respectively.

The Sub-Advisory Agreement, dated July 11, 1995, was approved by
the Fund's Directors on March 24, 1995 and the Fund's shareholders on July
11, 1995. The Sub-Advisory Agreement provides that it may be terminated
without penalty by either the Fund or the Portfolio Manager at any time by
the giving of 60 days' written notice to the other and terminates
automatically in the event of `assignment'', as defined in the Investment
Company Act. The Sub-Advisory Agreement provides that, unless sooner
terminated, it shall continue in effect from year to year only so long as
such continuance is specifically approved at least annually by either the
Board of Directors of the Fund or by a vote of the majority of the
outstanding voting securities of the Fund, provided, that in either event,
such continuance is also approved by the vote of the majority of the
Directors who are not parties cast in person at a meeting called for the
purpose of voting on such approval.

CUSTODIAN

Signet Trust Company is custodian for the securities and cash of
the Fund. Under the Custodian Agreement, Signet Trust Company holds the

Funds' portfolio securities in safekeeping and keeps all necessary records
and documents relating to its duties. The custodian receives a fee at an
annual rate of .05 of 1% on the first $10 million of average net assets of
each of the six respective portfolios and .025 of 1% on average net assets
in excess of $10 million. There is a $20 fee imposed on each transaction.
The custodian fee received during any fiscal year shall be at least $1,000
per Fund.

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of
Federated Investors, provides administrative personnel and services to the
Funds for the fees set forth in the prospectus.

DISTRIBUTION PLAN

The Fund has adopted a Plan for Shares of the Fund pursuant to
Rule 12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company of 1940. The Plan provides that the
Funds' Distributor shall act as the Distributor of shares, and it permits
the payment of fees to brokers and dealers for distribution and
administrative services and to administrators for administrative services.
The Plan is designed to (I) stimulate brokers and dealers to provide
distribution and administrative support services to the Fund and its
shareholders and (ii) stimulate administrators to render administrative
support services to the Fund and its shareholders. These services are to
be provided by a representative who has knowledge of the shareholders'
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various

personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investment of
client account designations, and addresses; and providing such other
services as the Director reasonably requests. For the fiscal year ended
April 30, 1996, the FUND accrued payments under the Plan amounting to
$630,406.

By adopting the Plan, the then Board of Directors expected that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate more
efficient portfolio management and assist the Fund in seeking to achieve
its investment objectives. By identifying potential investors in shares
whose needs are served by the Fund's objectives, and properly servicing
these accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.

DESCRIPTION OF THE FUND

The FUND is a Maryland corporation. The FUND's authorized shares
consist of 1,000,000,000 shares of common stock, par value $.001 per share.

Shares of the FUND entitle the holders to one vote per share. The shares
have no preemptive or conversion rights. The voting and dividend rights,
the right of redemption and the privilege of exchange are described in the
Prospectus. Shares are fully paid and non-assessable.

The FUND may be terminated upon the sale of its assets to another
open-end management investment company if approved by the vote of the
holders of a majority of the outstanding shares of the FUND. The FUND may
also be terminated upon liquidation and distribution of its assets, if
approved by a majority shareholder vote of the FUND. Shareholders of the
FUND shall be entitled to receive distributions as a class of the assets
belonging to the FUND. The assets of the FUND received for the issue or
sale of the shares of the FUND and all income earnings and the proceeds
thereof, subject only to the rights of creditors, are specifically
allocated to the FUND, and constitute the underlying assets of the FUND.

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

BLANCHARD FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction
with the current prospectus dated August 31, 1996 (the "Prospectus"),
pursuant to which the Blanchard Flexible Income Fund (the "FUND") is
offered. Please retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

General Information and History 2
Investment Objective and Policies 2
Investment Restrictions 15
Portfolio Transactions 16
Computation of Net Asset Value 17
Performance Information 18
Additional Purchase and Redemption Information 19
Tax Matters 20
Blanchard Funds Management 24

Management Services 28
The Sub-Advisory Agreement 28
Custodian 30
Administrative Services 30
Purchasing Shares 30
Distribution Plan 30
Description of the FUND 31
Shareholder Reports 31

Manager
Virtus Capital Management, Inc.

Sub-Adviser
OFFITBANK

Distributor
Federated Securities Corp.

Custodian
Signet Trust Company

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1996

GENERAL INFORMATION AND HISTORY

INVESTMENT OBJECTIVE AND POLICIES

The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled
"Investment Objective and Policies" and "Certain Investment Strategies and
Policies."

The FUND intends to invest in the following fixed income
securities markets:

U.S. Government Securities. This consists of debt obligations of
the U.S. Government and its agencies and instrumentalities and related
options, futures and repurchase agreements.

Investment Grade Fixed Income Securities. This consists of
investment grade fixed income securities, including mortgage related
and asset backed securities.

High Yield Securities. This consists of higher yielding (and,
therefore, higher risk), lower rated U.S. corporate fixed income
securities.

International Fixed Income Securities. This consists of
obligations of foreign governments, their agencies and
instrumentalities and other fixed income securities denominated in
foreign currencies or composite currencies.

OFFITBANK, the FUND's portfolio adviser, believes that the ability to
invest the FUND's assets among these markets, as opposed to investing in
any one, may enable the FUND to enhance current income and increase
opportunities for capital appreciation while taking risk to principal into
consideration. The Fund may invest up to 35% of its assets in lower quality
fixed income securities. There is no limit on the percentage of FUND
assets invested in any of the fixed income markets except for High Yield
Securities which is limited to 35%, and further limited to the extent of
any lower quality fixed income securities held in the International Fixed
Income Securities portfolio. See "Risk Factors - Lower Rated Fixed Income
Securities" in the FUND's Prospectus.

At least 65% of the FUND's total assets generally will be invested in
income-producing securities; however, the FUND expects that substantially
all of its total assets will be invested in income-producing securities,

together with certain futures, options and foreign currency contracts and
other investments described below.

The investment objective of providing high current income while
seeking opportunities for capital appreciation is a fundamental policy and
may not be changed without the authorization of the holders of a majority
of the outstanding shares of the FUND, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"). The other investment policies
may be changed with the approval of the FUND's Board of Trustees, except as
set forth under "Investment Restrictions" in this Statement of Additional
Information.

U.S. GOVERNMENT SECURITIES

FUND assets invested in this market will be invested exclusively in
U.S. Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. As used in this Prospectus,
the term "U.S. Government Securities" refers to debt securities denominated
in U.S. dollars issued or guaranteed by the U.S. government, by various of
its agencies, or by various instrumentalities established or sponsored by
the U.S. government. Certain of these obligations including U.S. Treasury
bills, notes and bonds, mortgage participation certificates guaranteed by
the Government National Mortgage Association ("GNMA"), and Federal Housing
Administration debentures, are supported by the full faith and credit of
the United States. Other U.S. Government Securities issued or guaranteed
by federal agencies or government sponsored enterprises are not supported
by the full faith and credit of the United States. These securities
include obligations supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of Federal Home Loan Banks, and

obligations supported only by the credit of the instrumentality, such as
Federal National Mortgage Association Bonds. When purchasing securities in
the U.S. Government market, OFFITBANK may take full advantage of the entire
range of maturities of U.S. Government Securities and may adjust the
average maturity of the investments held in the portfolio from time to
time, depending on its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest
rates. To the extent that the FUND invests in the mortgage market,
OFFITBANK usually will evaluate, among other things, relevant economic,
environmental and security-specific variables such as housing starts,
coupon and age trends. To determine relative value among markets OFFITBANK
may use tools such as yield/duration curves, break-even prepayment rate
analysis and holding-period-return scenario testing.

The FUND may seek to increase its current income by writing covered
call or put options with respect to some or all of the U.S. Government
Securities held in its portfolio. In addition, the FUND may at times,
through the writing and purchase of options on U.S. Government Securities,
and the purchase and sale of futures contracts and related options with
respect to U.S. Government Securities, seek to reduce fluctuations in net
asset value by hedging against a decline in the value of U.S. Government
Securities owned by the FUND or an increase in the price of such Securities
which the FUND plans to purchase, although it is not the general practice
to do so. Significant option writing opportunities generally exist only
with respect to longer term U.S. Government Securities. Options on U.S.
Government Securities and futures and related options are not considered
U.S. Government Securities; accordingly, they have a different set of risks
and features. These practices and related risks are described in "Certain
Investment Strategies and Policies" in the FUND's Prospectus and in

"Investment Objective and Policies" in this Statement of Additional
Information.

DESCRIPTION OF CERTAIN U.S. GOVERNMENT MORTGAGE-RELATED SECURITIES

GNMA CERTIFICATES

Government National Mortgage Association. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the
United States within the U.S. Department of Housing and Urban Development.
GNMA's principal programs involve its guarantees of privately issued
securities backed by pools of mortgages.

Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the FUND purchases are of the modified pass-
through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net
of fees paid to the GNMA Certificate issuer and GNMA, regardless of whether
or not the mortgagor actually makes the payment.

GNMA Certificates are backed by mortgages and, unlike most bonds,
their principal amount is paid back by the borrower over the length of the
loan rather than in a lump sum at maturity. Principal payments received by
the FUND will be reinvested in additional GNMA Certificates or in other
permissible investments.

GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a

pool of mortgages insured by the Federal Housing Administration ("FHA") or
the Farmers Home Administration or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and
credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments
required under its guarantee.

Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities. Prepayments of principal by mortgagors
and mortgage foreclosures will result in the return of a portion of
principal invested before the maturity of the mortgages in the pool.

As prepayment rates of individual mortgage pools will vary widely, it
is not possible to predict accurately the average life of a particular
issue of GNMA Certificates. However, statistics published by the FHA are
normally used as an indicator of the expected average life of GNMA
Certificates. These statistics indicate that the average life of single-
family dwelling mortgages with 25-30 year maturities (the type of mortgages
backing the vast majority of GNMA Certificates) is approximately twelve
years. For this reason, it is customary for pricing purposes to consider
GNMA Certificates as 30-year mortgage-backed securities which prepay fully
in the twelfth year.

Yield Characteristics of GNMA Certificates. The coupon rate of
interest of GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the Certificates, but
only by the amount of the fees paid to GNMA and the GNMA Certificate
issuer. For the most common type of mortgage pool, containing single-

family dwelling mortgages, GNMA receives an annual fee of 0.06 of one
percent of the outstanding principal for providing its guarantee, and the
GNMA Certificate issuer is paid an annual servicing fee of 0.44 of one
percent for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount, rather
than at par.

2. After issuance, Certificates usually trade in the secondary
market at a premium or discount.

3. Interest is paid monthly rather than semi-annually as is the case
for traditional bonds. Monthly compounding has the effect of
raising the effective yield earned on GNMA Certificates.

4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the
Certificate. If mortgagors prepay their mortgages, the principal
returned to Certificate holders may be reinvested at higher or
lower rates.

than U.S. Government and U.S. Government agency bonds. As the life of
individual pools may vary widely, however, the actual yield earned on any
issue of GNMA Certificates may differ significantly from the yield
estimated on the assumption of a twelve-year life.

Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types
of investors make GNMA Certificates highly liquid instruments. Quotes for
GNMA Certificates are readily available from securities dealers and depend
on, among other things, the level of market rates, the Certificate's coupon
rate and the prepayment experience of the pool of mortgages backing each
Certificate.

FNMA SECURITIES

The Federal National Mortgage Association ("FNMA") was established in
1938 to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all principal and interest payments made and
owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates. The FNMA guarantee is not backed by
the full faith and credit of the United States.

FHLMC SECURITIES

The Federal Home Loan Mortgage Corporation ("FHLMC") was created in
1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool.
The FHLMC guarantees timely monthly payment of interest on Pcs and the
ultimate payment of principal. GMCs also represent a pro rata interest in
a pool of mortgages. However, these instruments pay interest semiannually
and return principal once a year in guaranteed minimum payments. The
expected average life of these securities is approximately ten years. The
FHLMC guarantee is not backed by the full faith and credit of the United
States.

SPECIAL CONSIDERATIONS

maturities and the FUND expects that its portfolio of U.S. Government
Securities will be weighted towards the longer maturities at least to the
extent that it has written call options thereon. Although changes in the
value of U.S. Government securities will not affect investment income from
those securities, they will affect the FUND's net asset value.

INVESTMENT GRADE FIXED INCOME SECURITIES

The FUND may invest in other investment grade U.S. fixed income
securities. Such investments may include mortgage related securities that
are not U.S. Government Securities, asset backed securities and fixed
income securities rated Baa or higher by Moody's Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("Standard & Poor's").
Fixed income securities rated Baa by Moody's or BBB by Standard & Poor's
are considered investment grade obligations which lack outstanding
investment characteristics and may have speculative characteristics as
well. See Appendix A in the FUND's Prospectus for the rating securities
descriptions of these rating categories.

MORTGAGE RELATED SECURITIES

Mortgage-related securities issued by financial institutions (or
separate trusts or affiliates of such institutions), even where backed by
U.S. Government securities, are not considered U.S. Government Securities.

The mortgage pass-through market is marked by high liquidity and
credit quality. The primary risk that exists for mortgage pass-through
securities is interest rate risk. Changes in market yields will affect the
value of these securities as the price of fixed income securities generally

increases when interest rates decline and decreases when interest rates
rise. Prices of longer term securities generally increase or decrease more
sharply than those of shorter term securities in response to interest rate
changes. In addition, prepayment of principal on mortgage pass-through
securities may make it difficult to lock in interest rates for a fixed
period of time. To the extent that mortgage securities are purchased at
prices that differ from par, these prepayments (which are received at par)
may make up a significant portion of the pass-through total return.
Generally, mortgage securities yield more than treasury securities of the
same average life.

COLLATERALIZED MORTGAGE OBLIGATIONS

Collateralized mortgage obligations are debt obligations issued
generally by finance subsidiaries or trusts which are secured by mortgage-
backed certificates, including GNMA Certificates, FHLMC Certificates and
FNMA Certificates, together with certain funds and other collateral.
Scheduled distributions on the mortgage-backed certificates pledged to
secure the collateralized mortgage obligations, together with certain funds
and other collateral and reinvestment income thereon at an assumed
reinvestment rate, will be sufficient to make timely payments of interest
on the obligations and to retire the obligations not later than their
stated maturity. Since the rate of payment of principal of any
collateralized mortgage obligation will depend on the rate of payment
(including prepayments) of the principal of the mortgage loans underlying
the mortgage-backed certificates, the actual maturity of the obligation
could occur significantly earlier than its stated maturity. Collateralized
mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage

obligations may be either fixed or floating. In addition, certain
collateralized mortgage obligations do not bear interest and are sold at a
substantial discount (i.e., a price less than the principal amount).
Purchases of collateralized mortgage obligations at a substantial discount
involves a risk that the anticipated yield on the purchase may not be
realized if the underlying mortgage loans prepay at a slower than
anticipated rate, since the yield depends significantly on the rate of
prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of
loss of principal in the event of unanticipated prepayments of the mortgage
loans underlying the mortgage-backed certificates since the premium may not
have been fully amortized at the time the obligation is repaid. The market
value of collateralized mortgage obligations purchased at a substantial
premium or discount is extremely volatile and the effects of prepayments on
the underlying mortgage loans may increase such volatility.

Although payment of the principal of and interest on the mortgage-
backed certificates pledged to secure collateralized mortgage obligations
may be guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage
obligations represent obligations solely of their issuers and are not
insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency
or instrumentality, or by any other person or entity. The issuers of
collateralized mortgage obligations typically have no significant assets
other than those pledged as collateral for the obligations.

ASSET BACKED SECURITIES

In general, asset-backed securities in which the FUND may invest are
issued as debt securities by special purpose corporations. These

securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among
other things, credit card receivables and automobiles. The FUND will
invest in, to the extent available, (i) loan pass-through certificates or
participations representing an undivided ownership interest in pools of
installment sales contracts and installment loans (the "Participations")
and (ii) debt obligations issued by special purpose corporations which hold
subordinated equity interests in such installment sales contracts and
installment loans. The FUND anticipates that a substantial portion of the
asset backed securities in which it invests will consist of the debt
obligations of such special purpose corporations.

Asset-backed securities, in general, are of a shorter maturity
(usually five years) than most conventional mortgage-backed securities and
historically have been less likely to experience substantial prepayments.
Furthermore, the effect of prepayments on securities that have shorter
maturities, such as asset-backed securities, is much smaller than the
effect of prepayments on securities having longer maturities, such as
mortgage-backed securities. The yield characteristics of asset-backed
securities differ from more traditional debt securities in that interest
and principal payments are paid more frequently, usually monthly, and
principal may be prepaid at any time. As a result, if the FUND purchases
an asset-backed security at a discount, similar to conventional mortgage-
backed securities, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium,
faster than expected prepayments will reduce, while slower than expected
prepayments will increase, yield to maturity. Prepayments may result from

a number of factors, including trade-ins and liquidations due to default,
as well as the receipt of proceeds from physical damage, credit, life and
disability insurance policies. The rate of prepayments on asset-backed
securities may also be influenced by a variety of economic and social
factors, including general measures of consumer confidence; accordingly,
from time to time, substantial amounts of prepayments may be available for
reinvestment by the FUND and will be subject to the prevailing interest
rates at the time of prepayment.

Asset-backed securities often contain elements of credit support to
lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying asset. Liquidity
protection ensures that the pass through of payments due on the installment
sales contracts and installment loans which comprise the underlying pool
occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties;
through various means of structuring the transaction, or through a
combination of such approaches. The FUND will not pay any additional fees
for such credit support. However, the existence of credit support may
increase the market price of the security.

As with Mortgage-Related Securities, Asset-Backed Securities are often
backed by a pool of assets representing the obligations of a number of
different parties and use similar credit enhancement techniques.

Asset-Backed Securities do not have the benefit of the same security
interest in the related collateral as do Mortgage-Related Securities.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts
owed on the credit cards, thereby reducing the balance due. Most issuers
of automobile receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these obligations to
another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have a perfected security
interest in all of the obligations backing such receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may not,
in some cases, be available to support payments on these securities.

HIGH YIELD SECURITIES

The FUND may invest up to (but not including) 35% (further limited to
the extent of any lower quality fixed income securities held in the
International Fixed Income Securities portfolio) of its assets in higher
yielding (and, therefore, higher risk), lower rated U.S. corporate fixed
income securities, including debt securities, (commonly referred to as
"junk bonds") convertible securities and preferred stocks and unrated
corporate fixed income securities. Investments in high-yield securities
entail greater risks than those involved in higher-rated securities.

Convertible securities are bonds, debentures, notes, preferred stock
or other securities which may be converted or exchanged by the holder into
shares of the underlying common stock at a stated exchange ratio. A
convertible security may also be subject to redemption by the issuer but
only after a date and under certain circumstances (including a specified
price) established on issue. Adjustable rate preferred stocks are
preferred stocks which adjust their dividend rates quarterly based on
specified relationships to certain indexes of U.S. Treasury Securities.
The FUND may continue to hold securities obtained as a result of the
conversion of convertible securities held by the FUND when OFFITBANK
believes retaining such securities is consistent with the FUND's investment
objective.

Differing yields on fixed income securities of the same maturity are a
function of several factors, including the relative financial strength of
the issuers. Higher yields are generally available from securities in the
lower categories of recognized rating agencies, i.e., Ba or lower by
Moody's or BB or lower by Standard & Poor's. The FUND may invest in any
security which is rated by Moody's or by Standard & Poor's, or in any
unrated security which OFFITBANK determines is of suitable quality.
Securities in the rating categories below Baa as determined by Moody's and
BBB as determined by Standard & Poor's are considered to be of poor
standing and predominantly speculative. The rating services descriptions
of these rating categories, including the speculative characteristics of
the lower categories, are set forth in Appendix A in the FUND's Prospectus.

Securities ratings are based largely on the issuer's historical
financial information and the rating agencies' investment analysis at the
time of rating. The medium to lower-rated securities in which the FUND may

invest tend to offer higher yields than higher-rated securities with the
same maturities because the historical financial condition of the issuers
of such securities may not be as strong as that of other issuers. The
rating assigned to any particular security, however, is not necessarily a
reflection of the issuer's current financial condition, which may be better
or worse than the rating would indicate. Although OFFITBANK will consider
security ratings when making investment decisions in the High Yield market,
it will perform its own investment analysis and will not rely principally
on the ratings assigned by the rating services. OFFITBANK's analysis
generally may include, among other things, consideration of the issuer's
experience and managerial strength, changing financial condition, borrowing
requirements or debt maturity schedules, and its responsiveness to changes
in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects.

HIGH YIELD SECURITIES - RISK FACTORS. High Yield Securities are subject to
certain risks that may not be present with investments in higher grade
securities. See the FUND's Prospectus for more information.

EFFECT OF INTEREST RATE AND ECONOMIC CHANGES. The prices of High Yield
Securities tend to be less sensitive to interest rate changes than higher-
rated investments, but may be more sensitive to adverse economic changes or
individual corporate developments. Periods of economic uncertainty and
changes generally result in increased volatility in the market prices and
yields of High Yield Securities and thus in the FUND's net asset value. A
strong economic downturn or a substantial period of rising interest rates
could severely affect the market for High Yield Securities. In these
circumstances, highly leveraged companies might have greater difficulty in

making principal and interest payments, meeting projected business goals,
and obtaining additional financing. Thus, there could be a higher
incidence of default. This would affect the value of such securities and
thus the FUND's net asset value. Further, if the issuer of a security
owned by the FUND defaults, the FUND might incur additional expenses to
seek recovery.

THE HIGH YIELD SECURITIES MARKET. The market for High Yield Securities has
expanded in recent years and is relatively new. This expanded market has
not yet completely weathered an economic downturn. A further economic
downturn or an increase in interest rates could have a negative effect on
the High Yield Securities market and on the market value of the High Yield
Securities held by the FUND, as well as on the ability of the issuers of
such securities to repay principal and interest on their borrowings.

CREDIT RATINGS. The credit ratings issued by credit rating services may
not fully reflect the true risks of an investment. For example, credit
ratings typically evaluate the safety of principal and interest payments,
not market value risk, of High Yield Securities. Also, credit rating
agencies may fail to change on a timely basis a credit rating to reflect
changes in economic or company conditions that affect a security's market
value.

LIQUIDITY AND VALUATION. Lower-rated bonds are typically traded among a
smaller number of broker-dealers than in a broad secondary market.
Purchasers of High Yield Securities tend to be institutions, rather than
individuals, which is a factor that further limits the secondary market.
To the extent that no established retail secondary market exists, many High
Yield Securities may not be as liquid as higher-grade bonds. A less active

and thinner market for High Yield Securities than that available for higher
quality securities may result in more volatile valuations of the FUND's
holding and more difficulty in executing trades at favorable prices during
unsettled market conditions.

The ability of the FUND to value or sell High Yield Securities will be
adversely affected to the extent that such securities are thinly traded or
illiquid. During such periods, there may be less reliable objective
information available and thus the responsibility of the FUND's Board of
Trustees to value High Yield Securities becomes more difficult, with
judgment playing a greater role. Further, adverse publicity about the
economy or a particular issuer may adversely affect the public's perception
of the value, and thus liquidity, of a High Yield Security, whether or not
such perceptions are based on a fundamental analysis.

LEGISLATION. Provisions of the Revenue Reconciliation Act of 1989 limit a
corporate issuer's deduction for a portion of the original issue discount
on "high yield discount" obligations (including certain pay-in-kind
securities). This limitation could have a materially adverse impact on the
market for certain High Yield Securities. In addition, the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 requires savings
associations to divest their holdings of High Yield Securities before
July 1, 1994. This requirement also could have a materially adverse impact
on the market for High Yield Securities. From time to time, legislators
and regulators have proposed other legislation that would limit the use of
high yield debt securities in leveraged buyouts, mergers and acquisitions.
It is not certain whether such proposals, which also could adversely affect
High Yield Securities, will be enacted into law.

INTERNATIONAL FIXED INCOME SECURITIES

FUND assets invested in International Fixed Income Securities will be
invested in debt obligations and other fixed income securities, in each
case denominated in non-U.S. currencies or composite currencies including:

debt obligations issued or guaranteed by foreign national, provincial,
state, municipal or other governments with taxing authority or by
their agencies or instrumentalities;

debt obligations or supranational entities (described below);

debt obligations of the U.S. Government issued in non-dollar
securities; and

debt obligations and other fixed income securities of foreign and U.S.
corporate issuers (non-dollar denominated).

When investing in International Fixed Income Securities, the FUND is
not limited to purchasing debt securities rated at the time of purchase by
Moody's or Standard & Poor's. However, the FUND is limited to the extent
that it may not invest more than 35% of its assets in all lower quality
fixed income securities held by the FUND (by aggregating the value of all
such securities held in the High Yield Securities and the International
Fixed Income Securities portfolios). In making international fixed income
securities investments, OFFITBANK may consider, among other things, the
relative growth and inflation rates of different countries. OFFITBANK may
also consider expected changes in foreign currency exchange rates,
including the prospects for central bank intervention, in determining the

anticipated returns of securities denominated in foreign currencies.
OFFITBANK may further evaluate, among other things, foreign yield curves
and regulatory and political factors, including the fiscal and monetary
policies of such countries.

The FUND may invest in any country where OFFITBANK sees potential for
high income. It presently expects to invest primarily in non-dollar
denominated securities of issuers in the industrialized Western European
countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. The FUND may also invest up to 15% of its assets in the fixed
income securities of issuers in emerging market countries. See the Fund's
Prospectus for more information.

The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support.
Obligations of foreign governmental entities include obligations issued or
guaranteed by national, provincial, state or other governments with taxing
power or by their agencies. These obligations may or may not be supported
by the full faith and credit of a foreign government.

unable to repay its borrowings. Each supranational entity's lending
activities are limited to a percentage of its total capital (including
"callable capital" contributed by members at the entity's call), reserves
and net income.

RISK FACTORS

See "Risk Factors - Lower Rated Fixed Income Securities" and Appendix
A in the FUND's Prospectus for more information concerning the risks of
investing in lower quality fixed income securities.

Foreign investments involve certain risks that are not present in
domestic securities. Because the FUND intends to purchase securities
denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of the FUND's assets and the FUND's income available
for distribution. In addition, although a portion of the FUND's investment
income may be received or realized in such currencies, the Internal Revenue
Code of 1986 (the "Code") requires that the FUND compute and distribute its
income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the FUND's income has been earned and translated
into U.S. dollars but before payment, the FUND could be required to
liquidate portfolio securities to make such distributions. Similarly, if
an exchange rate depreciates between the time the FUND incurs expenses in
U.S. dollars and the time such expenses are paid, the amount of such
currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any
such currency of such expenses at the time they were incurred. Under the
Code, changes in an exchange rate which occur between the time the FUND

accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the FUND
actually collects such receivables or pays such liabilities will result in
foreign exchange gains or losses that increase or decrease distributable
net investment income. Similarly, dispositions of certain debt securities
(by sale, at maturity or otherwise) at a U.S. dollar amount which is higher
or lower than the FUND's original U.S. dollar cost may result in foreign
exchange gains or losses, which will increase or decrease distributable net
investment income.

The values of foreign investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Although the FUND will invest only in securities
denominated in foreign currencies that are fully exchangeable into U.S.
dollars without legal restriction at the time of investment, there is no
assurance that currency controls will not be imposed subsequently. In
addition, the values of foreign fixed income investments will fluctuate in
response to changes in U.S. and foreign interest rates.

There may be less information publicly available about a foreign
issuer than about a U.S. issuer, and foreign issuers are not generally
subject to accounting, auditing and financial reporting standards and
practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities
of comparable U.S. issuers. Foreign brokerage commissions, custodial
expenses and other fees are also generally higher than for securities
traded in the United States.

In addition, with respect to certain foreign countries, there is a
possibility of expropriation of assets, confiscatory taxation, political or
financial instability and diplomatic developments which could adversely
affect the value of investments in those countries. OFFITBANK does not
expect to invest the FUND's assets in countries where it believes such
events are likely to occur.

Income received by the FUND from sources within foreign countries may
be reduced by withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. OFFITBANK will attempt to minimize such taxes by
timing of transactions and other strategies, but there is no assurance that
such efforts will be successful. Any such taxes paid by the FUND will
reduce its net income available for distribution to shareholders.

The FUND is a "non-diversified" investment company portfolio, which
means that the FUND is not limited in the proportion of its assets that may
be invested in the securities of a single issuer. However, the FUND
intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the FUND of any liability for
Federal income tax to the extent its earnings are distributed to
shareholders. See "Distributions and Taxes." To so qualify, among other
requirements, the FUND will limit its investments so that, at the close of
each calendar quarter, (i) not more than 25% of the market value of the
FUND's total assets will be invested in the securities of a single issuer,
and (ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets will be invested in
the securities of a single issuer and the FUND will not own more than 10%

of the outstanding voting securities of a single issuer. For purposes of
the FUND's requirements to maintain diversification for tax purposes, the
issuer of a loan participation will be the underlying borrower. In cases
where the FUND does not have recourse directly against the borrower, both
the borrower and each agent bank and co-lender interposed between the FUND
and the borrower will be deemed issuers of the loan participation for tax
diversification purposes. The FUND's investments in U.S. Government
Securities are not subject to these limitations. Since the FUND as a non-
diversified investment company may invest in a smaller number of individual
issuers than a diversified investment company, an investment in the FUND
may, under certain circumstances, present greater risk to an investor than
an investment in a diversified company.

FUTURES CONTRACTS

The FUND may enter into contracts for the purchase or sale for
future delivery of fixed-income securities or foreign currencies which
otherwise meet the FUND's investment policies, to the extent permitted by
the Commodity Futures Trading Commission (the "CFTC"). U.S. futures
contracts have been designed by exchanges which have been designated
"contract markets" by the CFTC, and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market. Futures contracts trade on a number of contract markets,
and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as Treasury Notes, Government National Mortgage
Association modified pass-through mortgage-backed securities and three-

month U.S. Treasury Bills. The FUND may also enter into futures contracts
which are based on non-U.S. Government bonds.

An interest rate futures contract provides for the future sale by
one party and the purchase by the other party of a certain amount of a
specific, interest rate-sensitive financial instrument (debt security) at a
specified price, date, time and place. A foreign currency futures contract
provides for the future sale by one party and the purchase by the other
party of a certain amount of a specified foreign currency at a specified
price, date, time and place.

The FUND may not enter into futures transactions if the sum of
the amount of initial margin deposits on its existing futures contracts and
premiums paid for unexpired options would exceed 5% of the fair market
value of the FUND'S total assets, after taking into account unrealized
profits and unrealized losses on commodity contracts it has entered into.
The FUND will not use leverage when it enters into long futures or options
contracts and for each such long position the FUND will deposit cash or
cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.

amount is known as "initial margin" and is in the nature of a performance
bond or good faith deposit on the contract which is returned to the FUND
upon termination of the futures contract, assuming all contractual
obligations have been satisfied. The broker will have access to amounts in
the margin account if the FUND fails to meet its contractual obligations.
Subsequent payments, known as "variation margin," to and from the broker,
will be made daily as the price of the currency or securities underlying
the futures contract fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking-to-
market." At any time prior to the expiration of a futures contract, the
FUND may elect to close the position by taking an opposite position, which
will operate to terminate the FUND's existing position in the contract.

There are several risks in connection with the use of futures
contracts. Successful use of futures contracts is subject to the ability
of FUND management to predict correctly movements in the price of the
securities or currencies underlying the particular transaction. These
predictions and, thus, the use of futures contracts involve skills and
techniques that are different from those involved in the management of
portfolio securities.

Positions in futures contracts and options on futures contracts
may be closed out only on the exchange on which they were entered into (or
through a linked exchange). No secondary market for such contracts exists.
Although the FUND intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most futures
exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached

in a particular contract, no trades may be made that day at a price beyond
that limit. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting
the FUND to substantial losses. In such event, and in the event of adverse
price movements, the FUND would be required to make daily cash payments of
variation margin.

OPTIONS ON FUTURES CONTRACTS

The FUND may purchase and write put and call options on interest
rate and foreign currency contracts that are traded on a U.S. exchange or
board of trade or a foreign exchange, to the extent permitted by the CFTC,
and may enter into closing transactions with respect to such options to
terminate existing positions. There is no guarantee that such closing
transactions can be effected.

An option on an interest rate or foreign currency contract, as
contrasted with the direct investment in such a contract, gives the
purchaser the right, in return for the premium paid, to assume a position
in an interest rate or foreign currency contract at a specified exercise
price at any time prior to the expiration date of the option. Options on
interest rate futures contracts currently available include those with
respect to U.S. Treasury Bonds, U.S. Treasury Notes, U.S. Treasury Bills
and Eurodollars. Options on foreign currency futures currently available
include those with respect to British Pounds, Swiss Francs, Japanese Yen,
Canadian Dollars and Australian Dollars. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in

the writer's futures margin account, which represents the amount by which
the market price of the futures contracts exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the
point of sale, there are no daily cash payments to reflect changes in the
value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of
the FUND.

OPTIONS ON FOREIGN CURRENCIES

The FUND may purchase and write options on foreign currencies to
increase its gross income in a manner similar to that in which futures
contracts on foreign currencies, or forward contracts, will be utilized.

The FUND intends to write covered call options on foreign
currencies. A call option written on a foreign currency by the FUND is
"covered" if the FUND owns the underlying foreign currency covered by the
call or has an absolute and immediate right to acquire that foreign
currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian or by a
designated sub-custodian) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if the FUND
has a call on the same foreign currency and in the same principal amount as
the call written where the exercise price of the call held (a) is equal to
or less than the exercise price or the call written or (b) is greater than
the exercise price of the call written if the difference is maintained by

the FUND in cash, U.S. Government Securities and other high grade liquid
debt securities in a segregated account with its Custodian or with a
designated sub-custodian. As a writer of a covered put option, the FUND
incurs an obligation to buy the security underlying the option from the
purchaser of the put, at the option's exercise price at any time during the
option period, at the purchaser's election (certain listed and over-the-
counter put options written by the FUND will be exercisable by the
purchaser only on a specific date). A put is "covered" if, at all times,
the FUND maintains, in a segregated account maintained on its behalf at the
FUND's custodian, cash, U.S. Government securities or other high grade
obligations in an amount equal to at least the exercise price of the
option, at all times during the option period. Similarly, a short put
position could be covered by the FUND by its purchase of a put option on
the same security (currency) as the underlying security of the written
option, where the exercise price of the purchased option is equal to or
more than the exercise price of the put written or less than the exercise
price of the put written if the marked to market difference is maintained
by the FUND in cash, U.S. Government securities or other high grade debt
obligations which the FUND holds in a segregated account maintained at its
custodian.

FORWARD CURRENCY CONTRACTS

The FUND may engage in currency exchange transactions as a
portfolio management technique. The FUND will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or through entering into
forward contracts to purchase or sell currency. A forward currency
contract involves an obligation to purchase or sell a specific currency at

a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the
contract.
If a devaluation is generally anticipated, the FUND may not be
able to contract to sell the currency at a price above the devaluation
level it anticipates. The FUND will not enter into a currency transaction
if, as a result, it will fail to qualify as a regulated investment company
under the Code for any given year.

OPTIONS ON PORTFOLIO SECURITIES

The FUND may write only covered call option contracts.
Currently, the principal exchanges on which such options may be written are
the Chicago Board Option Exchange and the American, Philadelphia, and
Pacific Stock Exchanges. In addition, the FUND may purchase and sell
options in the over-the-counter market ("OTC Options"). A call option
gives the purchaser of the option the right to buy the underlying security
from the writer at the exercise price at any time prior to the expiration
of the contract, regardless of the market price of the security during the
option period. The premium paid to the writer is the consideration for
undertaking the obligations under the option contract. The writer forgoes
the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.

Government Securities dealers recognized by the Board of Governors of the
Federal Reserve System or member banks of the Federal Reserve System
("primary dealers"). The FUND may also write, to the extent available,
OTC Options with non-primary dealers, such as foreign dealers; however,
unlike OTC Options written with primary dealers, any OTC Options written
with such non-primary dealers and the assets used as cover for such options
will be treated as illiquid securities. In connection with these special
arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may
enter into OTC Option contracts and those standards, as modified from time
to time, will be implemented and monitored by the Manager. Under these
special arrangements, the FUND will enter into contracts with primary and
non-primary dealers which provide that the FUND has the absolute right to
repurchase an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary and non-primary dealers, the formula will generally be based on a
multiple of the premium received by the FUND for writing the option, plus
the amount, if any, by which the option is "in-the-money." The formula
will also include a factor to account for the difference between the price
of the security and the strike price of the option if the option is written
"out-of-the-money." Under such circumstances, and with respect to OTC
Options written with primary dealers only, the FUND will treat as illiquid
that amount of the "cover" assets equal to the amount by which the formula
price for the repurchase of the option is greater than the amount by which
the market value of the security subject to the option exceeds the exercise
price of the option (the amount by which the option is "in-the-money").

Although each agreement will provide that the FUND's repurchase price shall
be determined in good faith (and that it shall not exceed the maximum
determined pursuant to the formula) the formula price will not necessarily
reflect the market value of the option written, therefore, the FUND might
pay more to repurchase the OTC Option contract than the FUND would pay to
close out a similar exchange traded option.

In determining the FUND's net asset value, the current market
value of any option written by the FUND is subtracted from net asset value.
If the current market value of the option exceeds the premium received by
the FUND, the excess represents an unrealized loss, and, conversely, if the
premium exceeds the current market value of the option, such excess would
be unrealized gain.

ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND
OPTIONS ON FOREIGN CURRENCIES

Unlike transactions entered into by the FUND in certain futures
contracts, certain other futures contracts, options on foreign currencies
and forward contracts are not traded on contract markets regulated by the
CFTC and forward currency contracts are not regulated by the Commission.
Instead, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded
on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board options Exchange, subject to regulation by
the Commission. In the forward currency market, there are no daily price
fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Moreover, a trader of
forward contracts could lose amounts substantially in excess of its initial

investments, due to the collateral requirements associated with such
positions.

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

The purchase and sale of exchange-traded foreign currency
options, however, are subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse
market movements, margining of options written, the nature of the foreign
currency market, possible intervention by governmental authorities and the
effects of other political and economic events. In addition, exercise and
settlement of such options must be made exclusively through the OCC, which
has established banking relationships in applicable foreign countries for
this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of

currency, the fixing of dollar settlement prices or prohibitions on
exercise.

In addition, future contracts, options on futures contracts,
forward contracts and options on foreign currencies may be traded on
foreign exchanges, to the extent permitted by the CFTC. Such transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies or securities. The value of such positions
also could be adversely affected by (a) other complex foreign political and
economic factors, (b) lesser availability than in the United States of data
on which to make trading decisions, (c) delays in the FUND's ability to act
upon economic events occurring in foreign markets during nonbusiness hours
in the United States and the United Kingdom, (d) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (e) lesser trading volume.

Pursuant to the sub-advisory agreement, OFFITBANK, where
permitted by law, will purchase and sell foreign exchange in the interbank
dealer market for a fee on behalf of the FUND, subject to certain
procedures and reporting requirements adopted by the Board of Trustees.

REPURCHASE AGREEMENTS

time during which the FUND's money is invested. The FUND's risk is limited
to the ability of the seller to pay the agreed-upon sum upon the delivery
date. When the FUND enters into a repurchase agreement, it obtains
collateral having a value at least equal to the amount of the purchase
price. Repurchase agreements can be considered loans as defined by the
Investment Company Act of 1940, as amended (the "1940 Act"), collateralized
by the underlying securities. The return on the collateral may be more or
less than that from the repurchase agreement. The securities underlying a
repurchase agreement will be marked to market every business day so that
the value of the collateral is at least equal to the value of the loan,
including the accrued interest earned. In evaluating whether to enter into
a repurchase agreement, OFFITBANK will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of
the collateral securing the repurchase agreement declines, the FUND may
incur a loss.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, the FUND may lend its
portfolio securities in an amount up to 33-1/3% of total FUND assets to
broker-dealers, major banks, or other recognized domestic institutional
borrowers of securities. No lending may be made to any companies
affiliated with VCM or OFFITBANK. The borrower at all times during the
loan must maintain with the FUND cash or cash equivalent collateral or
provide to the FUND an irrevocable letter of credit equal in value at all
times to at least 100% of the value of the securities loaned. During the
time portfolio securities are on loan, the borrower pays the FUND any
dividends or interest paid on such securities, and the FUND may invest the
cash collateral and earn additional income, or it may receive an agreed-

upon amount of interest income from the borrower who has delivered
equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The
FUND may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the income earned on the
cash to the borrower or placing broker.

ILLIQUID SECURITIES

funds do not typically hold a significant amount of these restricted or
other illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect
on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying
redemptions within seven days. A mutual fund might also have to register
such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such
a public offering of securities.

The FUND may invest up to 10% of its total assets in restricted
securities issued under Section 4(2) of the Securities Act, which exempts
from registration "transactions by an issuer not involving any public
offering." Section 4(2) instruments are restricted in the sense that they
can only be resold through the issuing dealer and only to institutional
investors; they cannot be resold to the general public without
registration.

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

FUND management will monitor the liquidity of restricted
securities in the FUND's portfolio under the supervision of the FUND's
Trustees. In reaching liquidity decision, FUND management will consider,
inter alia, the following factors: (1) the frequency of trades and quotes
for the security; (2) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics
of the transfer).

INVESTMENT RESTRICTIONS

and the Statement of Additional Information, the term "majority of the
outstanding shares" of the FUND means, respectively, the vote of the lesser
of (i) 67% or more of the shares of the FUND present at a meeting, if the
holders of more than 50% of the outstanding shares of the FUND are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of
the FUND. The following are the FUND's investment restrictions set forth
in their entirety.

1. The FUND, a non-diversified management investment company,
has the following restrictions: (a) with respect to 50% of the FUND's
total assets, the FUND may not invest more than 5% of its total assets, at
market value, in the securities of one issuer (except the securities of the
U.S. Government, its agencies and instrumentalities) and (b) with respect
to the other 50% of the FUND's total assets, the FUND may not invest more
than 25% of the market value of its total assets in a single issuer (except
the securities of the U.S. Government, its agencies and instrumentalities).
These two restrictions, hypothetically, could give rise to the FUND having
securities of as few as twelve issuers.

2. The FUND will not purchase a security if, as a result: (a)
it would own more than 10% of any class or of the outstanding voting
securities of any single company; (b) more than 5% of its total assets
would be invested in the securities of companies (including predecessors)
that have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any one
industry other than the banking industry (except that this restriction does
not apply to U.S. Government Securities); or (d) more than 5% of net assets
would be invested in warrants or rights. (Included within that amount, but

not to exceed 2% of the value of the FUND's net assets, may be warrants
which are not listed on the New York or American Stock Exchanges.)

3. The FUND may borrow money from a bank solely for temporary
or emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets.

4. The FUND will not make loans of money or securities except
(i) through repurchase agreements, (ii) through loan participations, and
(iii) through the lending of its portfolio securities as described in
"Lending of Portfolio Securities" in the Prospectus and in this Statement.

5. The FUND may not invest more than 5% of its total assets in
the securities of other investment companies or purchase more than 3% of
any other investment company's voting securities, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.

6. The FUND may not pledge, mortgage or hypothecate its assets,
except that to secure borrowings permitted by Restriction 3 above, the FUND
may pledge securities having a value at the time of pledge not exceeding
10% of the market value of the FUND's total assets.

7. The FUND may not buy any securities or other property on
margin (except for such short term credits as are necessary for the
clearance of transactions) or engage in short sales.

8. The FUND may not invest in companies for the purpose of
exercising control or management.

9. The FUND may not underwrite securities issued by others
except to the extent that the FUND may be deemed an underwriter when
purchasing or selling portfolio securities.

10. The FUND may not purchase or retain securities of any issuer
(other than the shares of the FUND) if to the FUND's knowledge, those
officers and Trustees of the FUND and the officers and directors of VCM or
OFFITBANK, who individually own beneficially more than 1/2 of 1% of the
outstanding securities of such issuer, together own beneficially more than
5% of such outstanding securities.

11. The FUND may not purchase or sell real property (including
limited partnership interests, but excluding readily marketable interests
in real estate investment trusts or readily marketable securities of
companies which invest in real estate).

12. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs or leases.

13. The FUND may not issue senior securities.

shareholders it will revoke the commitment by terminating sales of its
shares in the state(s) involved.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities are
placed on behalf of the FUND by the Portfolio Manager subject to the
supervision of VCM and the Trustees and pursuant to authority contained in
the Investment Advisory Contract between the FUND and VCM, and the Sub-
Advisory Agreement between VCM and OFFITBANK. In selecting such brokers or
dealers, OFFITBANK will consider various relevant factors, including, but
not limited to the best net price available, the size and type of the
transaction, the nature and character of the markets for the security to be
purchased or sold, the execution efficiency, settlement capability,
financial condition of the broker-dealer firm, the broker-dealer's
execution services rendered on a continuing basis and the reasonableness of
any commissions.

literature and statistical services furnished either directly to the FUND
or to OFFITBANK. Such allocation shall be in such amounts as VCM or
OFFITBANK shall determine and OFFITBANK shall report regularly to VCM who
will in turn report to the Trustees on the allocation of brokerage for such
services.

The receipt of research from broker-dealers may be useful to
OFFITBANK in rendering investment management services to its other clients,
and conversely, such information provided by brokers or dealers who have
executed orders on behalf of OFFITBANK's other clients may be useful to
OFFITBANK in carrying out its obligations to the FUND. The receipt of such
research may not reduce OFFITBANK's normal independent research activities.

OFFITBANK is authorized, subject to best price and execution, to
place portfolio transactions with brokerage firms that have provided
assistance in the distribution of shares of the FUND and are authorized to
use Federated Securities Corp. (the "Distributor"), and OFFITBANK or an
affiliated broker-dealer on an agency basis, to effect a substantial amount
of the portfolio transactions which are executed on the New York or
American Stock Exchanges, Regional Exchanges and Foreign Exchanges where
relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result
of FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory
Contract does not provide for any reduction in the advisory fee as a result
of profits resulting from brokerage commissions effected through the
Distributor. In addition, the Sub-Advisory Agreement between VCM and
OFFITBANK does not provide for any reduction in the advisory fees as a

result of profits resulting from portfolio transactions effected through
OFFITBANK or an affiliated brokerage firm.

The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid the Distributor or to OFFITBANK or an affiliated broker-
dealer must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during
a comparable period of time." The Rule and the procedures also contain
review requirements and require VCM to furnish reports to the Trustees and
to maintain records in connection with such reviews.

relative to each account. In some cases this system could have a
detrimental effect on the price or volume of the security as far as the
FUND is concerned. In other cases, however, the ability of the FUND to
participate in volume transactions will produce better executions for the
FUND.

For the fiscal years ended April 30, 1996 and 1995, the FUND's
annual rate of portfolio turnover was approximately 431% and 455%
respectively.

COMPUTATION OF NET ASSET VALUE

The net asset value of the FUND is determined at 4:00 p.m.
(Eastern Time) on each day that the New York Stock Exchange is open for
business and on such other days as there is sufficient trading in the
FUND's securities to affect materially the net asset value per share of the
FUND. The FUND will be closed on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

Market or fair values of the FUND's portfolio securities are
determined as follows:

according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
at fair value as determined in good faith by the Trustees.

TRADING IN FOREIGN SECURITIES

of the New York Stock Exchange. Certain foreign currency exchange rates are
determined when such rates are made available to the FUND at times prior to
the close of the New York Stock Exchange. Foreign securities quoted in
foreign currencies are translated into U. S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the New
York Stock Exchange. If such events materially affect the value of
portfolio securities, these securities may be valued at their fair value as
determined in good faith by the Trustees, although the actual calculation
may be done by others.

PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the FUND
to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated
both in terms of total return and in terms of yield. The total return
basis combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the Commission, funds advertising performance must
include total return quotes calculated according to the following formula:

P(1 + T)n = ERV

Where P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)

The FUND's aggregate annualized total rate of return, reflecting
the initial investment and reinvestment of all dividends and distributions
for the fiscal year ended April 30, 1996 was 8.06% and for the life of the
fund (November 2, 1992 through April 30, 1996) was 6.32%.

The FUND may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the FUND's performance with
other measures of investment return. For example, in comparing the FUND's
total return with data published by Lipper Analytical Services, Inc. or
similar independent services or financial publications, the FUND calculates
its aggregate total return for the specified periods of time by assuming
the reinvestment of each dividend or other distribution at net asset value
on the reinvestment date. Percentage increases are determined by
subtracting the initial net asset value of the investment from the ending
net asset value and by dividing the remainder by the beginning net asset
value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee which was in effect from November 2, 1992 to
December, 1994 from the initial value invested. The FUND will, however,
disclose the pro rata share of the account opening fee and will disclose
that the performance data does not reflect such non-recurring charge and
that inclusion of such charge would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in
such advertising than the information prescribed under the Commission's
rules.

In addition to the total return quotations discussed above, the
FUND may advertise its yield based on a 30-day (or one month) period ended
on the date of the most recent balance sheet included in the FUND's Post-
Effective Amendment to its Registration Statement, computed by dividing the
net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:

YIELD 2[(a-b +1)6-1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.

d = the maximum offering price per share on the last day of
the period.

Under this formula, interest earned on debt obligations for
purposes of "all above, is calculated by (1) computing the yield to
maturity of each obligation held by the FUND based on the market value of
the obligation (including actual accrued interest) at the close of business
on the last day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), (2)
dividing that figure by 360 and multiplying the quotient by the market
value of the obligation (including actual accrued interest as referred to
above) to determine the interest income on the obligation for each day of
the subsequent month that the obligation is in the FUND's portfolio
(assuming a month of 30 days) and (3) computing the total of the interest
earned on all debt obligations and all dividends accrued on all equity
securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated

dividend rate of a security each day that the security is in the FUND's
portfolio. For purposes of "b" above, Rule 12b-1 expenses are included
among the expenses accrued for the period. Any amounts representing sales
charges will not be included among these expenses; however, the FUND will
disclose the pro rata share of the account opening fee. Undeclared earned
income, computed in accordance with generally accepted accounting
principles, may be subtracted from the maximum offering price calculation
required pursuant to "d" above.

Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the
Commission's rules. In addition, all advertisements containing performance
data of any kind will include a legend disclosing that such performance
data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.

The FUND's yield as of April 30, 1996, based on a 30-day period,
was 6.12%.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The FUND reserves the right to close an account that has dropped
below $1,000 in value for a period of three months or longer other than as
a result of a decline in the net asset value per share. Shareholders are
notified at least 60 days prior to any proposed redemption and are invited
to add to their account if they wish to continue as shareholders of the
FUND, however, the FUND does not presently contemplate making such

redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.

TAX MATTERS

The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

The FUND has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended

(the "Code"). As a regulated investment company, the FUND is not subject
to Federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses, including foreign currency gains and loss) and capital gain net
income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of
its investment company taxable income (i.e., net investment income and the
excess of net short-term capital gain over net long-term capital loss) for
the taxable year (the "Distribution Requirement"), and satisfies certain
other requirements of the Code that are described below. Distributions by
the FUND made during the taxable year or, under specified circumstances,
within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.

than three months (the "Short-Short Gain Test"). For purposes of these
calculations, gross income includes tax-exempt income. However, foreign
currency gains, including those derived from options, futures and forwards,
will not in any event be characterized as Short-Short Gain if they are
directly related to the regulated investment company's investments in stock
or securities (or options or futures thereon). Because of the Short-Short
Gain Test, the FUND may have to limit the sale of appreciated securities
that it has held for less than three months. However, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss,
since the recognition of a loss before the expiration of the three-month
holding period is disregarded for this purpose. Interest (including
original issue discount) received for this purpose by the FUND at maturity
or upon the disposition of a security held for less than three months will
not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this
purpose.

the disposition of a forward foreign currency contract, futures contract,
option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to
Section 1256, will generally be treated as ordinary income or loss. At
April 30, 1996, the FUND had a net capital loss carryover of $17,047,108
which is available through April 30, 2004, to the extent provided by
regulations.

Generally, for purposes of determining whether capital gain or
loss recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (ii) the asset is otherwise held by the FUND as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and the FUND grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto) or (iii)
the asset is stock and the FUND grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only
in the case of clause (i) above. In addition, the FUND may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.

option written by the FUND will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.

Certain transactions that may be engaged in by the FUND (such as
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they
are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
contract have not terminated (by delivery, exercise, entering into a
closing transaction or otherwise) as of such date. Any gain or loss
recognized as a consequence of the year-end deemed disposition of Section
1256 contracts is combined with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that
taxable year. The net amount of such gain or loss for the entire taxable
year (including gain or loss arising as a consequence of the year-end
deemed sale of such contracts) is treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss (except for Section 1256
forward foreign currency contracts, which are subject to Section 988
Rules). The Internal Revenue Service has held in several private rulings
(not necessarily applicable to the FUND) that gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the
gains arise as a result of a constructive sale under Code Section 1256.
The FUND may elect not to have this special tax treatment apply to Section

1256 contracts that are part of a "mixed straddle" with other investments
of the FUND that are not Section 1256 contracts.

Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss, or any net
foreign currency loss incurred after October 31 as if they had been
incurred in the succeeding year.

In addition to satisfying the requirements described above, the
fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of its taxable year, at least 50% of the value of the FUND'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 the FUND has not invested more than 5% of the value of the
FUND's total assets in securities of such issuer and as to which the FUND
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its 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 the FUND controls and which are engaged in the
same or similar trades or businesses.

If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital

gain) will he subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

For purposes of the excise tax, a regulated investment company
shall (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year and (2)
unless it has made a taxable year election, exclude foreign currency gains
and losses incurred after October 31 of any year in determining the amount
of ordinary taxable income for the current calendar year (and, instead,
include such gains and losses in determining ordinary taxable income for
the succeeding calendar year).

The FUND intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income

prior to the end of each calendar year to avoid liability for the excise
tax. However, investors should note that the FUND may in certain
circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.

FUND DISTRIBUTIONS

The FUND anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and
treated as dividends for Federal income tax purposes, but they will not
qualify for the 70% dividends-received deduction for corporations.

The FUND may either retain or distribute to shareholders its net
capital gain for each taxable year. The FUND currently intends to
distribute any such amounts. Net capital gain distributed and designated
as a capital gain dividend will be taxable to shareholders as long-term
capital gain, regardless of the length of time the shareholder has held his
shares or whether such gain was recognized by the FUND prior to the date on
which the shareholder acquired his shares.

or securities of foreign corporations, the FUND may elect to "pass through"
to the FUND's shareholders the amount of foreign taxes paid by the FUND.
If the FUND so elects, each shareholder would be required to include in
gross income, even though not actually received, its pro rata share of the
foreign taxes paid by the FUND, but would be treated as having paid its pro
rata share of such foreign taxes and would therefore be allowed to either
deduct such amount in computing taxable income or use such amount (subject
to various Code limitations) as a foreign tax credit against Federal income
tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income
its pro rata share of such foreign taxes plus the portion of dividends
received from the FUND representing income derived from foreign sources.
No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Shareholders should consult
their own tax advisors concerning the application of the foreign tax credit
to them.

date. In addition, if the net asset value at the time a shareholder
purchases shares of the FUND reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be
taxable to the shareholder as dividends in the manner described above,
although such distributions economically constitute a return of capital to
the shareholder.

Ordinarily, shareholders are required to take distributions by
the FUND into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
FUND) on December 31 of such calendar year if such dividends are actually
paid by January 31 of the following year. Shareholders will be advised
annually as to the U.S. federal income tax consequences of distributions
made (or deemed made) during the year.

The FUND will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the FUND that
it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."

SALE OR REDEMPTION OF SHARES

A shareholder will recognize gain or loss on the sale or
redemption of shares of the FUND in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of
the FUND within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the
sale or redemption of shares of the FUND will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-
term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) generally will apply in determining
the holding period of shares. Long-term capital gains of noncorporate
taxpayers are currently taxed at a maximum rate 11.6% lower than the
maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

FOREIGN SHAREHOLDERS

Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation,
or foreign partnership ("foreign shareholder"), depends on whether the
income from the FUND is "effectively connected" with a U.S. trade or
business carried on by such shareholder.

If the income from the FUND is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or
lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate) on the gross income resulting
from the FUND's election to treat any foreign taxes paid by it as paid by
its shareholders, but may not be allowed a deduction against this gross
income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as
having been paid. Such a foreign shareholder would generally be exempt
from U.S. Federal income tax on gains realized on the sale of shares of the
FUND and capital gain dividends.

If the income from the FUND is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of
shares of the FUND will be subject to U.S. Federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

In the case of foreign noncorporate shareholders, the FUND may be
required to withhold U.S. Federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at
a reduced treaty rate) unless such shareholders furnish the FUND with
proper notification of its foreign status.

advisers with respect to the particular tax consequences to them of an
investment in the FUND, including the applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS

The foregoing general discussion of U.S. Federal income tax
consequences is based on the Code and the Treasury Regulations issued
thereunder as in effect on the date of this Statement of Additional
Information. 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.

Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies often differ
from the rules for U.S. Federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting an investment in the
FUND under their particular circumstances.

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.

JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER
PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND;
Chairman and

BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and
Director, Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or
Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue,
Executive Vice President of the Trust.

JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS
3255 TAMIAMI TRAIL NORTH

NAPLES, FL TRUSTEE OF THE FUND;
President, Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in
Southwest Florida; formerly, President,
Naples Property Management, Inc. and
Northgate Village Development
Corporation; Director or Trustee of the
Funds.

JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-
law; Director, The

BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds.

EDWARD C. GONZALES*
FEDERATED INVESTORS TOWER

PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated
Management, Federated Research,
Federated Research Corp., Federated
Global Research Corp. and Passport
Research, Ltd.; Executive Vice President
and Director, Federated Securities
Corp.; Trustee, Federated Shareholder
Services Company; Trustee or Director of
some of the Funds; President, Executive
Vice President and Treasurer of some of
the Funds.

GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674

PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney,
Member of Miller,
BIRTHDATE: OCTOBER 6, 1926 Ament, Henny & Kochuba; Chairman,
Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director or Trustee
of the Funds.

WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and

Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the
Funds. .

President or Executive Vice President of
the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and Trustee of
the Trust.

RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive
Vice

BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the
Funds.

* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.

@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.

THE FUNDS

As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:

Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust;
Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-
Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.; High
Yield Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series.

FUND OWNERSHIP

As of August 15, 1996, Officers and Trustees own less than 1% of
the outstanding shares of each Fund.
To the best knowledge of the FUND, as of August 15, 1996, no
shareholder owned 5% or more of the outstanding shares of the FUND.

OFFICERS AND TRUSTEES COMPENSATION

NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM PAID TO TRUSTEES
THE TRUST+ FROM THE FUND AND
FUND COMPLEX*

John F. Donahue, $0 $-0- for the Fund
Chairman and Trustee Complex
THOMAS G. BIGLEY, $1008.23 $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, JR., $1129.96 $3441.37 for the
TRUSTEE Fund Complex
WILLIAM J. COPELAND, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
JAMES E. DOWD, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. ELLIS, $1008.23 $3145.78 for the
M.D., TRUSTEE Fund Complex
EDWARD L. FLAHERTY, $1129.96 $3441.37 for the
JR., TRUSTEE Fund Complex
EDWARD C. GONZALES, $0 $0 for the Fund
PRESIDENT AND Complex
TRUSTEE
PETER E. MADDEN, $1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, JR., $1008.23 $3145.78 for the

J.D., S.J.D., Fund Complex
TRUSTEE
WESLEY W. POSVAR, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $1008.23 $3145.78 for the
TRUSTEE Fund Complex

MANAGEMENT SERVICES

MANAGER TO THE TRUST

gross negligence, or reckless disregard of the duties imposed upon it by
its contract with the Trust.

MANAGEMENT FEES

For its services, VCM receives an annual management fee as
described in the prospectus. For the fiscal year ended April 30, 1994 the
FUND's investment management fee paid to the prior manager was $4,285,213
less voluntary expense reimbursement of $1,252,529. For the fiscal year
ended April 30, 1995, the FUND's investment management fee paid to the
prior manager was $2,723,672, less voluntary expense reimbursement of
$43,422. For the fiscal year ended April 30, 1996, the FUND's investment
management fee paid to the prior manager was $377,138, less voluntary
expense reimbursement of $0, and the FUND's investment management fee paid
to VCM was $1,417,999, less voluntary expense reimbursement of $0.

THE SUB-ADVISORY AGREEMENT

OFFITBANK furnishes investment advisory services to the FUND
pursuant to a Sub-Advisory Agreement between VCM and OFFITBANK. Pursuant
to the Sub-Advisory Agreement, OFFITBANK supervises the investment and
reinvestment of the cash, securities or other properties comprising the
FUND's portfolio, subject at all times to the direction of VCM and the
policies and control of the Trust's Board of Trustees. OFFITBANK gives the
FUND the benefit of its best judgment, efforts and facilities in rendering
its services as Sub-Adviser.

In carrying out its obligations, OFFITBANK:

(a) uses the same skill and care in providing such service
as it uses in providing services to fiduciary accounts for which it has
investment responsibilities; (b) obtains and evaluates pertinent
information about significant developments and economics, statistical and
financial data, domestic, foreign or otherwise, whether affecting the
economy generally or the FUND's portfolio and whether concerning the
individual issuers whose securities are included in the FUND's portfolio or
the activities in which the issuers engage, or with respect to securities
which it considers desirable for inclusion in the FUND's portfolio;
(c) determines which issuers and securities shall be represented in the
FUND's portfolio and regularly reports thereon to the Trust's Board of
Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give
instructions to the custodian and/or sub-custodian of the FUND appointed by
the Trust's Board of Trustees, as to deliveries of securities, transfers of
currencies and payments of cash for the account of the FUND, in relation to
the matters contemplated by this Agreement; and (f) takes, on behalf of the
FUND, all actions which appear to the Trust and VCM necessary to carry into
effect such purchase and sale programs and supervisory functions as
aforesaid, including the placing of orders for the purchase and sale of
securities for the FUND and the prompt reporting to VCM of such purchases
and sales.

will take the following into consideration: the best net price available,
the reliability, integrity and financial condition of the broker-dealer;
the size of and difficulty in executing the order; and the value of the
expected contribution of the broker-dealer to the investment performance of
the FUND on a continuing basis. Accordingly, the price to the FUND in any
transaction may be less favorable than that available from another broker-
dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies as the
Board of Trustees may determine, OFFITBANK shall not be deemed to have
acted unlawfully or to have breached any duty created under the Sub-
Advisory Agreement or otherwise solely by reason of its having caused the
FUND to pay a broker or dealer for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction, if OFFITBANK determines
in good faith that such amount of commission was reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its
other clients as to which it exercises investment discretion. Subject to
such policies as the Board of Trustees may determine, OFFITBANK will
purchase and sell foreign currency and futures contracts and other
securities for the FUND. OFFITBANK is further authorized to allocate the
orders placed by it on behalf of the FUND to any affiliated broker-dealer
of the FUND or to such brokers and dealers who also provide research or
statistical material, or other services to the FUND, VCM or OFFITBANK.
Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the
Board of Trustees of the Trust indicating the brokers to whom such
allocations have been made and the basis therefor.

Any investment program undertaken by OFFITBANK pursuant to the
Sub-Advisory Agreement, as well as any other activities undertaken by
OFFITBANK on behalf of the FUND pursuant thereto, is at all times subject
to any directives of the Board of Trustees of the Trust. VCM provides
OFFITBANK with written notice of all such directives, so long as the Sub-
Advisory Agreement remains in effect.

Pursuant to the Sub-Advisory Agreement, OFFITBANK maintains, at
its expense and without cost to VCM or the FUND, a trading function in
order to carry out its obligations to place orders for the purchase and
sale of portfolio securities for the FUND.

Pursuant to the Sub-Advisory Agreement, upon request of VCM and
with the approval of the Trust's Board of Trustees, OFFITBANK may perform
services on behalf of the FUND which are not required by the Sub-Advisory
Agreement. Such services will be performed on behalf of the FUND and
OFFITBANK's cost in rendering such services may be billed monthly to VCM,
subject to examination by VCM's independent accountants. Payment or
assumption by OFFITBANK of any FUND expense that OFFITBANK is not required
to pay or assume under the Sub-Advisory Agreement shall not relieve VCM or
OFFITBANK of any of their obligations to the FUND or obligate OFFITBANK to
pay or assume any similar FUND expense on any subsequent occasions.

Sub-Advisory Agreement is calculated and accrued daily and the amounts of
the daily accruals are paid monthly. The fee paid to OFFITBANK by the
prior manager for the fiscal year ended April 30, 1995 was $763,516, for
the fiscal year ended April 30, 1994 was $1,100,253 and $124,403 for the
period November 2, 1992 to April 30, 1993. The compensation paid to
OFFITBANK will not be reduced by the amount of brokerage commissions
received by OFFITBANK or its affiliated broker-dealer pursuant to Section
17(e)(2) of the 1940 Act.

Pursuant to the Sub-Advisory Agreement, OFFITBANK agrees that it
will not render advisory or sub-advisory services to any other similar
publicly offered no-load or low-load open-end investment company registered
with the SEC while the Sub-Advisory Agreement is in effect.

The Sub-Advisory Agreement was approved by the then Trustees on
March 24, 1995. The Sub-Advisory Agreement will remain in force and effect
for an initial term of two years, and shall remain in effect thereafter
from year to year, provided that such continuance is specifically approved
at least annually: (a) (i) by the Trust's Board of Trustees or (ii) by the
vote of a majority of the FUND's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and (b) by the affirmative vote of a
majority of the Trustees who are not parties to the Sub-Advisory Agreement
or interested persons of a party to the Sub-Advisory Agreement (other than
as a Trustee of the Trust), by votes cast in person at a meeting
specifically called for such purpose.

in Section 2(a) (42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60)
days' written notice to the other party. The Sub-Advisory Agreement
automatically terminates: (a) in the event of its assignment, the term
"assignment" having the meaning defined in Section 2(a)(4) of the 1940 Act,
or (b) in the event that the Investment Advisory Contract between the FUND
and VCM shall terminate.

CUSTODIAN

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of
Federated Investors, provides administrative personnel and services to the
Fund for the fees set forth in the prospectus.

PURCHASING SHARES

Shares of the Fund are sold at their net asset value without a
sales charge on days the New York Stock Exchange is open for business. The

procedure for purchasing Shares of the Fund is explained in the prospectus
under "Investing in Shares."

DISTRIBUTION PLAN

The Trust has adopted a Plan for Shares of the Fund pursuant to
Rule 12b-1 which was promulgated by the Securities and Exchange Commission
pursuant to the Investment Company Act of 1940. The Plan provides that the
Fund's Distributor shall act as the Distributor of shares, and it permits
the payment of fees to brokers and dealers for distribution and
administrative services and to administrators for administrative services.
The Plan is designed to (i) stimulate brokers and dealers to provide
distribution and administrative support services to the Fund and its
shareholders and (ii) stimulate administrators to render administrative
support services to the Fund and its shareholders. These services are to
be provided by a representative who has knowledge of the shareholders'
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments
of client account cash balances; answering routine client inquiries
regarding the Fund; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Trust
reasonably requests. For the fiscal year ended April 30, 1996, the Fund
accrued payments under the Plan amounting to $598,379.

Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and

effective administrative system; (2) a more efficient use of assets of
shareholders by having them rapidly invested in the Fund with a minimum of
delay and administrative detail; and (3) an efficient and reliable records
system for shareholders and prompt responses to shareholder requests and
inquiries concerning their accounts.

DESCRIPTION OF THE FUND

Shareholder and Trustee Liability. The FUND is a series of an
entity of the type commonly known as a "Massachusetts business trust."
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the Trust.
The FUND's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations for the FUND and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the FUND or the Trustees. The
Declaration of Trust provides for indemnification out of the FUND property
of any shareholder held personally liable for the obligations of the FUND.

entitled to receive distributions as a class of the assets belonging to the
FUND. The assets of the FUND received for the issue or sale of the shares
of the FUND and all income earnings and the proceeds thereof, subject only
to the rights of creditors, are specially allocated to the FUND, and
constitute the underlying assets of the FUND.

SHAREHOLDER REPORTS

STATEMENT OF ADDITIONAL INFORMATION

BLANCHARD SHORT-TERM FLEXIBLE INCOME FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction
with the current prospectus dated August 31, 1996 (the "Prospectus"),
pursuant to which the Blanchard Short-Term Flexible Income Fund (the
"FUND") is offered. Please retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

General Information and History 2
Investment Objective and Policies 2
Securities in Which the FUND May Invest 2
Investment Restrictions 15
Portfolio Transactions 16
Computation of Net Asset Value 17
Performance Information 18
Additional Purchase and Redemption Information 20
Tax Matters 20
Blanchard Funds Management 25
Management Services 29
The Sub-Advisory Agreement 30
Custodian 31
Administrative Services 31
Distribution Plan 31
Description of the FUND 32
Shareholder Reports 33

Manager
Virtus Capital Management, Inc.

Sub-Adviser
OFFITBANK

Distributor
Federated Services Corp.

Custodian
Signet Trust Company

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1996

GENERAL INFORMATION AND HISTORY

investing primarily in a broad range of short-term debt securities. There
is no assurance that the FUND will achieve its investment objective. This
objective is a fundamental policy and may not be changed except by a
majority vote of shareholders.

INVESTMENT OBJECTIVE AND POLICIES

The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled
"Investment Objective and Policies," "Certain Portfolio Securities" and
"Certain Investment Strategies and Policies."

Under normal market conditions, the FUND will invest at least 80%
of its assets in a broad range of U.S. debt securities of all types. The
FUND may invest up to 20% of the value of its assets in securities of
foreign issuers denominated in foreign currency and not publicly traded in
the United States.

At least 65% of the value of the FUND's assets will be invested
in investment-grade debt securities, which are considered to be those rated
at least Baa by Moody's Investors Service, Inc. ("Moody's") or at least BBB
by Standard & Poor's Corporation ("Standard & Poor's") or, if unrated,
deemed to be of comparable quality by OFFITBANK. The FUND may invest up to
35% of its assets in lower-quality debt securities if OFFITBANK deems that
such securities present attractive investment opportunities. The FUND will
not invest in debt securities rated lower than Caa by Moody's and CCC by
Standard & Poor's, or, if unrated, are of comparable quality in OFFITBANK's
opinion. Debt securities rated Baa by Moody's and BBB by Standard & Poor's

are considered investment grade obligations which lack outstanding
investment characteristics and may have speculative characteristics as
well. Debt securities rated Caa by Moody's and CCC by Standard & Poor's
are considered to have predominantly speculative characteristics with
respect to capacity to pay interest and repay principal and to be of poor
standing. See "Risk Factors -- Lower Quality Securities" and Appendix A in
the FUND's Prospectus.

Normally, the dollar-weighted average maturity of the FUND's
portfolio will be less than three years, but will never exceed five years.
However, the FUND may invest in individual securities with terms to
maturity of greater than five years if the FUND's portfolio contains
sufficient short-term securities so that the weighted average maturity
complies with the above-stated policy. As the useful life of individual
pools of assets underlying certain obligations in which the Fund may invest
may at times be of a shorter duration than the stated maturity of the
obligation itself, the Fund may consider the useful life of such underlying
assets as the maturity of the obligation owned by the Fund. Although it is
intended that the average maturity of the FUND's portfolio will be three
years or less, the FUND retains the flexibility to increase the average
maturity up to five years if OFFITBANK considers it appropriate or
advantageous to investors. Accordingly, the FUND's average maturity may
vary, based on OFFITBANK's analysis of interest rate trends and other data.
In general, the FUND's average maturity will tend to be shorter when
OFFITBANK expects interest rates to rise and longer when it expects
interest rates to decline.

Under normal market conditions, the FUND does not expect to have
a substantial portion of its assets invested in money market instruments.

However, when OFFITBANK determines that adverse market conditions exist,
the FUND may adopt a temporary defensive posture and invest its entire
portfolio in money market instruments. To the extent the FUND is so
invested, the FUND's investment objective may not be achieved.

SECURITIES IN WHICH THE FUND MAY INVEST

The FUND's portfolio may include, in any proportion, bonds,
notes, mortgage securities, asset-backed securities, government and
government agency obligations, zero coupon securities and convertible
securities, and short-term obligations such as bankers' acceptances,
certificates of deposit, repurchase agreements and commercial paper.

The FUND may invest in U.S. government securities and in options,
futures contracts and repurchase transactions with respect to such
securities. Certain of these obligations including U.S. Treasury bills,
notes and bonds, mortgage participation certificates guaranteed by the
Government National Mortgage Association ("GNMA"), and Federal Housing
Administration debentures, are supported by the full faith and credit of
the United States. Other U.S. government securities issued or guaranteed
by Federal agencies or government sponsored enterprises are not supported
by the full faith and credit of the United States. These securities
include obligations supported by the right of the issuer to borrow from the
U.S. Treasury, such as obligations of Federal Home Loan Banks, and
obligations supported only by the credit of the instrumentality, such as
Federal National Mortgage Association Bonds. When purchasing securities in
the U.S. government market, OFFITBANK may take full advantage of the entire
range of maturities of U.S. government securities and may adjust the
average maturity of the investments held in the portfolio from time to

time, depending on its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest
rates. To the extent that the FUND invests in the mortgage market,
OFFITBANK usually will evaluate, among other things, relevant economic,
environmental and security-specific variables such as housing starts,
coupon and age trends. To determine relative value among markets OFFITBANK
may use tools such as yield/duration curves, break-even prepayment rate
analysis and holding-period-return scenario testing.

The FUND may seek to increase its current income by writing
covered call or put options with respect to some or all of the U.S.
government securities held in its portfolio. In addition, the FUND may at
times, through the writing and purchase of options on U.S. government
securities, and the purchase and sale of futures contracts and related
options with respect to U.S. government securities, seek to reduce
fluctuations in net asset value by hedging against a decline in the value
of U.S. government securities owned by the FUND or an increase in the price
of such securities which the FUND plans to purchase, although it is not the
general practice to do so. Significant option writing opportunities
generally exist only with respect to longer term U.S. government
securities. Options on U.S. government securities and futures and related
options are not considered U.S. government securities; accordingly, they
have a different set of risks and features. These practices and related
risks are described below.

U.S. government securities are considered among the most
creditworthy of fixed-income investments. Because of this added safety,
the yields available from U.S. government securities are generally lower
than the yields available from corporate debt securities. The values of

U.S. government securities (like those of fixed-income securities
generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of outstanding long term U.S.
government securities generally rise. Conversely, during periods of rising
interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities
with longer maturities and the FUND expects that its portfolio of U.S.
government securities will be weighted towards the longer maturities at
least to the extent that it has written call options thereon. Although
changes in the value of U.S. government securities will not affect
investment income from those securities, they will affect the FUND's net
asset value.

The FUND may invest up to 35% of its assets in higher- yielding
(and, therefore, higher risk), lower rated bonds and other debt securities
and securities with debt-like characteristics, including U.S. corporate
fixed-income securities, convertible securities and preferred stocks and
unrated corporate fixed-income securities. Lower quality debt securities,
commonly referred to as "junk bonds," are considered speculative and
involve greater risk of default or price changes due to changes in the
issuer's creditworthiness than higher quality debt securities. See "Risk
Factors-Lower Quality Debt Securities" below for a discussion of certain
risks.

price) established on issue. Adjustable rate preferred stocks are
preferred stocks which adjust their dividend rates quarterly based on
specified relationships to certain indexes of U.S. Treasury Securities.
The FUND may continue to hold securities obtained as a result of the
conversion of convertible securities held by the FUND when OFFITBANK
believes retaining such securities is consistent with the FUND's investment
objective.

Differing yields on fixed-income securities of the same maturity
are a function of several factors, including the relative financial
strength of the issuers. Higher yields are generally available from
securities in the lower categories of recognized rating agencies, i.e., Ba
or lower by Moody's or BB or lower by Standard & Poor's. The FUND may
invest in any security which is rated by Moody's or by Standard & Poor's,
or in any unrated security which OFFITBANK determines is of suitable
quality. Securities in the rating categories below Baa as determined by
Moody's and BBB as determined by Standard & Poor's are considered to be of
poor standing and predominantly speculative. The rating services
descriptions of these rating categories, including the speculative
characteristics of the lower categories, are set forth in Appendix A in the
FUND's Prospectus.

analysis and will not rely principally on the ratings assigned by the
rating services. OFFITBANK's analysis generally may include, among other
things, consideration of the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity
schedules, and its responsiveness to changes in business conditions and
interest rates. It also considers relative values based on anticipated
cash flow, interest or dividend coverage, asset coverage and earnings
prospects.

The FUND may invest up to 20% of its assets in international
securities consisting of debt obligations and other fixed-income
securities, in each case denominated in non-U.S. currencies or composite
currencies, including: debt obligations issued or guaranteed by foreign
national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities; debt obligations of
supranational entities (described below); debt obligations of the U.S.
Government issued in non-dollar securities; and debt obligations and other
fixed-income securities of foreign and U.S. corporate issuers (non-dollar
denominated).

When investing in international securities, the FUND is not
limited to purchasing debt securities rated at the time of purchase by
Moody's or Standard & Poor's. However, the FUND is limited to the extent
that it may not invest more than 35% of its assets in lower quality debt
securities. In making international securities investments, OFFITBANK may
consider, among other things, the relative growth and inflation rates of
different countries. OFFITBANK may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities

denominated in foreign currencies. OFFITBANK may further evaluate, among
other things, foreign yield curves and regulatory and political factors,
including the fiscal and monetary policies of such countries.

The FUND may invest in any country where OFFITBANK sees potential
for high income. It presently expects to invest primarily in non-dollar
denominated securities of issuers in the industrialized Western European
countries; in Canada, Japan, Australia and New Zealand; and in Latin
America. The FUND may invest up to 10% of its assets in the debt
securities of issuers in emerging market countries.

The FUND may invest, without limitation, in unrated debt
securities issued by foreign governments, their agencies and
instrumentalities, where the foreign government, its agency or
instrumentality is rated less than Baa by Moody's or less than BBB by
Standard & Poor's, provided, however, that OFFITBANK has determined through
its own credit analysis that the credit characteristics of any such unrated
security are equivalent to those of a security rated at least Baa by
Moody's or BBB by Standard & Poor's. To the extent that OFFITBANK has not
made any such determination, such unrated debt securities will be deemed to
have the rating assigned by Moody's or Standard & Poor's to the
governmental entity. To the extent that such securities are deemed to be
rated less than Baa by Moody's or less than BBB by Standard & Poor's,
investment in such securities will be subject to the overall 35% limitation
on investment in lower quality debt securities.

The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support.
Obligations of foreign governmental entities include obligations issued or

guaranteed by national, provincial, state or other governments with taxing
power or by their agencies. These obligations may or may not be supported
by the full faith and credit of a foreign government.

Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and
related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Steel and
Coal Community, the Asian Development Bank and the Inter-American
Development Bank. The governmental agencies, or "stockholders," usually
make initial capital contributions to the supranational entity and in many
cases are committed to making additional capital contributions if the
supranational entity is unable to repay its borrowings. Each supranational
entity's lending activities are limited to a percentage of its total
capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. The FUND does not have a policy
of concentrating investments in supranational entities.

RISK FACTORS

LOWER QUALITY DEBT SECURITIES. The lower quality debt securities
that may comprise up to 35% of the FUND's investments generally produce a
higher current yield than do debt securities of higher quality. However,
these debt securities are considered speculative because they involve
greater price volatility and risk than do higher quality debt securities
and yields on these debt securities will tend to fluctuate over time.
Although the market value of all debt securities varies as a result of
changes in prevailing interest rates (e.g., when interest rates rise, the

market value of debt securities can be expected to decline), values of
lower quality debt securities tend to react differently than the values of
higher quality debt securities. The prices of lower quality debt
securities are less sensitive to changes in interest rates than higher
quality debt securities. Conversely, lower quality debt securities also
involve a greater risk of default by the issuer in the payment of principal
and income and are more sensitive to economic downturns and recessions than
higher quality debt securities. The financial stress resulting from an
economic downturn could have a greater negative effect on the ability of
issuers of lower quality debt securities to service their principal and
interest payments, to meet projected business goals and to obtain
additional financing than on more creditworthy issuers. In the event of an
issuer's default in payment of principal or interest on such securities, or
any other debt securities in the FUND's portfolio, the net asset value of
the FUND will be negatively affected. Moreover, as the market for lower
quality debt securities is a relatively new one, a severe economic downturn
might increase the number of defaults, thereby adversely affecting the
value of all outstanding lower quality debt securities and disrupting the
market for such securities. Debt securities purchased by the FUND as part
of an initial underwriting present an additional risk due to their lack of
market history. These risks are exacerbated with respect to debt
securities rated Caa by Moody's or CCC by Standard & Poor's. Unrated debt
securities generally carry the same risks as do lower rated debt
securities.

the extent that no established retail secondary market exists, many lower
quality debt securities may not be as liquid as Treasury and investment
grade bonds. The ability of the FUND to sell lower quality debt securities
will be adversely affected to the extent that such securities are thinly
traded or illiquid. Moreover, the ability of the FUND to value lower
quality debt securities becomes more difficult, and judgment plays a
greater role in valuation, as there is less reliable, objective data
available with respect to such securities that are thinly traded or
illiquid. Unrated debt securities are not necessarily of lower quality
than rated debt securities, but they may not be attractive to as many
buyers.

Because investors may perceive that there are greater risks
associated with the lower quality debt securities of the type in which the
FUND may invest, the yields and prices of such securities may tend to
fluctuate more than those for lower quality debt securities. Changes in
perception of issuers' creditworthiness tend to occur more frequently and
in a more pronounced manner in the lower quality segments of the debt
securities market than do changes in higher quality segments of the debt
securities market, resulting in greater yield and price volatility. The
speculative characteristics of lower rated debt securities are set forth in
Appendix A in the FUND's Prospectus.

OFFITBANK believes that the risks of investing in such high
yielding, debt securities may be minimized through careful analysis of
prospective issuers. Although the opinion of ratings services such as
Moody's and Standard & Poor's is considered in selecting portfolio
securities, they evaluate the safety of the principal and the interest
payments of the security, not their market value risk. Additionally,

credit rating agencies may experience slight delays in updating ratings to
reflect current events. OFFITBANK relies, primarily, on its own credit
analysis (see above). This may suggest, however, that the achievement of
the FUND's investment objective is more dependent on OFFITBANK's
proprietary credit analysis, than is otherwise the case for a fund that
invests exclusively in higher quality debt securities.

Once the rating of a portfolio security or the quality
determination ascribed by OFFITBANK to an unrated debt security has been
downgraded, OFFITBANK will consider all circumstances deemed relevant in
determining whether to continue to hold the security, but in no event will
the FUND retain such securities if it would cause the FUND to have more
than 35% of the value of its assets invested in debt securities rated lower
than Baa by Moody's or BBB or Standard & Poor's, or if unrated, are judged
by OFFITBANK to be of comparable quality.

FOREIGN INVESTMENTS. Foreign investments involve certain risks
that are not present in domestic securities. Because the FUND intends to
purchase securities denominated in foreign currencies, a change in the
value of any such currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the FUND's assets and the
FUND's income available for distribution. In addition, although a portion
of the FUND's investment income may be received or realized in such
currencies, the Internal Revenue Code of 1986 (the "Code") requires that
the FUND compute and distribute its income in U.S. dollars. Therefore, if
the exchange rate for any such currency declines after the FUND's income
has been earned and translated into a U.S. dollar equivalent, but before
payment of the foreign currency denominated gain, the FUND could be
required to liquidate portfolio securities to make such distributions.

Similarly, if an exchange rate depreciates between the time the FUND incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay
such expenses in U.S. dollars will be greater than the equivalent amount in
any such currency of such expenses at the time they were incurred. Under
the Code, changes in an exchange rate which occur between the time the FUND
accrues interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time the FUND
actually collects such receivables or pays such liabilities will result in
foreign exchange gains or losses that increase or decrease distributable
net investment income. Similarly, dispositions of certain debt securities
(by sale, at maturity or otherwise) at a U.S. dollar amount which is higher
or lower than the FUND's original U.S. dollar cost may result in foreign
exchange gains or losses, which will increase or decrease distributable net
investment income.

The values of foreign investments and the investment income
derived from them may also be affected unfavorably by changes in currency
exchange control regulations. Although the FUND will invest only in
securities denominated in foreign currencies that are fully exchangeable
into U.S. dollars without legal restriction at the time of investment,
there is no assurance that currency controls will not be imposed
subsequently. In addition, the values of foreign fixed-income investments
will fluctuate in response to changes in U.S. and foreign interest rates.

foreign issuers are less liquid and at times more volatile than securities
of comparable U.S. issuers. Foreign brokerage commissions, custodial
expenses and other fees are also generally higher than for securities
traded in the United States.

In addition, with respect to certain foreign countries, there is
a possibility of expropriation of assets, confiscatory taxation, political
or financial instability and diplomatic developments which could adversely
affect the value of investments in those countries. OFFITBANK does not
expect to invest the FUND's assets in countries where it believes such
events are likely to occur.

Income received by the FUND from sources within foreign countries
may be reduced by withholding and other taxes imposed by such countries.
Tax conventions between certain countries and the United States may reduce
or eliminate such taxes. OFFITBANK will attempt to minimize such taxes by
timing of transactions and other strategies, but there is no assurance that
such efforts will be successful. Any such taxes paid by the FUND will
reduce its net income available for distribution to shareholders.

Investors should recognize that investing in debt obligations and
other fixed-income securities of issuers in emerging countries involves
certain special considerations and risk factors, including those set forth
below, which are not typically associated with investing in debt
obligations and other fixed-income securities of U.S. issuers.

Trading volume in emerging country securities markets is
substantially less than that in the United States. Further, securities of
some emerging country issuers are less liquid and more volatile than

securities of comparable U.S. issuers. Commissions for trading on emerging
country stock exchanges are generally higher than commissions for trading
on U.S. exchanges, although the FUND will endeavor to achieve the most
favorable net results on its portfolio transactions and may, in certain
instances, be able to purchase its portfolio investments on other stock
exchanges where commissions are negotiable.

Issuers in emerging countries are not generally subject to
uniform accounting, auditing and financial reporting standards, practices
and disclosure requirements comparable to those applicable to U.S. issuers.
Consequently, there may be less publicly available information about an
emerging country issuer than about a U.S. issuer. Further, there is
generally less government supervision and regulation of foreign stock
exchanges, brokers and listed issuers than in the United States.

The FUND may invest in unlisted emerging country debt obligations
and other fixed-income securities, including investments in new and early
stage issuers, which may involve a high degree of business and financial
risk that can result in substantial losses. Because of the absence of any
trading market for these investments, the FUND may take longer to liquidate
these positions than would be the case for publicly traded securities.
Although these securities may be resold in privately negotiated
transactions, the prices realized on these sales could be less than those
originally paid by the FUND. Further, issuers whose securities are not
publicly traded may not be subject to public disclosure and other investor
protection requirements applicable to publicly traded securities.
The economies of individual emerging countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation,

capital reinvestment, resource self-sufficiency and balance of payments
position. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been and
may continue to be adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist
measures imposed or negotiated by the countries with which they trade.
These economies also have been and may continue to be adversely affected by
economic conditions in the countries with which they trade.

With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such
countries or the value of the FUND's investments in those countries. In
addition, it may be difficult to obtain and enforce a judgment in a court
outside of the United States.

MORTGAGE-RELATED SECURITIES. The FUND may invest in mortgage-
related securities. The mortgage pass-through market is marked by high
liquidity and credit quality. The primary risk that exists for mortgage
pass-through securities is interest rate risk. Changes in market yields
will affect the value of these securities as the price of fixed-income
securities generally increases when interest rates decline and decreases
when interest rates rise. Prices of longer term securities generally
increase or decrease more sharply than those of shorter term securities in
response to interest rate changes. In addition, prepayment of principal on
mortgage pass-through securities may make it difficult to lock in interest
rates for a fixed period of time. To the extent that mortgage securities
are purchased at prices that differ from par, these prepayments (which are

received at par) may make up a significant portion of the pass-through
total return. Generally, mortgage securities yield more than Treasury
securities of the same average life.

ASSET-BACKED SECURITIES. The FUND may invest in asset-backed
securities. In general, asset-backed securities in which the FUND may
invest are issued as debt securities by special purpose corporations.
These securities represent an undivided ownership interest in a pool of
installment sales contracts and installment loans collateralized by, among
other things, credit card receivables and automobiles. The FUND will
invest in, to the extent available, (i) loan pass-through certificates or
participations representing an undivided ownership interest in pools of
installment sales contracts and installment loans (the "Participations")
and (ii) debt obligations issued by special purpose corporations which hold
subordinated equity interests in such installment sales contracts and
installment loans. The FUND anticipates that a substantial portion of the
asset backed securities in which it invests will consist of the debt
obligations of such special purpose corporations.

an asset-backed security at a discount, similar to conventional mortgage-
backed securities, a prepayment rate that is faster than expected will
increase yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of reducing yield to maturity.
Conversely, if the FUND purchases an asset-backed security at a premium,
faster than expected prepayments will reduce, while slower than expected
prepayments will increase, yield to maturity. Prepayments may result from
a number of factors, including trade-ins and liquidations due to default,
as well as the receipt of proceeds from physical damage, credit, life and
disability insurance policies. The rate of prepayments on asset-backed
securities may also be influenced by a variety of economic and social
factors, including general measures of consumer confidence; accordingly,
from time to time, substantial amounts of prepayments may be available for
reinvestment by the FUND and will be subject to the prevailing interest
rates at the time of prepayment.

Asset-backed securities often contain elements of credit support
to lessen the effect of the potential failure by obligors to make timely
payments on underlying assets. Credit support falls into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying asset. Liquidity
protection ensures that the pass through of payments due on the installment
sales contracts and installment loans which comprise the underlying pool
occurs in a timely fashion. Protection against losses resulting from
ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such
protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties;
through various means of structuring the transaction, or through a

combination of such approaches. The FUND will not pay any additional fees
for such credit support. However, the existence of credit support may
increase the market price of the security.

DESCRIPTION OF CERTAIN MORTGAGE-RELATED SECURITIES

GNMA CERTIFICATES

Government National Mortgage Association. The Government
National Mortgage Association is a wholly-owned corporate instrumentality
of the United States within the U.S. Department of Housing and Urban
Development. GNMA's principal programs involve its guarantees of privately
issued securities backed by pools of mortgages.

Nature of GNMA Certificates. GNMA Certificates are mortgage-
backed securities. The Certificates evidence part ownership of a pool of
mortgage loans. The Certificates which the FUND purchases are of the
modified pass-through type. Modified pass-through Certificates entitle the
holder to receive all interest and principal payments owed on the mortgage
pool, net of fees paid to the GNMA Certificate issuer and GNMA, regardless
of whether or not the mortgagor actually makes the payment.

GNMA Guarantee. The National Housing Act authorizes GNMA to
guarantee the timely payment of principal of and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
("FHA") or the Farmers Home Administration or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and
credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments
required under its guarantee.

Life of GNMA Certificates. The average life of a GNMA
Certificate is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities. Prepayments of principal
by mortgagors and mortgage foreclosures will result in the return of a
portion of principal invested before the maturity of the mortgages in the
pool.

As prepayment rates of individual mortgage pools will vary
widely, it is not possible to predict accurately the average life of a
particular issue of GNMA Certificates. However, statistics published by
the FHA are normally used as an indicator of the expected average life of
GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately
twelve years. For this reason, it is customary for pricing purposes to
consider GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of
interest of GNMA Certificates is lower than the interest rate paid on the
VA-guaranteed or FHA-insured mortgages underlying the Certificates, but

only by the amount of the fees paid to GNMA and the GNMA Certificate
issuer. For the most common type of mortgage pool, containing single-
family dwelling mortgages, GNMA receives an annual fee of 0.06 of one
percent of the outstanding principal for providing its guarantee, and the
GNMA Certificate issuer is paid an annual servicing fee of 0.44 of one
percent for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.

The coupon rate by itself, however, does not indicate the yield
which will be earned on the Certificates for the following reasons:

1. Certificates are usually issued at a premium or discount,
rather than at par.

2. After issuance, Certificates usually trade in the secondary
market at a premium or discount.

3. Interest is paid monthly rather than semi-annually as is the
case for traditional bonds. Monthly compounding has the
effect of raising the effective yield earned on GNMA
Certificates.

4. The actual yield of each GNMA Certificate is influenced by
the prepayment experience of the mortgage pool underlying
the Certificate. If mortgagors prepay their mortgages, the
principal returned to Certificate holders may be reinvested
at higher or lower rates.

In quoting yields for GNMA Certificates, the customary practice
is to assume that the Certificates will have a twelve-year life. Compared
on this basis, GNMA Certificates have historically yielded roughly 1/4 of
one percent more than high grade corporate bonds and 1/2 of one percent
more than U.S. Government and U.S. Government agency bonds. As the life of
individual pools may vary widely, however, the actual yield earned on any
issue of GNMA Certificates may differ significantly from the yield
estimated on the assumption of a twelve-year life.

FNMA SECURITIES

The Federal National Mortgage Association ("FNMA") was
established in 1938 to create a secondary market in mortgages insured by
the FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each
FNMA Certificate represents a pro rata share of all principal and interest
payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates. The FNMA guarantee
is not backed by the full faith and credit of the United States.

FHLMC SECURITIES

The Federal Home Loan Mortgage Corporation ("FHLMC") was created
in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"): mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owned on the underlying pool.
The FHLMC guarantees timely monthly payment of interest on PCs and the
ultimate payment of principal. GMCs also represent a pro rata interest in
a pool of mortgages. However, these instruments pay interest semiannually
and return principal once a year in guaranteed minimum payments. The
expected average life of these securities is approximately ten years. The
FHLMC guarantee is not backed by the full faith and credit of the United
States.

FUTURES CONTRACTS

performance of the contracts as between the clearing members of the
exchange. The FUND will enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as Treasury Notes, Government National Mortgage
Association modified pass-through mortgage-backed securities and three-
month U.S. Treasury Bills. The FUND may also enter into futures contracts
which are based on non-U.S. Government bonds.

No consideration is paid or received by the FUND upon entering
into a futures contract. Upon entering into a futures contract, the FUND

will be required to deposit in a segregated account with its custodian an
amount of cash or cash equivalents, such as U.S. Government Securities or
high grade debt obligations, equal to approximately 5% of the contract
amount (this amount is subject to change by the exchange on which the
contract is traded and brokers may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance bond or
good faith deposit on the contract which is returned to the FUND upon
termination of the futures contract, assuming all contractual obligations
have been satisfied. The broker will have access to amounts in the margin
account if the FUND fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures
contract fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as "marking-to-market." At
any time prior to the expiration of a futures contract, the FUND may elect
to close the position by taking an opposite position, which will operate to
terminate the FUND's existing position in the contract.

Although the FUND intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active
market will exist for the contracts at any particular time. Most futures
exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached
in a particular contract, no trades may be made that day at a price beyond
that limit. It is possible that futures contract prices could move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting
the FUND to substantial losses. In such event, and in the event of adverse
price movements, the FUND would be required to make daily cash payments of
variation margin.

OPTIONS ON FUTURES CONTRACTS

and Eurodollars. Options on foreign currency futures currently available
include those with respect to British Pounds, Swiss Francs, Japanese Yen,
Canadian Dollars and Australian Dollars. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by which
the market price of the futures contracts exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option on
the futures contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid for the option
(plus transaction costs). Because the value of the option is fixed at the
point of sale, there are no daily cash payments to reflect changes in the
value of the underlying contract; however, the value of the option does
change daily and that change would be reflected in the net asset value of
the FUND.

OPTIONS ON FOREIGN CURRENCIES

currency held in its portfolio. A call option is also covered if the FUND
has a call on the same foreign currency and in the same principal amount as
the call written where the exercise price of the call held (a) is equal to
or less than the exercise price or the call written or (b) is greater than
the exercise price of the call written if the difference is maintained by
the FUND in cash, U.S. Government Securities and other high grade liquid
debt securities in a segregated account with its Custodian or with a
designated sub-custodian. As a writer of a covered put option, the FUND
incurs an obligation to buy the security underlying the option from the
purchaser of the put, at the option's exercise price at any time during the
option period, at the purchaser's election (certain listed and over-the-
counter put options written by the FUND will be exercisable by the
purchaser only on a specific date). A put is "covered" if, at all times,
the FUND maintains, in a segregated account maintained on its behalf at the
FUND's custodian, cash, U.S. Government securities or other high grade
obligations in an amount equal to at least the exercise price of the
option, at all times during the option period. Similarly, a short put
position could be covered by the FUND by its purchase of a put option on
the same security (currency) as the underlying security of the written
option, where the exercise price of the purchased option is equal to or
more than the exercise price of the put written or less than the exercise
price of the put written if the marked to market difference is maintained
by the FUND in cash, U.S. Government securities or other high grade debt
obligations which the FUND holds in a segregated account maintained at its
custodian.

FORWARD CURRENCY CONTRACTS

If a devaluation is generally anticipated, the FUND may not be
able to contract to sell the currency at a price above the devaluation
level it anticipates. The FUND will not enter into a currency transaction
if, as a result, it will fail to qualify as a regulated investment company
under the Code for any given year.

OPTIONS ON PORTFOLIO SECURITIES

underlying security above the exercise price so long as the option remains
open and covered, except insofar as the premium represents such a profit.

The staff of the Securities and Exchange Commission (the "SEC")
has taken the position that purchased over-the-counter options and the
assets used as cover for written over-the-counter options are illiquid
securities. The FUND will write OTC Options only with primary U.S.
Government Securities dealers recognized by the Board of Governors of the
Federal Reserve System or member banks of the Federal Reserve System
("primary dealers"). The FUND may also write, to the extent available,
OTC Options with non-primary dealers, such as foreign dealers; however,
unlike OTC Options written with primary dealers, any OTC Options written
with such non-primary dealers and the assets used as cover for such options
will be treated as illiquid securities. In connection with these special
arrangements, the FUND intends to establish standards for the
creditworthiness of the primary and non-primary dealers with which it may
enter into OTC Option contracts and those standards, as modified from time
to time, will be implemented and monitored by the Manager. Under these
special arrangements, the FUND will enter into contracts with primary and
non-primary dealers which provide that the FUND has the absolute right to
repurchase an option it writes at any time at a repurchase price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula contained in the contract. Although the
specific details of the formula may vary between contracts with different
primary and non-primary dealers, the formula will generally be based on a
multiple of the premium received by the FUND for writing the option, plus
the amount, if any, by which the option is "in-the-money." The formula
will also include a factor to account for the difference between the price

of the security and the strike price of the option if the option is written
"out-of-the-money." Under such circumstances, and with respect to OTC
Options written with primary dealers only, the FUND will treat as illiquid
that amount of the "cover" assets equal to the amount by which the formula
price for the repurchase of the option is greater than the amount by which
the market value of the security subject to the option exceeds the exercise
price of the option (the amount by which the option is "in-the-money").
Although each agreement will provide that the FUND's repurchase price shall
be determined in good faith (and that it shall not exceed the maximum
determined pursuant to the formula) the formula price will not necessarily
reflect the market value of the option written, therefore, the FUND might
pay more to repurchase the OTC Option contract than the FUND would pay to
close out a similar exchange traded option.

RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES

institutions acting as market-makers. Foreign currency options are traded
on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board options Exchange, subject to regulation by
the Commission. In the forward currency market, there are no daily price
fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Moreover, a trader of
forward contracts could lose amounts substantially in excess of its initial
investments, due to the collateral requirements associated with such
positions.

has established banking relationships in applicable foreign countries for
this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the
OCC or its clearing member, impose special procedures on exercise and
settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on
exercise.

REPURCHASE AGREEMENTS

The FUND may enter into repurchase agreements. Under a
repurchase agreement, the FUND acquires a debt instrument for a relatively
short period (usually not more than one week) subject to the obligation of
the seller to repurchase and the FUND to resell such debt instrument at a
fixed price. The resale price is in excess of the purchase price in that
it reflects an agreed-upon market interest rate effective for the period of
time during which the FUND's money is invested. The FUND's risk is limited
to the ability of the seller to pay the agreed-upon sum upon the delivery
date. When the FUND enters into a repurchase agreement, it obtains
collateral having a value at least equal to the amount of the purchase
price. Repurchase agreements can be considered loans as defined by the
Investment Company Act of 1940, as amended (the "1940 Act"), collateralized
by the underlying securities. The return on the collateral may be more or
less than that from the repurchase agreement. The securities underlying a
repurchase agreement will be marked to market every business day so that
the value of the collateral is at least equal to the value of the loan,
including the accrued interest earned. In evaluating whether to enter into
a repurchase agreement, OFFITBANK will carefully consider the
creditworthiness of the seller. If the seller defaults and the value of
the collateral securing the repurchase agreement declines, the FUND may
incur a loss.

LENDING OF PORTFOLIO SECURITIES

loan must maintain with the FUND cash or cash equivalent collateral or
provide to the FUND an irrevocable letter of credit equal in value at all
times to at least 100% of the value of the securities loaned. During the
time portfolio securities are on loan, the borrower pays the FUND any
dividends or interest paid on such securities, and the FUND may invest the
cash collateral and earn additional income, or it may receive an agreed-
upon amount of interest income from the borrower who has delivered
equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The
FUND may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the income earned on the
cash to the borrower or placing broker.

ILLIQUID SECURITIES

Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have

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

dispose of the security, the method of soliciting offers and the mechanics
of the transfer).

INVESTMENT RESTRICTIONS

Investment restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority (as defined in the
1940 Act) of the outstanding shares of the FUND. As used in the Prospectus
and the Statement of Additional Information, the term "majority of the
outstanding shares" of the FUND means, respectively, the vote of the lesser
of (i) 67% or more of the shares of the FUND present at a meeting, if the
holders of more than 50% of the outstanding shares of the FUND are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of
the FUND. The following are the FUND's investment restrictions set forth
in their entirety.

2. The FUND will not purchase a security if, as a result: (a)
it would own more than 10% of any class or of the outstanding voting
securities of any single company; (b) more than 5% of its total assets
would be invested in the securities of companies (including predecessors)
that have been in continuous operation for less than 3 years; (c) more than
25% of its total assets would be concentrated in companies within any one
industry (except that this restriction does not apply to U.S. government
securities); or (d) more than 5% of net assets would be invested in
warrants or rights. (Included within that amount, but not to exceed 2% of
the value of the FUND's net assets, may be warrants which are not listed on
the New York or American Stock Exchanges.)

7. The FUND may not buy any securities or other property on
margin (except for such short term credits as are necessary for the
clearance of transactions) or engage in short sales.

8. The FUND may not invest in companies for the purpose of
exercising control or management.

9. The FUND may not underwrite securities issued by others
except to the extent that the FUND may be deemed an underwriter when
purchasing or selling portfolio securities.

12. The FUND may not invest directly in oil, gas, or other
mineral exploration or development programs or leases.

13. The FUND may not issue senior securities.

PORTFOLIO TRANSACTIONS

execution services rendered on a continuing basis and the reasonableness of
any commissions.

In addition to meeting the primary requirements of execution and
price, brokers or dealers may be selected who provide research services, or
statistical material or other services to the FUND or to OFFITBANK for the
FUND's use, which in the opinion of the Trustees, are reasonable and
necessary to the FUND's normal operations. Those services may include
economic studies, industry studies, security analysis or reports, sales
literature and statistical services furnished either directly to the FUND
or to OFFITBANK. Such allocation shall be in such amounts as VCM or
OFFITBANK shall determine and OFFITBANK shall report regularly to VCM who
will in turn report to the Trustees on the allocation of brokerage for such
services.

relevant, or which are traded in the Over-the-Counter market. Any profits
resulting from portfolio transactions earned by the Distributor as a result
of FUND transactions will accrue to the benefit of the shareholders of the
Distributor who are also shareholders of VCM. The Investment Advisory
Contract does not provide for any reduction in the advisory fee as a result
of profits resulting from brokerage commissions effected through the
Distributor. In addition, the Sub-Advisory Agreement between VCM and
OFFITBANK does not provide for any reduction in the advisory fees as a
result of profits resulting from portfolio transactions effected through
OFFITBANK or an affiliated brokerage firm.

It may happen that the same security will be held by other
clients of VCM or of OFFITBANK. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and
amounts will be allocated in accordance with a formula considered by VCM to
be equitable to each, taking into consideration such factors as size of
account, concentration of holdings, investment objectives, tax status, cash
availability, purchase cost, holding period and other pertinent factors
relative to each account. In some cases this system could have a
detrimental effect on the price or volume of the security as far as the
FUND is concerned. In other cases, however, the ability of the FUND to
participate in volume transactions will produce better executions for the
FUND.

For the fiscal years ended April 30, 1996 and 1995, the FUND's
rate of portfolio turnover was approximately 291% and 84%,
respectively.

COMPUTATION OF NET ASSET VALUE

The net asset value of the FUND is determined at 4:00 p.m.
(Eastern Time) on each day that the New York Exchange is open for business
and on such other days as there is sufficient trading in the FUND's
securities to affect materially the net asset value per share of the FUND.
The FUND will be closed on New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

Market or fair values of the FUND's portfolio securities are
determined as follows:

TRADING IN FOREIGN SECURITIES

PERFORMANCE INFORMATION

For purposes of quoting and comparing the performance of the FUND
to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated
both in terms of total return and in terms of yield. The total return
basis combines principal and dividend income changes for the periods shown.
Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.

Under the rules of the Commission, funds advertising performance must
include total return quotes calculated according to the following formula:

P(1 + T)n = ERV

Where P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)

aggregate annualized total rate of return, reflecting the initial
investment and reinvestment of all dividends and distributions for the one
year period ended April 30, 1996 and for the life of the FUND (April 16,
1993 to April 30, 1996) was 7.47% and 5.47%, respectively.

The FUND may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the FUND's performance with
other measures of investment return. For example, in comparing the FUND's
total return with data published by Lipper Analytical Services, Inc. or
similar independent services or financial publications, the FUND calculates
its aggregate total return for the specified periods of time by assuming
the reinvestment of each dividend or other distribution at net asset value
on the reinvestment date. Percentage increases are determined by
subtracting the initial net asset value of the investment from the ending
net asset value and by dividing the remainder by the beginning net asset
value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December 1994, from the
initial value invested. The FUND will, however, disclose the pro rata
share of the account opening fee and will disclose that the performance
data does not reflect such non-recurring charge and that inclusion of such
charge would reduce the performance quoted. Such alternative total return
information will be given no greater prominence in such advertising than
the information prescribed under the Commission's rules.

net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:

YIELD = 2[(a-b+1)6-1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.

d = the maximum offering price per share on the last day of
the period.

earned on all debt obligations and all dividends accrued on all equity
securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated
dividend rate of a security each day that the security is in the FUND's
portfolio. For purposes of "b" above, Rule 12b-1 expenses are included
among the expenses accrued for the period. Any amounts representing sales
charges will not be included among these expenses; however, the FUND will
disclose the pro rata share of the account opening fee. Undeclared earned
income, computed in accordance with generally accepted accounting
principles, may be subtracted from the maximum offering price calculation
required pursuant to "d" above.

For the 30-day period ended April 30, 1996, the FUND's yield was
4.95%.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

to add to their account if they wish to continue as shareholders of the
FUND, however, the FUND does not presently contemplate making such
redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.

TAX MATTERS

The following is only a summary of certain additional tax
considerations generally affecting the FUND and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the FUND or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

The FUND has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). As a regulated investment company, the FUND is not subject
to Federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses, including foreign currency gains and loss) and capital gain net
income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of
its "investment company taxable income" (i.e., net investment income and
the excess of net short-term capital gain over net long-term capital loss)
for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year,
will be considered distributions of income and gains of the taxable year
and can therefore satisfy the Distribution Requirement.

that are offset by realized or unrealized losses on offsetting positions)
from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less
than three months (the "Short-Short Gain Test"). However, foreign currency
gains, including those derived from options, futures and forwards, will not
in any event be characterized as Short-Short Gain if they are directly
related to the regulated investment company's investments in stock or
securities (or options or futures thereon). Because of the Short-Short
Gain Test, the FUND may have to limit the sale of appreciated securities
that it has held for less than three months. However, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss,
since the recognition of a loss before the expiration of the three-month
holding period is disregarded for this purpose. Interest (including
original issue discount) received by the FUND at maturity or upon the
disposition of a security held for less than three months will not be
treated as gross income derived from the sale or other disposition of such
security within the meaning of the Short-Short Gain Test. However, income
attributable to realized market appreciation will be treated as gross
income from the sale or other disposition of securities for this purpose.
At April 30, 1996, the FUND had a net capital loss carryover of $9,659,884,
which is available through April 30, 2003 to offset future capital gains.
The capital loss carryover was acquired on February 12, 1996, from the
merger between the FUND and Blanchard Short-Term Global Income Fund.

market discount which accrued while the FUND held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on
the disposition of a debt obligation denominated in a foreign currency or
an option with respect thereto (but only to the extent attributable to
changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract,
option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to
Code Section 1256, will generally be treated as ordinary income or loss.

Any gain recognized by the FUND on the lapse of, or any gain or
loss recognized by the FUND from a closing transaction with respect to, an

option written by the FUND will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the FUND will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.

Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts, certain foreign currency contracts, and
options on stock indexes and futures contracts) will be subject to special
tax treatment as "Section 1256 contracts." Section 1256 contracts are
treated as if they are sold for their fair market value on the last
business day of the taxable year, even though a taxpayer's obligations
(or rights) under such contract have not terminated (by delivery, exercise,
entering into a closing transaction or otherwise) as of such date. Any
gain or loss recognized as a consequence of the year-end deemed disposition
of Section 1256 contracts is taken into account for the taxable year
together with any other gain or loss that was previously recognized upon
the termination of Section 1256 contracts during that taxable year. Any
capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss
(except for Section 1256 forward foreign currency contracts, which are
subject to Section 988 Rules). The FUND may elect not to have this special
tax treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the FUND that are not Section 1256
contracts. The Internal Revenue Service has held in several private

rulings that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held
for not less than three months if the gains arise as a result of a
constructive sale under Code Section 1256.

Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain
(i.e., the excess of net long-term capital gain over net short-term capital
loss) for any taxable year, to elect (unless it has made a taxable year
election for excise tax purposes as discussed below) to treat all or any
part of any net capital loss, any net long-term capital loss, or any net
foreign currency loss incurred after October 31 as if they had been
incurred in the succeeding year.

In addition to satisfying the requirements described above, the
fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the FUND's taxable year, at least 50% of the value of the FUND'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 the FUND has not invested more than 5% of the value of
the FUND's total assets in securities of such issuer and as to which the
FUND does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its 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 the FUND controls and which are engaged in the
same or similar trades or businesses. Generally, options (call or put)
with respect to a security are treated as issued by the issuer of the

security and not by the issuer of the option. However, with regard to
forward currency contracts, there does not appear to be any formal or
informal authority which identifies the issuer of such instrument.

If for any taxable year the FUND does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will he subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable as ordinary dividends to the extent of the FUND's current and
accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

exclude foreign currency gains and losses incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).

FUND DISTRIBUTIONS

The FUND anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such
distributions will be taxable to shareholders as ordinary income and
treated as dividends for Federal income tax purposes, but they will not
qualify for the 70% dividends-received deduction for corporations.

Investment income that may be received by the FUND from sources
within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the FUND to a reduced rate of, or exemption from,
taxes on such income. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the FUND's assets to be invested
in various countries is not known. If more than 50% of the value of the
FUND's total assets at the close of its taxable year consists of the stock
or securities of foreign corporations (which is not likely), the FUND may
elect to "pass through" to the FUND's shareholders the amount of foreign
taxes paid by the FUND. If the FUND so elects, each shareholder would be
required to include in gross income, even though not actually received, his
pro rata share of the foreign taxes paid by the FUND, but would be treated
as having paid his pro rata share of such foreign taxes and would therefore
be allowed to either deduct such amount in computing taxable income or use
such amount (subject to various Code limitations) as a foreign tax credit
against Federal income tax (but not both). For purposes of the foreign tax
credit limitation rules of the Code, each shareholder would treat as
foreign source income his pro rata share of such foreign taxes plus the
portion of dividends received from the FUND representing income derived
from foreign sources. No deduction for foreign taxes could be claimed by
an individual shareholder who does not itemize deductions. Each
shareholder should consult his own tax adviser regarding the potential
application of foreign tax credits.

shares; any excess will be treated as gain from the sale of his shares, as
discussed below.

Distributions by the FUND will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the FUND (or of another fund).
Shareholders receiving a distribution in the form of additional shares will
be treated as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the reinvestment
date. In addition, if the net asset value at the time a shareholder
purchases shares of the FUND reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be
taxable to the shareholder as dividends in the manner described above,
although such distributions economically constitute a return of capital to
the shareholder.

Ordinarily, shareholders are required to take distributions by
the FUND into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
FUND) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. Federal income tax consequences of distributions
made (or deemed made) during the year.

The FUND will be required in certain cases to withhold and remit
to the U.S. Treasury 31% of ordinary income dividends and capital gain

dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the FUND that
it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."

SALE OR REDEMPTION OF SHARES

A shareholder will recognize gain or loss on the sale or
redemption of shares of the FUND in an amount equal to the difference
between the proceeds of the sale or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of
the FUND within 30 days before or after the sale or redemption. In
general, any gain or loss arising from (or treated as arising from) the
sale or redemption of shares of the FUND will be considered capital gain or
loss and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-
term capital loss to the extent of the amount of capital gain dividends
received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) generally will apply in determining
the holding period of shares. Long-term capital gains of noncorporate
taxpayers are currently taxed at a maximum rate 11.6% lower than the
maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

FOREIGN SHAREHOLDERS

If the income from the FUND is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or
lower treaty rate) upon the gross amount of the dividend. Furthermore,
such a foreign shareholder may be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) on the gross income resulting
from the FUND's election to treat any foreign taxes paid by it as paid by
its shareholders, but may not be allowed a deduction against this gross
income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as
having been paid. Such a foreign shareholder would generally be exempt
from U.S. Federal income tax on gains realized on the sale of shares of the
FUND and capital gain dividends.

If the income from the FUND is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of
shares of the FUND will be subject to U.S. Federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

The tax consequences to a foreign shareholder entitled to claim
the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the FUND, including the applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.

THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA TRUSTEE OF THE FUND; Chairman of the
Board,

BIRTHDATE: FEBRUARY 3, 1934 Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst & Young
LLP; Director, MED 3000 Group, Inc.;
Trustee, University of Pittsburgh;
Director or Trustee of the Funds.
.

WILLIAM J. COPELAND
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA TRUSTEE OF THE FUND; Director and Member
of the

BIRTHDATE: JULY 4, 1918 Executive Committee, Michael Baker,
Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank
Corp. and Director, Ryan Homes, Inc.;
Director or Trustee of the Funds.

JAMES E. DOWD
571 HAYWARD MILL ROAD
CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-law;
Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..

EDWARD L. FLAHERTY, JR.@
TWO GATEWAY CENTER - SUITE 674

PITTSBURGH, PA TRUSTEE OF THE FUND; Attorney of
Counsel, Miller,
BIRTHDATE: JUNE 18, 1924 Ament, Henny & Kochuba; Director, Eat'N
Park Restaurants, Inc.; formerly,
Counsel, Horizon Financial, F.A.,
Western Region; Director or Trustee of
the Funds. .

PETER E. MADDEN
225 FRANKLIN STREET

BOSTON, MA TRUSTEE OF THE FUND; Consultant; Former
State
BIRTHDATE: MARCH 16, 1942 Representative, Commonwealth of
Massachusetts;formerly, President, State
Street Bank and Trust Company and State
Street Boston Corporation; Director or
Trustee of the Funds.

WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING

UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA TRUSTEE OF THE FUND; Professor,
International
BIRTHDATE: SEPTEMBER 14, 1925 Politics; Mangement Consultant; Trustee,
Carnegie Endowment for International
Peace, RAND Corporation, Online Computer
Library Center, Inc., National Defense
University, U.S. Space Foundation and
Czech Managment Center; President
Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the
Funds. .

J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER

Services Company; President and Trustee,
Federated Shareholder Services;
Director, Federated Securities Corp.;
Executive Vice President and Secretary
of the Funds.

* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.

@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.

THE FUNDS

As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:

Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series.

FUND OWNERSHIP

As of August 15, 1996, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.

To the best knowledge of the FUND, as of August 15, 1996, no shareholder
owned 5% or more of the outstanding shares of the FUND.

OFFICERS AND TRUSTEES COMPENSATION

NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM PAID TO TRUSTEES
THE TRUST+ FROM THE FUND AND
FUND COMPLEX*

JOHN F. DONAHUE, $0 $0 for the Fund
CHAIRMAN AND TRUSTEE Complex
THOMAS G. BIGLEY, $1008.23 $2647.78 for the
TRUSTEE Fund Complex
JOHN T. CONROY, JR., $1129.96 $3441.37 for the
TRUSTEE Fund Complex

WILLIAM J. COPELAND, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
JAMES E. DOWD, $1129.96 $3441.37 for the
TRUSTEE Fund Complex
LAWRENCE D. ELLIS, $1008.23 $3145.78 for the
M.D., TRUSTEE Fund Complex
EDWARD L. FLAHERTY, $1129.96 $3441.37 for the
JR., TRUSTEE Fund Complex
EDWARD C. GONZALES, $0 $0 for the Fund
PRESIDENT AND Complex
TRUSTEE
PETER E. MADDEN, $1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, JR., $1008.23 $3145.78 for the
J.D., S.J.D., Fund Complex
TRUSTEE
WESLEY W. POSVAR, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $1008.23 $3145.78 for the
TRUSTEE Fund Complex

MANAGEMENT SERVICES

MANAGER TO THE TRUST

MANAGEMENT FEES

For its services, VCM receives an annual management fee as
described in the prospectus. For the period from April 16, 1993
(commencement of operations) to April 30, 1993 and for the fiscal year
ended April 30, 1994, the FUND's investment management fees paid to the
prior manager were $486 and $192,383, respectively, all of which were
deferred by the prior manager. For the fiscal year ended April 30, 1995,
the FUND's investment management fee paid to the prior manager was $235,737
of which $181,185 was voluntarily waived by the prior manager. For the

fiscal year ended April 30, 1996, the FUND's investment management fee paid
to the prior manager was $32,746 of which $23,550 was voluntarily waived by
the prior manager, and the FUND's investment management fee paid to VCM was
$389,107 of which $162,247 was voluntarily waived by VCM.

THE SUB-ADVISORY AGREEMENT

In carrying out its obligations, OFFITBANK:

(c) determines which issuers and securities shall be represented in the
FUND's portfolio and regularly reports thereon to the Trust's Board of
Trustees; (d) formulates and implements continuing programs for the
purchases and sales of the securities of such issuers and regularly reports
thereon to the Trust's Board of Trustees; (e) is authorized to give
instructions to the custodian and/or sub-custodian of the FUND appointed by
the Trust's Board of Trustees, as to deliveries of securities, transfers of
currencies and payments of cash for the account of the FUND, in relation to
the matters contemplated by this Agreement; and (f) takes, on behalf of the
FUND, all actions which appear to the Trust and VCM necessary to carry into
effect such purchase and sale programs and supervisory functions as
aforesaid, including the placing of orders for the purchase and sale of
securities for the FUND and the prompt reporting to VCM of such purchases
and sales.

OFFITBANK is responsible for decisions to buy and sell securities
for the FUND's portfolio, broker-dealer selection, and negotiation of
brokerage commission rates. OFFITBANK's primary consideration in effecting
a security transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, OFFITBANK
will take the following into consideration: the best net price available,
the reliability, integrity and financial condition of the broker-dealer;
the size of and difficulty in executing the order; and the value of the
expected contribution of the broker-dealer to the investment performance of
the FUND on a continuing basis. Accordingly, the price to the FUND in any
transaction may be less favorable than that available from another broker-
dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies as the
Board of Trustees may determine, OFFITBANK shall not be deemed to have

acted unlawfully or to have breached any duty created under the Sub-
Advisory Agreement or otherwise solely by reason of its having caused the
FUND to pay a broker or dealer for effecting a portfolio investment
transaction in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction, if OFFITBANK determines
in good faith that such amount of commission was reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or
OFFITBANK's overall responsibilities with respect to the FUND and to its
other clients as to which it exercises investment discretion. Subject to
such policies as the Board of Trustees may determine, OFFITBANK will
purchase and sell foreign currency and futures contracts and other
securities for the FUND. OFFITBANK is further authorized to allocate the
orders placed by it on behalf of the FUND to any affiliated broker-dealer
of the FUND or to such brokers and dealers who also provide research or
statistical material, or other services to the FUND, VCM or OFFITBANK.
Such allocation is in such amounts and proportions as OFFITBANK shall
determine and OFFITBANK will report on said allocations regularly to the
Board of Trustees of the Trust indicating the brokers to whom such
allocations have been made and the basis therefor.

Pursuant to the Sub-Advisory Agreement, for the services to be
rendered and the facilities furnished hereunder, VCM pays OFFITBANK a
monthly fee at the annual rate of .30% of the FUND's first $25 million of
average daily net assets; plus .25% of the FUND's average daily net assets
in excess of $25 million but less than $50 million; plus .20% of the FUND's
average daily net assets in excess of $50 million. The prior manager has
advised the FUND that the fees paid to OFFITBANK were $195 for the period
ended April 30, 1993, $45,697 for the fiscal year ended April 30, 1994 and
$27,254 for the fiscal year ended April 30, 1995. Compensation under the
Sub-Advisory Agreement is calculated and accrued daily and the amounts of
the daily accruals are paid monthly. The compensation paid to OFFITBANK
will not be reduced by the amount of brokerage commissions received by

OFFITBANK or its affiliated broker-dealer pursuant to Section 17(e)(2) of
the 1940 Act.

The Sub-Advisory Agreement may be terminated at any time, without
the payment of any penalty, by vote of the Trust's Board of Trustees or by
vote of a majority of the FUND's outstanding voting securities (as defined
in Section 2(a) (42) of the 1940 Act), or by VCM or OFFITBANK on sixty (60)
days' written notice to the other party. The Sub-Advisory Agreement
automatically terminates: (a) in the event of its assignment, the term
"assignment" having the meaning defined in Section 2(a)(4) of the 1940 Act,
or (b) in the event that the Investment Advisory Contract between the FUND
and VCM shall terminate.

CUSTODIAN

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of
Federated Investors, provides administrative personnel and services to the
Funds for the fees set forth in the prospectus.

DISTRIBUTION PLAN

distribution and administrative support services to the Fund and its
shareholders and (ii) stimulate administrators to render administrative
support services to the Fund and its shareholders. These services are to
be provided by a representative who has knowledge of the shareholders'
particular circumstances and goals, and include, but are not limited to:
providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments
of client account cash balances; answering routine client inquiries
regarding the Funds; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as
the Trust reasonably requests. For the fiscal year ended April 30, 1996,
the Fund accrued payments under the Plan amounting to $140,612, of which
$36,364 was waived.

whose needs are served by the Fund's objectives, and properly servicing
these accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.

DESCRIPTION OF THE FUND

Shareholder and Trustee Liability. The FUND is a series of an
entity of the type commonly known as a "Massachusetts business trust."
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable for the obligations of the trust.
The FUND's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations for the FUND and requires
that notice of such disclaimer be given in each agreement, obligation, or
instrument entered into or executed by the FUND or the Trustees. The
Declaration of Trust provides for indemnification out of the FUND property
of any shareholder held personally liable for the obligations of the FUND.

gross negligence, or reckless disregard of the duties involved in the
conduct of his office.

SHAREHOLDER REPORTS

Shareholders will receive reports semi-annually showing the
investments of the FUND and other information. In addition, shareholders

will receive annual financial statements audited by the FUND's independent
accountants.

STATEMENT OF ADDITIONAL INFORMATION

BLANCHARD FLEXIBLE TAX-FREE BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779

This Statement is not a prospectus but should be read in conjunction
with the current prospectus dated August 31, 1996 (the "Prospectus"),
pursuant to which the Blanchard Flexible Tax-Free Bond Fund (the "FUND") is
offered. Please retain this document for future reference.

To obtain the Prospectus please call the FUND at 1-800-829-3863.

TABLE OF CONTENTS Page

General Information and History 2
Investment Objective and Policies 2
Securities in Which the FUND May Invest 3
Investment Restrictions 7
Portfolio Transactions 9
Computation of Net Asset Value 10
Performance Information 10
Additional Purchase and Redemption Information 12
Tax Matters 12
Blanchard Funds Management 17
Management Services 22
The Advisory Agreement 22
Administrative Services 24
Distribution Plan 24
Description of the FUND 24
Shareholder Reports 25
Appendix A - Description of Bond Ratings A-1

Manager
Virtus Capital Management, Inc.

Portfolio Adviser
United States Trust Company of New York

Distributor
Federated Securities Corp.

Custodian

Signet Trust Company

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Deloitte & Touche LLP

Dated: August 31, 1996

GENERAL INFORMATION AND HISTORY

As described in the FUND's Prospectus, the FUND is a non-diversified
series of Blanchard Funds, a Massachusetts business trust that was
organized under the name "Blanchard Strategic Growth Fund" (the "Trust").
The trustees of the Trust approved the change in the name of the Trust on
December 4, 1990. The FUND is a "no-load" fund which seeks to provide a
high level of current interest income exempt from Federal income tax
consistent with the preservation of principal. The FUND invests primarily
in obligations of varying maturities issued by or on behalf of states,
territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies, authorities and
instrumentalities, the interest from which, in the opinion of bond counsel
for the issuer, is exempt from Federal income tax ("Municipal
Obligations"). There is no assurance that the FUND will achieve its
investment objective. This objective is a fundamental policy and may not be
changed except by a majority vote of shareholders.

INVESTMENT OBJECTIVE AND POLICIES

The following information supplements, and should be read in
conjunction with, the sections in the FUND's Prospectus entitled
"Investment Objective and Policies," "Securities in Which the Fund May
Invest" and "Other Investment Information."

The FUND's investment objective is to provide a high level of current
interest income exempt from Federal income tax consistent with the
preservation of principal. The FUND will invest at least 65% of its assets
in Municipal Obligations, except when maintaining a temporary defensive
position.

The FUND invests in Municipal Obligations which are determined by U.S.
Trust to present minimal credit risks. As a matter of fundamental policy,
except during temporary defensive periods, the FUND will maintain at least
80% of its assets in tax-exempt obligations. (This policy may not be
changed without the vote of the holders of a majority of the FUND's
outstanding shares.) However, from time to time on a temporary defensive
basis due to market conditions, the FUND may hold uninvested cash reserves
or invest in taxable obligations in such proportions as, in the opinion of
U.S. Trust, prevailing market or economic conditions may warrant.
Uninvested cash reserves will not earn income. Should the FUND invest in
taxable obligations, it would purchase: (i) obligations of the U.S.
Treasury; (ii) obligations of agencies and instrumentalities of the U.S.
Government; (iii) money market instruments, such as certificates of
deposit, commercial paper, and bankers' acceptances; (iv) repurchase
agreements collateralized by U.S. Government obligations or other money
market instruments; (v) municipal bond index futures and interest rate

futures contracts; or (vi) securities issued by other investment companies
that invest in high quality, short-term securities. Interest income from
certain short-term holdings may be taxable to shareholders as ordinary
income.

In seeking to achieve its investment objective, the FUND may invest in
"private activity bonds" (see "Municipal Obligations" below), the interest
on which is treated as a specific tax preference item under the Federal
alternative minimum tax. Investments in such securities, however, will not
exceed, under normal market conditions, 20% of the FUND's total assets when
added together with any taxable investments held by the FUND.

The Municipal Obligations purchased by the FUND will consist of: (1)
municipal bonds rated "A" or better by Moody's Investors Service, Inc.
("Moody's") or by Standard & Poor's Corporation ("S&P") or, in certain
instances, municipal bonds with lower ratings if they are deemed by U.S.
Trust to be comparable to A-rated issues; (2) municipal notes rated "MIG-2"
or better ("VMIG-2" or better in the case of variable rate notes) by
Moody's or "SP-2" or better by S&P; and (3) municipal commercial paper
rated "Prime-2" or better by Moody's or "A-2" or better by S&P. If not
rated, securities purchased by the FUND will be of comparable quality to
the above ratings as determined by U.S. Trust under the supervision of the
FUND's Board of Trustees. A discussion of Moody's and S&P's rating
categories is contained in Appendix A.

Although the FUND does not presently intend to do so on a regular
basis, it may invest more than 25% of its assets in Municipal Obligations
the interest on which is paid solely from revenues of similar projects, if
such investment is deemed necessary or appropriate by U.S. Trust. To the

extent that the FUND's assets are concentrated in Municipal Obligations
payable from revenues on similar projects, the FUND will be subject to the
peculiar risks presented by such projects to a greater extent than it would
be if the FUND's assets were not so concentrated.

SECURITIES IN WHICH THE FUND MAY INVEST

MUNICIPAL OBLIGATIONS. The two principal classifications of Municipal
Obligations which may be held by the FUND are "general obligation"
securities and "revenue" securities. General obligation securities are
secured by the issuer's pledge of its full faith, credit, and taxing power
for the payment of principal and interest. Revenue securities are payable
only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise tax or
other specific revenue source such as the user of the facility being
financed. Private activity bonds held by the FUND are in most cases
revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity revenue
bonds is usually directly related to the credit standing of the corporate
user of the facility involved.

The FUND's portfolio may also include "moral obligation" securities,
which are normally issued by special-purpose public authorities. If the
issuer of moral obligation securities is unable to meet its debt service
obligations from current revenues, it may draw on a reserve fund the
restoration of which is a moral commitment, but not a legal obligation of
the state or municipality which created the issuer. There is no limitation
on the amount of moral obligation securities that may be held by the FUND.

The FUND may also purchase custodial receipts evidencing the right to
receive either the principal amount or the periodic interest payments
("stripped") or both with respect to specific underlying Municipal
Obligations. In general, such "stripped" Municipal Obligations are offered
at a substantial discount in relation to the principal and/or interest
payments which the holders of the receipt will receive. To the extent that
such discount does not produce a yield to maturity for the investor that
exceeds the original tax-exempt yield on the underlying Municipal
Obligation, such yield will be exempt from Federal income tax for such
investor to the same extent as interest on the underlying Municipal
Obligation. The FUNDs intend to purchase "stripped" Municipal Obligations
only when the yield thereon will be, as described above, exempt from
Federal income tax to the same extent as interest on the underlying
Municipal Obligations. "Stripped" Municipal Obligations are considered
illiquid securities subject to the 10% limit described in "Investment
Limitations" in the Statement of Additional Information.

FUTURES CONTRACTS. The FUND may purchase and sell municipal bond
index and interest rate futures contracts as a hedge against changes in
market conditions. A municipal bond index assigns values daily to the
municipal bonds included in the index based on the independent assessment
of dealer-to-dealer municipal bond brokers. A municipal bond index futures
contract represents a firm commitment by which two parties agree to take or
make a delivery of an amount equal to a specified dollar amount times the
difference between the municipal bond index value on the last trading date
of the contract and the price at which the futures contract is originally
struck. No physical delivery of the underlying securities in the index is
made.

The FUND may enter into contracts for the future delivery of fixed-
income securities commonly known as interest rate futures contracts.
Interest rate futures contracts are similar to the municipal bond index
futures contracts except that, instead of a municipal bond index, the
"underlying commodity" is represented by various types of fixed-income
securities.

The FUND will not engage in transactions in futures contracts for
speculation, but only as a hedge against changes in market values of
securities which it holds or intends to purchase where the transactions are
intended to reduce risks inherent in the management of the FUND. The FUND
may engage in futures contracts only to the extent permitted by the
Commodity Futures Trading Commission ("CFTC") and the Securities and
Exchange Commission ("SEC").

When investing in futures contracts, the FUND must satisfy certain
asset segregation requirements to ensure that the use of futures is
unleveraged. When the FUND takes a long position in a futures contract, it
must maintain a segregated account containing cash and/or certain liquid
assets equal to the purchase price of the contract, less any margin or
deposit. When the FUND takes a short position in a futures contract, the
FUND must maintain a segregated account containing cash and/or certain
liquid assets equal to the market value of the securities underlying such
contract, less any margin or deposit, which must be at least equal to the
market price at which the short position was established.

Transactions by the FUND in futures contracts may subject the FUND to
a number of risks. Successful use of futures by the FUND is subject to the
ability of U.S. Trust to anticipate correctly movements in the direction of

the market. In addition, there may be an imperfect correlation, or no
correlation at all, between movements in the price of the futures contracts
and movements in the price of the instruments being hedged. Further, there
is no assurance that a liquid market will exist for any particular futures
contract at any particular time. Consequently, the FUND may realize a loss
on a futures transaction that is not offset by a favorable movement in the
price of securities which it holds or intends to purchase, or it may be
unable to close a futures position in the event of adverse price movements.
Any income from investments in futures contracts will be taxable income of
the FUND.

MONEY MARKET INSTRUMENTS. Money market instruments that may be
purchased by the FUND in accordance with its investment objectives and
policies stated above include, among other things, bank obligations,
commercial paper and corporate bonds with remaining maturities of 13 months
or less.

Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or
insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation, or by a savings and loan association or savings bank which is
insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. Investments in time deposits are limited to no more
than 5% of the value of the FUND's total assets at time of purchase.

Investments by the FUND in commercial paper will consist of issues
that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's.
In addition, the FUND may acquire unrated commercial paper that is

determined by U.S. Trust at the time of purchase to be of comparable
quality to rated instruments that may be acquired by the FUND.

Commercial paper may include variable and floating rate instruments.
While there may be no active secondary market with respect to a particular
instrument purchased by the FUND, the FUND may, from time to time as
specified in the instrument, demand payment of the principal of the
instrument or may resell the instrument to a third party. The absence of
an active secondary market, however, could make it difficult for the FUND
to dispose of the instrument if the issuer defaulted on its payment
obligation or during periods that the FUND is not entitled to exercise its
demand rights, and the FUND could, for this or other reasons, suffer a loss
with respect to such instrument.

REPURCHASE AGREEMENTS. As stated above, the FUND may agree to
purchase portfolio securities subject to the seller's agreement to
repurchase them at a mutually agreed upon date and price ("repurchase
agreements"). The FUND will enter into repurchase agreements only with
financial institutions such as banks or broker/dealers which are deemed to
be creditworthy by U.S. Trust under guidelines approved by the FUND's Board
of Trustees. The FUND will not enter into repurchase agreements with U.S.
Trust or its affiliates. Repurchase agreements maturing in more than seven
days will be considered illiquid securities subject to the 10% limit
described in "Investment Restrictions."

The seller under a repurchase agreement will be required to maintain
the value of the obligations subject to the agreement at not less than the
repurchase price. Default or bankruptcy of the seller would, however,
expose the FUND to possible delay in connection with the disposition of the

underlying securities or loss to the extent that proceeds from a sale of
the underlying securities were less than the repurchase price under the
agreement. Income on the repurchase agreements will be taxable.

INVESTMENT COMPANY SECURITIES. The FUND may also invest in securities
issued by other investment companies that invest in high-quality, short-
term securities and that determine their net asset value per share based on
the amortized cost or penny-rounding method. In addition to the advisory
fees and other expenses the FUND bears directly in connection with its own
operations, as a shareholder of another investment company, the FUND would
bear its pro rata portion of the other investment company's advisory fees
and other expenses. As such, the FUND's shareholders would indirectly bear
the expenses of the FUND and the other investment company, some or all of
which would be duplicative. Such securities will be acquired by the FUND
within the limits prescribed by the Investment Company Act of 1940 (the
"1940 Act").

WHEN-ISSUED AND FORWARD TRANSACTIONS AND STAND-BY COMMITMENTS. The
FUND may purchase eligible securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions involve a commitment by the FUND to purchase or sell
particular securities with payment and delivery taking place in the future,
beyond the normal settlement date, at a stated price and yield. Securities
purchased on a "forward commitment" or "when issued" basis are recorded as
an asset and are subject to changes in value based upon changes in the
general level of interest rates. It is expected that forward commitments
and "when-issued" purchases will not exceed 25% of the value of the FUND's
total assets absent unusual market conditions, and that the length of such
commitments will not exceed 45 days. The FUND does not intend to engage in

"when-issued" purchases and forward commitments for speculative purposes,
but only in furtherance of its investment objectives.

In addition, the FUND may acquire "stand-by commitments" with respect
to Municipal Obligations that it holds. Under a "stand-by commitment," a
dealer agrees to purchase, at the FUND's option, specified Municipal
Obligations at a specified price. The FUND will acquire "stand-by
commitments" solely to facilitate portfolio liquidity and does not intend
to exercise its rights thereunder for trading purposes. "Stand-by
commitments" acquired by the FUND would be valued at zero in determining
the FUND's net asset value.

RISK FACTORS:

FUTURES CONTRACTS. The FUND may enter into contracts for the purchase
or sale for future delivery of municipal bond indices or fixed-income
securities which otherwise meet the FUND's investment policies, to the
extent permitted by the Commodity Futures Trading Commission (the "CFTC").
U.S. futures contracts have been designed by exchanges which have been
designated "contract markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of contract
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the
exchange.

A municipal bond index futures contract represents a firm commitment
by which two parties agree to take or make a delivery of an amount equal to
a specified dollar amount times the difference between the municipal bond

index value on the last trading date of the contract and the price at which
the futures contract is originally struck. An interest rate futures
contract provides for the future sale by one party and the purchase by the
other party of a certain amount of a specific, interest rate-sensitive
financial instrument (debt security) at a specified price, date, time and
place.

The FUND will not use leverage when it enters into long futures or
options contracts. For each such long position the FUND will deposit cash
or cash equivalents, such as U.S. Government Securities or high grade debt
obligations, having a value equal to the underlying commodity value of the
contract as collateral with its custodian in a segregated account.

No consideration is paid or received by the FUND upon entering into a
futures contract. Upon entering into a futures contract, the FUND will be
required to deposit in a segregated account with its custodian an amount of
cash or cash equivalents, such as U.S. Government Securities or high grade
debt obligations, equal to approximately 5% of the contract amount (this
amount is subject to change by the exchange on which the contract is traded
and brokers may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on
the contract which is returned to the FUND upon termination of the futures
contract, assuming all contractual obligations have been satisfied. The
broker will have access to amounts in the margin account if the FUND fails
to meet its contractual obligations. Subsequent payments, known as
"variation margin," to and from the broker, will be made daily as the price
of the currency or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable, a process known as "marking-to-market." At any time prior to the

expiration of a futures contract, the FUND may elect to close the position
by taking an opposite position, which will operate to terminate the FUND's
existing position in the contract.

Positions in futures contracts may be closed out only on the exchange
on which they were entered into (or through a linked exchange). No
secondary market for such contracts exists. Although the FUND intends to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges limit the amount
of fluctuation permitted in futures contract prices during a single trading
day. Once the daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit. It is possible
that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting the FUND to
substantial losses. In such event, and in the event of adverse price
movements, the FUND would be required to make daily cash payments of
variation margin.

REPURCHASE AGREEMENTS. The FUND may enter into repurchase agreements.
Under a repurchase agreement, the FUND acquires a debt instrument for a
relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the FUND to resell such debt
instrument at a fixed price. The resale price is in excess of the purchase
price in that it reflects an agreed-upon market interest rate effective for
the period of time during which the FUND's money is invested. The FUND's
risk is limited to the ability of the seller to pay the agreed-upon sum
upon the delivery date. When the FUND enters into a repurchase agreement,
it obtains collateral having a value at least equal to the amount of the
purchase price. Repurchase agreements can be considered loans, as defined
by the 1940 Act, collateralized by the underlying securities. The return
on the collateral may be more or less than that from the repurchase
agreement. The securities underlying a repurchase agreement will be marked
to market every business day so that the value of the collateral is at
least equal to the value of the loan, including the accrued interest
earned. In evaluating whether to enter into a repurchase agreement, the
Portfolio Adviser will carefully consider the creditworthiness of the
seller. If the seller defaults and the value of the collateral securing
the repurchase agreement declines, the FUND may incur a loss.

LENDING OF PORTFOLIO SECURITIES

during the loan must maintain with the FUND cash or cash equivalent
collateral or provide to the FUND an irrevocable letter of credit equal in
value at all times to at least 100% of the value of the securities loaned.
During the time portfolio securities are on loan, the borrower pays the
FUND any dividends or interest paid on such securities, and the FUND may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower who has delivered
equivalent collateral or a letter of credit. Loans are subject to
termination at the option of the FUND or the borrower at any time. The
FUND may pay reasonable administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the income earned on the
cash to the borrower or placing broker.

ILLIQUID SECURITIES

The FUND has adopted the following investment policy, which may be
changed by the vote of the Board of Trustees. The FUND will not invest in
illiquid securities if immediately after such investment more than 10% of
the FUND's total assets (taken at market value) would be invested in such
securities. The staff of the SEC defines an illiquid security as any
security that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the company has
valued the instrument.

have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from
the issuer or in the secondary market. Mutual funds do not typically hold
a significant amount of these restricted or other illiquid securities
because of the potential for delays on resale and uncertainty in valuation.
Limitations on resale may have an adverse effect on the marketability of
portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemptions within seven
days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay.
Adverse market conditions could impede such a public offering of
securities.

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

investors; they cannot be resold to the general public without
registration.

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

FUND management will monitor the liquidity of restricted securities in
the FUND's portfolio under the supervision of the FUND's Trustees. In
reaching liquidity decision, FUND management will consider, inter alia, the
following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics
of the transfer).

INVESTMENT RESTRICTIONS

Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act)
of the outstanding shares of the FUND. As used in the Prospectus and the
Statement of Additional Information, the term "majority of the outstanding
shares" of the FUND means, respectively, the vote of the lesser of (i) 67%
or more of the shares of the FUND present at a meeting, if the holders of
more than 50% of the outstanding shares of the FUND are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of
the FUND. The following are the FUND's investment restrictions set forth
in their entirety.

1. The FUND, a non-diversified management investment company, at the
close of each quarter of the FUND's taxable year, has the following
restrictions: (a) with respect to 50% of the FUND's total assets, the FUND
may not invest more than 5% of its total assets, at market value, in the
securities of one issuer (except the securities of the U.S. Government, its
agencies and instrumentalities) and (b) with respect to the other 50% of
the FUND's total assets, the FUND may not invest more than 25% of the
market value of its total assets in a single issuer (except the securities
of the U.S. Government, its agencies and instrumentalities). These two
restrictions, hypothetically, could give rise to the FUND having
securities, other than U.S. Government securities, of as few as twelve
issuers.

25% of its total assets would be concentrated in companies within any one
industry (except that this restriction does not apply to U.S. Government
securities); or (d) more than 5% of net assets would be invested in
warrants or rights. (Included within that amount, but not to exceed 2% of
the value of the FUND's net assets, may be warrants which are not listed on
the New York or American Stock Exchanges.)

3. The FUND may borrow money from a bank solely for temporary or
emergency purposes (but not in an amount equal to more than 20% of the
market value of its total assets). This does not preclude the FUND from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities. The FUND will not
purchase additional securities while the amount of any borrowings is in
excess of 5% of the market value of its total assets.

4. The FUND will not make loans of money or securities except
(i) through repurchase agreements, (ii) through loan participations, and
(iii) through the lending of its portfolio securities as described in the
Prospectus and in this Statement of Additional Information.

5. The FUND may not invest more than 10% of its total assets in the
securities of other investment companies or purchase more than 3% of any
other investment company's voting securities, except as they may be
acquired as part of a merger, consolidation or acquisition of assets.

arrangements with respect to the FUND's permissible futures transactions,
including initial and variation margin, are not considered to be a pledge
of assets for purposes of this restriction.

7. The FUND may not buy any securities or other property on margin
(except for the deposit of initial or variation margin in connection with
hedging and risk management transactions and for such short term credits as
are necessary for the clearance of transactions) or engage in short sales.

8. The FUND may not invest in companies for the purpose of
exercising control or management.

9. The FUND may not underwrite securities issued by others except to
the extent that the FUND may be deemed an underwriter when purchasing or
selling portfolio securities.

10. The FUND may not purchase or retain securities of any issuer
(other than the shares of the FUND) if to the FUND's knowledge, those
officers and Trustees of the FUND and the officers and directors of VCM or
the Portfolio Adviser who individually own beneficially more than 1/2 of 1%
of the outstanding securities of such issuer, together own beneficially
more than 5% of such outstanding securities.

11. The FUND may not purchase or sell real property (including
limited partnership interests, but excluding readily marketable securities
of companies which invest in real estate).

12. The FUND may not invest directly in oil, gas, or other mineral
exploration or development programs or leases.

13. The FUND may not issue senior securities.

PORTFOLIO TRANSACTIONS

All orders for the purchase or sale of portfolio securities are placed
on behalf of the FUND by the Portfolio Adviser subject to the supervision
of VCM and the Trustees and pursuant to authority contained in the
Investment Advisory Contract between the FUND and VCM, and the Sub-Advisory
Agreement between VCM and the Portfolio Adviser. In selecting such brokers
or dealers, the Portfolio Adviser will consider various relevant factors,
including, but not limited to the best net price available, the size and
type of the transaction, the nature and character of the markets for the
security to be purchased or sold, the execution efficiency, settlement
capability, financial condition of the broker-dealer firm, the broker-
dealer's execution services rendered on a continuing basis and the
reasonableness of any commissions.

In addition to meeting the primary requirements of execution and
price, brokers or dealers may be selected who provide research services, or
statistical material or other services to the FUND or to the Portfolio
Adviser for the FUND's use, which in the opinion of the Trustees, are
reasonable and necessary to the FUND's normal operations. Those services
may include economic studies, industry studies, security analysis or
reports, sales literature and statistical services furnished either
directly to the FUND or to the Portfolio Adviser. Such allocation shall be
in such amounts as VCM or the Portfolio Adviser shall determine and the
Portfolio Adviser shall report regularly to VCM who will in turn report to
the Trustees on the allocation of brokerage for such services.

The receipt of research from broker-dealers may be useful to the
Portfolio Adviser in rendering investment management services to its other
clients, and conversely, such information provided by brokers or dealers
who have executed orders on behalf of the Portfolio Adviser's other clients
may be useful to the Portfolio Adviser in carrying out its obligations to
the FUND. The receipt of such research may not reduce the Portfolio
Adviser's normal independent research activities.

The Portfolio Adviser is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the FUND and are
authorized to use Federated Securities Corp. ("the Distributor"), and the
Portfolio Adviser or an affiliated broker-dealer on an agency basis, to
effect a substantial amount of the portfolio transactions which are
executed on the New York or American Stock Exchanges, Regional Exchanges
and Foreign Exchanges where relevant, or which are traded in the Over-the-

Counter market. Any profits resulting from portfolio transactions earned
by the Distributor as a result of FUND transactions will accrue to the
benefit of the shareholders of the Distributor who are also shareholders of
VCM. The Investment Advisory Contract does not provide for any reduction
in the management fee as a result of profits resulting from brokerage
commissions effected through the Distributor. In addition, the Sub-
Advisory Agreement between VCM and the Portfolio Adviser does not provide
for any reduction in the advisory fees as a result of profits resulting
from portfolio transactions effected through the Portfolio Adviser or an
affiliated brokerage firm.

The Trustees have adopted certain procedures incorporating the
standards of Rule 17e-1 issued under the 1940 Act which requires that the
commissions paid to the Distributor or to the Portfolio Adviser or an
affiliated broker-dealer must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar
securities during a comparable period of time." The Rule and the
procedures also contain review requirements and require VCM to furnish
reports to the Trustees and to maintain records in connection with such
reviews.

terms of a particular transaction or VCM's overall responsibilities to the
FUND.

It may happen that the same security will be held by other clients of
VCM or of the Portfolio Adviser. When the other clients are simultaneously
engaged in the purchase or sale of the same security, the prices and
amounts will be allocated in accordance with a formula considered by VCM to
be equitable to each, taking into consideration such factors as size of
account, concentration of holdings, investment objectives, tax status, cash
availability, purchase cost, holding period and other pertinent factors
relative to each account. In some cases this system could have a
detrimental effect on the price or volume of the security as far as the
FUND is concerned. In other cases, however, the ability of the FUND to
participate in volume transactions will produce better executions for the
FUND.

COMPUTATION OF NET ASSET VALUE

The net asset value of the FUND is determined at 4:00 p.m. (Eastern
Time) on each day that the New York Exchange is open for business and on
such other days as there is sufficient trading in the FUND's securities to
affect materially the net asset value per share of the FUND. The FUND will
be closed on New Year's Day, Presidents' Day, Good Friday, Martin Luther
King Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

DETERMINING MARKET VALUE OF SECURITIES

Market or fair values of the FUND's portfolio securities are
determined as follows:

according to the last reported sales price on a recognized
securities exchange, if available. (If a securitie is traded on more than
one exchange, the price on theprimary market for that security, as
determined by the Adviser or sub-adviser, is used.);
according to the last reported bid price, if no sale on the
recognized exchange is reported or if the security is traded over-the-
counter;
for short-term obligations, according to the prices furnished
by an independent pricing service, except that short-term obligations with
remaining maturities of 60 days or less at the time of purchase, may be
valued at amortized cost; or
at fair value as determined in good faith by the Trustees.

PERFORMANCE INFORMATION

Principal changes are based on the difference between the beginning and
closing net asset values for the period and assume reinvestment of
dividends and distributions paid by the FUND. Dividends and distributions
are comprised of net investment income and net realized capital gains.
Under the rules of the Commission, funds advertising performance must
include total return quotes calculated according to the following formula:

P(1 + T)n = ERV

Where P = a hypothetical initial payment of $1,000

T = average annual total return

n = number of years (1, 5 or 10)

ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10 year
periods or at the end of the 1, 5 or 10 year periods
(or fractional portion thereof)
Under the foregoing formula the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the FUND's registration statement. In calculating the
ending redeemable value, the pro rata share of the account opening fee is
deducted from the initial $1,000 investment and all dividends and
distributions by the FUND are assumed to have been reinvested at net asset
value as described in the prospectus on the reinvestment dates during the
period. Total return, or "T" in the formula above, is computed by finding

the average annual compounded rates of return over the 1, 5 and 10 year
periods (or fractional portion thereof) that would equate the initial
amount invested to the ending redeemable value. The FUND's aggregate
annualized total rate of return, reflecting the initial investment and
reinvestment of all dividends and distributions for the one year period
ended April 30, 1996 and for the life of the FUND (August 12, 1993 to April
30, 1996) was 6.86% and 6.20%, respectively.

The FUND may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set
forth above in order to compare more accurately the FUND's performance with
other measures of investment return. For example, in comparing the FUND's
total return with data published by Lipper Analytical Services, Inc. and
Morningstar, Inc., or similar independent services or financial
publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or
other distribution at net asset value on the reinvestment date. Percentage
increases are determined by subtracting the initial net asset value of the
investment from the ending net asset value and by dividing the remainder by
the beginning net asset value. The FUND does not, for these purposes,
deduct the pro rata share of the account opening fee from the initial value
invested. The FUND will, however, disclose the pro rata share of the
account opening fee and will disclose that the performance data does not
reflect such non-recurring charge and that inclusion of such charge would
reduce the performance quoted. Such alternative total return information
will be given no greater prominence in such advertising than the
information prescribed under the Commission's rules.

In addition to the total return quotations discussed above, the FUND
may advertise its yield based on a 30-day (or one month) period ended on
the date of the most recent balance sheet included in the FUND's Post-
Effective Amendment to its Registration Statement, computed by dividing the
net investment income per share earned during the period by the maximum
offering price per share on the last day of the period, according to the
following formula:

YIELD = 2[( a-b +1)6-1]
cd

Where: a = dividends and interest earned during the period.

b = expenses accrued for the period (net of
reimbursements).

c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.

d = the maximum offering price per share on the last day of
the period.

Under this formula, interest earned on debt obligations for purposes
of "a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the FUND based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest), (2) dividing that

figure by 360 and multiplying the quotient by the market value of the
obligation (including actual accrued interest as referred to above) to
determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the FUND's portfolio (assuming a
month of 30 days) and (3) computing the total of the interest earned on all
debt obligations and all dividends accrued on all equity securities during
the 30-day or one month period. In computing dividends accrued, dividend
income is recognized by accruing 1/360 of the stated dividend rate of a
security each day that the security is in the FUND's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Any amounts representing sales charges will not be
included among these expenses; however, the FUND will disclose the pro rata
share of the account opening fee. Undeclared earned income, computed in
accordance with generally accepted accounting principles, may be subtracted
from the maximum offering price calculation required pursuant to "d" above.

Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the Commission's
rules. In addition, all advertisements containing performance data of any
kind will include a legend disclosing that such performance data represents
past performance and that the investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.

For the 30-day period ended April 30, 1996 the FUND's yield was 4.74%.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a
result of a decline in the net asset value per share. Shareholders are
notified at least 60 days prior to any proposed redemption and are invited
to add to their account if they wish to continue as shareholders of the
FUND, however, the FUND does not presently contemplate making such
redemptions and the FUND will not redeem any shares held in tax-sheltered
retirement plans.

The FUND has elected to be governed by Rule 18f-1 of the 1940 Act,
under which the FUND is obligated to redeem the shares of any shareholder
solely in cash up to the lesser of 1% of the net asset value of the FUND or
$250,000 during any 90-day period. Should any shareholder's redemption
exceed this limitation, the FUND can, at its sole option, redeem the excess
in cash or in portfolio securities. Such securities would be selected
solely by the FUND and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the
value used in computing net asset value for the purpose of such redemption.

TAX MATTERS

discussion here and in the Prospectus is not intended as a substitute for
careful tax planning.

QUALIFICATION AS A REGULATED INVESTMENT COMPANY

The FUND has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the FUND is not subject to
Federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses, including foreign currency gains and loss) and capital gain net
income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of
its "investment company taxable income" (i.e., net investment income and
the excess of net short-term capital gain over net long-term capital loss)
for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below.
Distributions by the FUND made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year,
will be considered distributions of income and gains of the taxable year
and can therefore satisfy the Distribution Requirement.

In addition to satisfying the Distribution Requirement, a regulated
investment company with investment objectives, policies and restrictions
similar to the FUND must (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities and other
income (including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock

or securities (the "Income Requirement"); and (2) derive less than 30% of
its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, or securities or
foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). Because of the
Short-Short Gain Test, the FUND may have to limit the sale of appreciated
securities that it has held for less than three months. However, the
Short-Short Gain Test will not prevent the FUND from disposing of
investments at a loss, since the recognition of a loss before the
expiration of the three-month holding period is disregarded for this
purpose. Interest (including original issue discount) received by the FUND
at maturity or upon the disposition of a security held for less than three
months will not be treated as gross income derived from the sale or other
disposition of such security within the meaning of the Short-Short Gain
Test. However, income attributable to realized market appreciation will be
treated as gross income from the sale or other disposition of securities
for this purpose. At April 30,1996, the FUND had a net capital loss
carryover of $679,214 which is available through April 30, 2003 to offset
future capital gains.

Generally, for purposes of determining whether capital gain or loss
recognized by the FUND on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (i) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (ii) the asset is otherwise held by the FUND as part of a
"straddle" (which term generally excludes a situation where the asset is
stock and the FUND grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto) or (iii)
the asset is stock and the FUND grants an in-the-money qualified covered
call option with respect thereto. However, for purposes of the Short-Short
Gain Test, the holding period of the asset disposed of may be reduced only
in the case of clause (i) above. In addition, the FUND may be required to
defer the recognition of a loss on the disposition of an asset held as part
of a straddle to the extent of any unrecognized gain on the offsetting
position.

Any gain recognized by the FUND on the lapse of, or any gain or loss
recognized by the FUND from a closing transaction with respect to, an
option written by the FUND will be treated as a short-term capital gain or
loss. For purposes of the Short-Short Gain Test, the holding period of an
option written by the FUND will commence on the date it is written and end
on the date it lapses or the date a closing transaction is entered into.
Accordingly, the FUND may be limited in its ability to write options which
expire within three months and to enter into closing transactions at a gain
within three months of the writing of options.

Certain transactions that may be engaged in by the FUND (such as
regulated futures contracts and options on stock indexes and futures

contracts) will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for
their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contract have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence
of the year-end deemed disposition of Section 1256 contracts is taken into
account for the taxable year together with any other gain or loss that was
previously recognized upon the termination of Section 1256 contracts during
that taxable year. Any capital gain or loss for the taxable year with
respect to Section 1256 contracts (including any capital gain or loss
arising as a consequence of the year-end deemed sale of such contracts) is
generally treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The FUND may elect not to have this special tax
treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the FUND that are not Section 1256
contracts. The Internal Revenue Service has held in several private
rulings and Treasury Regulations now provide that gains arising from
Section 1256 contracts will be treated for purposes of the Short-Short Gain
Test as being derived from securities held for not less than three months
if the gains arise as a result of a constructive sale under Code Section
1256.

part of any net capital loss, or any net long-term capital loss incurred
after October 31 as if they had been incurred in the succeeding year.

In addition to satisfying the requirements described above, the FUND
must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each
quarter of the FUND's taxable year, at least 50% of the value of the FUND'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 the FUND has not invested more than 5% of the value of
the FUND's total assets in securities of such issuer and as to which the
FUND does not hold more than 10% of the outstanding voting securities of
such issuer), and no more than 25% of the value of its 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 the FUND controls and which are engaged in the
same or similar trades or businesses. Generally, options (call or put)
with respect to a security are treated as issued by the issuer of the
security and not by the issuer of the option.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to
98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having
a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it
is subject to income tax for any taxable year ending in such calendar year.

For purposes of the excise tax, a regulated investment company shall
(1) reduce its capital gain net income (but not below its net capital gain)
by the amount of any net ordinary loss for the calendar year and (2)
exclude foreign currency gains and losses incurred after October 31 of any
year (or after the end of its taxable year if it has made a taxable year
election) in determining the amount of ordinary taxable income for the
current calendar year (and, instead, include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).

FUND DISTRIBUTIONS

The FUND anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be
taxable to shareholders as ordinary income and treated as dividends for
Federal income tax purposes, but they will not qualify for the 70%
dividends-received deduction for corporations.

purchases shares of the FUND reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
value of the assets of the FUND, distributions of such amounts will be
taxable to the shareholder as dividends in the manner described above,
although such distributions economically constitute a return of capital to
the shareholder.

Ordinarily, shareholders are required to take distributions by the
FUND into account in the year in which the distributions are made.
However, dividends declared in October, November or December of any year
and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the
FUND) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised
annually as to the U.S. Federal income tax consequences of distributions
made (or deemed made) during the year.

The FUND will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the FUND that
it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."

SALE OR REDEMPTION OF SHARES

A shareholder will recognize gain or loss on the sale or redemption of
shares of the FUND in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be
disallowed if the shareholder purchases other shares of the FUND within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares
of the FUND will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year.
However, any capital loss arising from the sale or redemption of shares
held for six months or less will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares.
For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in determining the holding period of
shares. Long-term capital gains of noncorporate taxpayers are currently
taxed at a maximum rate 11.6% lower than the maximum rate applicable to
ordinary income. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer,
$3,000 of ordinary income.

FOREIGN SHAREHOLDERS

If the income from the FUND is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income
dividends will be subject to U.S. withholding tax at the rate of 30% (or
lower applicable treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate) on the gross income resulting
from the FUND's election to treat any foreign taxes paid by it as paid by
its shareholders, but may not be allowed a deduction against this gross
income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as
having been paid. Such a foreign shareholder would generally be exempt
from U.S. Federal income tax on gains realized on the sale of shares of the
FUND and capital gain dividends.

If the income from the FUND is effectively connected with a U.S. trade
or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of
shares of the FUND will be subject to U.S. Federal income tax at the rates
applicable to U.S. citizens or domestic corporations.

with respect to the particular tax consequences to them of an investment in
the FUND, including the applicability of foreign taxes.

EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS

Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ
from the rules for U.S. Federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting an investment in the
FUND under their particular circumstances.

BLANCHARD FUNDS MANAGEMENT

Officers and Trustees are listed with their addresses, birthdates, and
present positions with Blanchard Funds, and principal occupations.

JOHN F. DONAHUE@*
FEDERATED INVESTORS TOWER

PITTSBURGH, PA CHAIRMAN AND TRUSTEE OF THE FUND;
Chairman and
BIRTHDATE: JULY 28, 1924 Trustee, Federated Investors, Federated
Advisers, Federated Management, and
Federated Research; Chairman and
Director, Federated Research Corp. and
Federated Global Research Corp.;
Chairman, Passport Research, Ltd.; Chief
Executive Officer and Director or
Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue,
Executive Vice President of the Trust.

JOHN T. CONROY, JR.
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES,
INC., REALTORS

3255 TAMIAMI TRAIL NORTH
NAPLES, FL TRUSTEE OF THE FUND;
President, Investment
BIRTHDATE: JUNE 23, 1937 Properties Corporation; Senior Vice-
President, John R. Wood and Associates,
Inc., Realtors; Partner or Trustee in
private real estate ventures in
Southwest Florida; formerly, President,
Naples Property Management, Inc. and
Northgate Village Development
Corporation; Director or Trustee of the
Funds.

JAMES E. DOWD
571 HAYWARD MILL ROAD

CONCORD, MA TRUSTEE OF THE FUND; Attorney-at-
law; Director, The
BIRTHDATE: MAY 18, 1922 Emerging Germany Fund, Inc.; Director or
Trustee of the Funds..

EDWARD C. GONZALES*

FEDERATED INVESTORS TOWER
PITTSBURGH, PA PRESIDENT, TREASURER AND TRUSTEE OF THE
FUND;Vice
BIRTHDATE: OCTOBER 22, 1930 Chairman, Treasurer, and Trustee,
Federated Investors; Vice President,
Federated Advisers, Federated
Management, Federated Research,
Federated Research Corp., Federated
Global Research Corp. and Passport
Research, Ltd.; Executive Vice President
and Director, Federated Securities
Corp.; Trustee, Federated Shareholder
Services Company; Trustee or Director of
some of the Funds; President, Executive
Vice President and Treasurer of some of
the Funds.

GREGOR F. MEYER
TWO GATEWAY CENTER - SUITE 674

Council for Environmentsal Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management
Center; Director or Trustee of the
Funds. .

Director, Federated Services Company;
President or Executive Vice President of
the Funds; Director or Trustee of some
of the Funds. Mr. Donahue is the son of
John F. Donahue, Chairman and Trustee of
the Trust.

RICHARD B. FISHER
FEDERATED INVESTORS TOWER

PITTSBURGH, PA VICE PRESIDENT OF THE FUND;Executive
Vice
BIRTHDATE: MAY 17, 1923 President and Trustee, Federated
Investors, Chairman and Director,
Federated Securities Corp.; President or
Vice President of some of the Funds;
Director or Trustee of some of the
Funds.

* This Trustee is deemed to be an "interested person" of the Trust as
defined in the Investment Company Act of 1940, as amended.

@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board of
Trustees between meetings of the Board.

THE FUNDS

As referred to in the list of Trustees and Officers, "Funds"
includes the following investment companies:

Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated
Short-Term Municipal Trust; Federated Short-Term U.S. Government Trust;
Federated Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-
Free Trust; Federated Total Return Series, Inc.; Federated U.S. Government
Bond Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Utility Fund, Inc.; High
Yield Cash Trust; Intermediate Municipal Trust; International Series, Inc.;
Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration
Trust; Tax-Free Instruments Trust; The Planters Funds; The Starburst Funds;
The Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series.

FUND OWNERSHIP

As of August 15, 1996, Officers and Trustees own less than 1% of the
outstanding shares of each Fund.

To the best knowledge of the FUND, as of August 15, 1996, the following
shareholders owned 5% or more of the outstanding shares of the FUND:
Stephens Inc., Little Rock, Arkansas, owned approximately 382,604 shares
(8.82%) and William J. Harnett, Waldorf, Maryland, owned approximately
325,120 (7.50%).

OFFICERS AND TRUSTEES COMPENSATION

NAME, POSITION AGGREGATE TOTAL COMPENSATION
WITH THE TRUST COMPENSATION FROM PAID TO TRUSTEES
THE TRUST+ FROM THE FUND AND
FUND COMPLEX*

TRUSTEE
PETER E. MADDEN, $1008.23 $2846.78 for the
TRUSTEE Fund Complex
GREGORY F. MEYER, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
JOHN E. MURRAY, JR., $1008.23 $3145.78 for the
J.D., S.J.D., Fund Complex
TRUSTEE
WESLEY W. POSVAR, $1008.23 $3145.78 for the
TRUSTEE Fund Complex
MARJORIE P. SMUTS $1008.23 $3145.78 for the
TRUSTEE Fund Complex

+ As of December 31, 1995, Blanchard Funds was comprised of 11
portfolios.
* The total compensation is provided for the Fund Complex, which
consists of the Blanchard Precious Metals Fund, The Virtus Funds,
and the Trust. The information is provided for Blanchard Funds
and Blanchard Precious Metals Fund, Inc. for the fiscal year
ended 4/30/96, and for The Virtus Funds for the fiscal year ended
9/30/95.

MANAGEMENT SERVICES

MANAGER TO THE TRUST

The Trust's manager is Virtus Capital Management, Inc. ("VCM"),
which is a division of Signet Trust Company, a wholly-owned subsidiary
of Signet Banking Corporation. Because of the internal controls
maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge
of Signet Bank's or its affiliates' lending relationships with an
issuer.

The manager shall not be liable to the Trust, a Fund, or any
shareholder of any of the Funds for any losses that may be sustained
in the purchase, holding, or sale of any security or for anything done
or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Trust.

MANAGEMENT FEES

For its services, VCM receives an annual management fee as
described in the prospectus. For the period from August 12, 1993
(commencement of operations) to April 30, 1994 and the fiscal year
ended April 30, 1995, the FUND's investment management fees to the
prior manager were $89,180 and $127,835, respectively, all of which
was voluntarily waived. For the same periods, the prior manager paid
fees to the Portfolio Adviser of $9,758 and $34,662, respectively. For
the fiscal year ended April 30, 1996, the FUND's investment management
fee paid to the prior manager was $30,642 and $132,013, respectively,
all of which was voluntary waived.

THE ADVISORY AGREEMENT

The Portfolio Adviser furnishes investment advisory services to
the FUND pursuant to an Advisory Agreement between VCM and the
Portfolio Adviser. Pursuant to the Advisory Agreement, the Portfolio
Adviser supervises the investment and reinvestment of the cash,
securities or other properties comprising the FUND's portfolio,
subject at all times to the direction of VCM and the policies and
control of the Trust's Board of Trustees. The Portfolio Adviser gives
the FUND the benefit of its best judgment, efforts and facilities in
rendering its services as Portfolio Adviser.

In carrying out its obligations, the Portfolio Adviser: (a) uses
the same skill and care in providing such service as it uses in
providing services to fiduciary accounts for which it has investment
responsibilities; (b) obtains and evaluates pertinent information
about significant developments and economics, statistical and
financial data, domestic, foreign or otherwise, whether affecting the
economy generally or the FUND's portfolio and whether concerning the
individual issuers whose securities are included in the FUND's
portfolio or the activities in which the issuers engage, or with
respect to securities which it considers desirable for inclusion in
the FUND's portfolio; (c) determines which issuers and securities
shall be represented in the FUND's portfolio and regularly reports
thereon to the Trust's Board of Trustees; (d) formulates and
implements continuing programs for the purchases and sales of the
securities of such issuers and regularly reports thereon to the
Trust's Board of Trustees; (e) is authorized to give instructions to
the custodian and/or sub-custodian of the FUND appointed by the
Trust's Board of Trustees, as to deliveries of securities, transfers

of currencies and payments of cash for the account of the FUND, in
relation to the matters contemplated by this Agreement; and (f) takes,
on behalf of the FUND, all actions which appear to the Trust and VCM
necessary to carry into effect such purchase and sale programs and
supervisory functions as aforesaid, including the placing of orders
for the purchase and sale of securities for the FUND and the prompt
reporting to VCM of such purchases and sales.

The Portfolio Adviser is responsible for decisions to buy and
sell securities for the FUND's portfolio, broker-dealer selection, and
negotiation of brokerage commission rates. The Portfolio Adviser's
primary consideration in effecting a security transaction will be
execution at the most favorable price. In selecting a broker-dealer
to execute each particular transaction, the Portfolio Adviser will
take the following into consideration: the best net price available,
the reliability, integrity and financial condition of the broker-
dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the
investment performance of the FUND on a continuing basis.
Accordingly, the price to the FUND in any transaction may be less
favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Trustees may determine, the Portfolio Adviser shall not be deemed to
have acted unlawfully or to have breached any duty created under the
Advisory Agreement or otherwise solely by reason of its having caused
the FUND to pay a broker or dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if

the Portfolio Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Portfolio Adviser's
overall responsibilities with respect to the FUND and to its other
clients as to which it exercises investment discretion. Subject to
such policies as the Board of Trustees may determine, the Portfolio
Adviser will purchase and sell foreign currency and futures contracts
and other securities for the FUND. the Portfolio Adviser is further
authorized to allocate the orders placed by it on behalf of the FUND
to any affiliated broker-dealer of the FUND or to such brokers and
dealers who also provide research or statistical material, or other
services to the FUND, VCM or the Portfolio Adviser. Such allocation
is in such amounts and proportions as the Portfolio Adviser shall
determine and the Portfolio Adviser will report on said allocations
regularly to the Board of Trustees of the Trust indicating the brokers
to whom such allocations have been made and the basis therefor.

Any investment program undertaken by the Portfolio Adviser
pursuant to the Advisory Agreement, as well as any other activities
undertaken by the Portfolio Adviser on behalf of the FUND pursuant
thereto, is at all times subject to any directives of the Board of
Trustees of the Trust. VCM provides the Portfolio Adviser with
written notice of all such directives, so long as the Advisory
Agreement remains in effect.

Pursuant to the Advisory Agreement, the Portfolio Adviser
maintains, at its expense and without cost to VCM or the FUND, a

trading function in order to carry out its obligations to place orders
for the purchase and sale of portfolio securities for the FUND.

Pursuant to the Advisory Agreement, upon request of VCM and with
the approval of the Trust's Board of Trustees, the Portfolio Adviser
may perform services on behalf of the FUND which are not required by
the Advisory Agreement. Such services will be performed on behalf of
the FUND and the Portfolio Adviser's cost in rendering such services
may be billed monthly to VCM subject to examination by VCM's
independent accountants. Payment or assumption by the Portfolio
Adviser of any FUND expense that the Portfolio Adviser is not required
to pay or assume under the Advisory Agreement shall not relieve VCM or
the Portfolio Adviser of any of their obligations to the FUND or
obligate the Portfolio Adviser to pay or assume any similar FUND
expense on any subsequent occasions.

Pursuant to the Advisory Agreement, for the services to be
rendered and the facilities furnished hereunder, VCM pays the
Portfolio Adviser a monthly fee at the annual rate of .20% of the
FUND's average daily net assets. Compensation under the Advisory
Agreement is calculated and accrued daily and the amounts of the daily
accruals are paid monthly. The compensation paid to the Portfolio
Adviser will not be reduced by the amount of brokerage commissions
received by the Portfolio Adviser or its affiliated broker-dealer
pursuant to Section 17(e)(2) of the 1940 Act. For the period August
12, 1993 (commencement of operations) to April 30, 1994 and the fiscal
years ended April 30, 1995 and 1996, the fees paid to the Portfolio
Adviser by the prior manager were $9,758, $34,662, and $42,605,
respectively.

The Advisory Agreement was approved by the Trustees on March 24,
1995. The Advisory Agreement will remain in force and effect for an
initial term of two years, and shall remain in effect thereafter from
year to year, provided that such continuance is specifically approved
at least annually: (a) (i) by the Trust's Board of Trustees or (ii) by
the vote of a majority of the FUND's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act), and (b) by the
affirmative vote of a majority of the Trustees who are not parties to
the Advisory Agreement or interested persons of a party to the
Advisory Agreement (other than as a Trustee of the Trust), by votes
cast in person at a meeting specifically called for such purpose.

The Advisory Agreement may be terminated at any time, without the
payment of any penalty, by vote of the Trust's Board of Trustees or by
vote of a majority of the FUND's outstanding voting securities (as
defined in Section 2(a) (42) of the 1940 Act), or by VCM or the
Portfolio Adviser on sixty (60) days' written notice to the other
party. The Advisory Agreement automatically terminates: (a) in the
event of its assignment, the term "assignment" having the meaning
defined in Section 2(a)(4) of the 1940 Act, or (b) in the event that
the Investment Advisory Contract between the FUND and VCM shall
terminate.

CUSTODIAN

recores and documents relating to its duties. The custodian receives a
fee at an annual rate of .05 of 1% on the first $10 million of average
net assets of each of the six respective portfolios and .025 of 1% on
average net assets in excess of $10 million. There is a $20 fee
imposed on each transaction. The custodian fee received during any
fiscal year shall be at least $1,000 per Fund.

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of
Federated Investors, provides administrative personnel and services to
the Funds for the fees set forth in the prospectus.

DISTRIBUTION PLAN

personnel including clerical, supervisory, and computer, as necessary
or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client
inquiries regarding the Funds; assisting clients in changing dividend
options, account designations, and addresses; and providing such other
services as the Trust reasonably requests. For the fiscal year ended
April 30,1996, the FUND accrued payments under the Plan amounting to
$54,218.

Other benefits which the Fund hopes to achieve through the Plan
include, but are not limited to the following: (1) an efficient and
effective administrative system; (2) a more efficient use of assets of
shareholders by having them rapidly invested in the Fund with a
minimum of delay and administrative detail; and (3) an efficient and
reliable records system for shareholders and prompt responses to
shareholder requests and inquiries concerning their accounts.

By adopting the Plan, the then Board of Trustees expected that
the Fund will be able to achieve a more predictable flow of cash for
investment purposes and to meet redemptions. This will facilitate
more efficient portfolio management and assist the Fund in seeking to
achieve its investment objectives. By identifying potential investors
in shares whose needs are served by the Fund's objectives, and
properly servicing these accounts, the Fund may be able to curb sharp
fluctuations in rates of redemptions and sales.

DESCRIPTION OF THE FUND

Shareholder and Trustee Liability. The FUND is a series of an
entity of the type commonly known as a "Massachusetts business trust."
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable for the obligations
of the trust. The FUND's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations for the
FUND and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the
FUND or the Trustees. The Declaration of Trust provides for
indemnification out of the FUND property of any shareholder held
personally liable for the obligations of the FUND.

The Declaration of Trust also provides that the FUND shall, upon
request, assume the defense of any claim made against any shareholders
for any act or obligation of the FUND and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which
the FUND itself would be unable to meet its obligations. VCM believes
that, in view of the above, the risk of personal liability to
shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust
protects a Trustee against any liability to which he would otherwise
be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office.

Voting Rights. The FUND's capital consists of shares of
beneficial interest. Shares of the FUND entitle the holders to one
vote per share. The shares have no preemptive or conversion rights.
The voting and dividend rights and the right of redemption are
described in the Prospectus. Shares are fully paid and nonassessable,
except as set forth under "Shareholder and Trustee Liability" above.
The shareholders have certain rights, as set forth in the Declaration
of Trust, to call a meeting for any purpose, including the purpose of
voting on removal of one or more Trustees.

The FUND may be terminated upon the sale of its assets to another
open-end management company if approved by the vote of the holders of
a majority of the outstanding shares of the FUND. The FUND may also
be terminated upon liquidation and distribution of its assets, if
approved by a majority shareholder vote of the FUND. Shareholders of
the FUND shall be entitled to receive distributions as a class of the
assets belonging to the FUND. The assets of the FUND received for the
issue or sale of the shares of the FUND and all income earnings and
the proceeds thereof, subject only to the rights of creditors, are
specially allocated to the FUND, and constitute the underlying assets
of the FUND.

SHAREHOLDER REPORTS

Shareholders will receive reports semi-annually showing the
investments of the FUND and other information. In addition,
shareholders will receive annual financial statements audited by the
FUND's independent accountants.

The financial statements for the fiscal period ended April 30,
1996, are incorporated herein by reference from the Fund's Annual
Report dated April 30, 1996. A copy of the Annual Report for the Fund
may be obtained without charge by contacting Signet Financial
Services, Inc. at 1-800-829-3863.

APPENDIX A

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:

AAA: Bonds which are rated Aaa judged to be the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are 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 fluctuations of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in Aaa securities.

A: Bonds 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.

NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in the
generic rating classifications Aa and A in its bond rating system.

The modifier 1 indicates that the security 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 issue ranks in the
lower end of its generic rating category.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:

Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months.

- Leading market positions in well-established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.

- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.

- Well-established access to a range of financial markets and
assured sources of alternate liquidity.

Issuers rated PRIME-2 or P-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.

DESCRIPTION OF STANDARD AND POOR'S CORPORATION'S
BOND RATINGS:

AAA: Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay principal is
extremely strong.

AA: Bonds rated AA have a very strong capacity to pay interest;
and repay principal and differ from the higher rated issues only in
small degree.

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

PLUS (+) OR MINUS (-): The ratings AA and A may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.

NR: Bonds may lack a S&P rating because no public rating has
been requested, because there is insufficient information on which to
base a rating, or because S&P does not rate a particular type of
obligation as a matter of policy.

DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:

S&P's commercial paper ratings are current assessment of the
likelihood of timely payment of debts having an original maturity of
no more than 365 days.

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

NOTES WITH RESPECT TO ALL RATINGS:

Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal that are similar to the

risks of lower-rated bonds. The Fund is dependent on Fund
management's judgment, analysis and experience in the evaluation of
such bonds.

Investors should note that the assignment of a rating to a bond
by a rating service may not reflect the effect of recent developments
on the issuer's ability to make interest and principal payments.

PART C. OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements. (1-7) To be filed by
amendment.
(2,6)Audited Financial
Statements for the fiscal year
ended October 31, 1995 are
incorporated herein by
reference to the Annual Report
of Shareholders dated December
31, 1995.
(b) Exhibits
1. (a) Declaration of Trust of
Registrant.(1)

(b) Amendment of Declaration of Trust.(7)
2. By-laws of Registrant.(1)
3. Not Applicable
4. Specimen certificate for shares of
beneficial interest of Registrant.(2)
5. (i) Conformed copy of Management Contract
through and including Exhibit C
between Registrant, on behalf of each
of the series, and Virtus Capital
Management,
Inc. +
(ii) Conformed copy of Sub-Advisory
Agreements for Short-Term Global
Income Fund, Flexible Income Fund,
Short-Term Bond Fund, Flexible Tax-
Free Bond Fund, and Global Growth
Fund between Virtus Capital
Management, Inc., and Shufro, Rose &
Ehrman; Investment Advisors, Inc.;
Fiduciary International, Inc.;
OFFITBANK; Lombard Odier
International Portfolio Management
Limited; Provident Investment
Counsel, Inc.; U.S. Trust Company of
New York; Mellon Capital Management
Corporation; Martin Currie Inc.; and
Martin Currie Inc. from Item
5(b)(x)(a)-xviii) of the Blanchard
Funds Registration Statement filed

with the Commission on August 7,
1995. (File Number 33-3165 and 811-
4579). +
(iii) The Registrant incorporates the Form
of Global Asset Allocation Agreement
between Virtus Capital Management,
Inc. and Fiduciary International,
Inc. for Global (formerly Strategic)
Growth Fund from Item 5(b)(x)(b) of
the Blanchard Funds Registration
Statement filed with the Commission
on August 7, 1995. (File Number 33-
3165 and 811-4579).

(iv) Comformed copy of Sub-Advisory
Agreement between Lombard Odier
International Portfolio Management
Limited and WLO Global Management for
Short-Term Global Income Fund from
Item 5(b)(xix) of the Blanchard Funds
Registration Statement filed with the
Commission on August 7, 1995. (File
Number 33-3165 and 811-4579). +
6. (i) Conformed copy of Distributor's
Contract including Exhibit C between
Registrant and Federated Securities
Corp. +

7. Not Applicable.
8. (i) Form of Custodian Contract between
Registrant, on behalf of each series
and Signet Trust Company.(17)
(ii) Form of Agreement for Fund
Accounting, Shareholder Recordkeeping
and Custody Services Procurement
between Registrant, and Federated
Services Company.(17)
9. (i) Conformed copy of Administrative
Services Agreement between Registrant
and Federated Administrative
Services.(19)
(ii) Form of Transfer Agency and Fund
Accounting and Pricing Services
Agreements for Growth & Income
Fund.(18)
10. None.
11. Conformed copy of consent of Deloitte
& Touche LLP, independent accountants
for the Fund.(20)
12. Not applicable.
13. Agreement re: initial $100,000
capital.(3)
14. Copies of model tax-sheltered
retirement plans.(3)
15. (i) Conformed copy of Distribution Plan
including Exhibit B. +
(ii) Copy of 12b-1 Agreement.(19)

16.(i) Schedule of Performance Quotations
for Global (formerly Strategic)
Growth Fund series and for Blanchard
100% Treasury (formerly Government)
Money Market Fund series.(5)
(ii) Schedule of Performance Quotations
for Short-Term Global Income Fund
series(6)
(iii) Schedule of Performance Quotations
for American Equity (formerly
Worldwide Bond) Fund series(9)
(iv) Schedule of Performance Quotations
for Flexible Income Fund series.(10)
(v) Schedule of Performance Quotations
for Short-Term Bond Fund series.(11)
(vi) Schedule of Performance Quotations
for Flexible Tax-Free Bond Fund
series.(12)
(vii) Schedule of Performance Quotations
for Emerging Markets Fund (formerly
Blanchard Asset Manager or Blanchard
Asset Allocation Fund) series.(12)
(viii) Forms of computation of performance
quotations for Growth & Income and
Capital Growth series.(18)
17. Copy of Financial Data Schedules. +
18. Not applicable.
19. Conformed Copy of Power of
Attorney.(19)

+ All Exhibits Have been filed electronically.
1 Previously filed on February 5, 1986 in the Registrant's
Registration Statement.
2 Previously filed on March 28, 1986 in Pre-Effective Amendment No.
I to the Registrant's Registration Statement.
3 Previously filed on April 23, 1986 in Pre-Effective Amendment No.
2 to the Registrant's Registration Statement.
5 Previously filed on July 3, 1990 in Post-Effective Amendment No.
6 to the Registrant's Registration Statement.
6 Previously filed on November 2, 1990 in Post-Effective Amendment
No. 7 to the Registrant's Registration Statement.
7 Previously filed on December 21, 1990 in Post-Effective Amendment
No. 8 to the Registrant's Registration Statement.
9 Previously filed on June 8, 1992 in Post-Effective Amendment No.
13 to the Registrant's Registration Statement.
10 Previously filed on September 3, 1992 in Post-Effective Amendment
No. 15 to the Registrant's Registration Statement.
11 Previously filed on February 5, 1993 in Post-Effective Amendment
No. 16 to the Registrant's Registration Statement.
12 Previously filed on May 25, 1993 in Post-Effective Amendment No.
17 to the Registrant's Registration Statement.
17 To be filed by amendment.
18 Previously filed on August 7, 1995 in Post-Effective Amendment
No. 29 to the Registrant's Registration Statement.
19 Previously filed on October 17, 1995 in Post-Effective Amendment
No. 31 to the Registrant's Registration Statement.

20 Previously filed on February 27, 1996 in Post-Effective Amendment
No. 33 to the Registrant's Registration Statement.

ITEM 25. Persons Controlled By or Under Common Control with
Registrant

See "The Manager and Management Agreement" in the Prospectus
and Statement of Additional Information.

ITEM 26. Number of Holders or Securities

Number of Record Holders
Title of Class as of August 14, 1996

BCGF 226
BG&IF 2,117
BAAF 12
BFTFBF 1,122
BSTFIF 14,699
BFIF 15,613
BGGF 7,706

ITEM 27. Indemnification (20)

ITEM 28. Business and Other Connections or Investment Adviser

For a description of the other business of Virtus Capital
Management, Inc. see "Management of the Funds" in Part A. The
officers of Virtus Capital Management, Inc. are:

Gary M. Allen President, Chief Chief Investment Officer,
Investment Officer VCM, since March 1995;
Senior
and Director Vice President and Chief
Investment Officer, STC
(March 1994 to March 1995);
Managing Director of U.S.
Equities (November 1990 to
March 1994) and Director,
Internal Asset Management
(June 1985 to November
1990) of the Virginia
Retirement System.
E. Christian Goetz Senior Vice President,Chief Operating Officer,
VCM,
Chief Operating Officer since February, 1996;
Director
and Director of Fixed Income, VCM, since
March, 1995; Portfolio
Manager STC (November, 1990
to March, 1995).

Tanya Orr Bird Vice President and Equity Portfolio Manager,
VCM,
and Director since September, 1995;
Director of Client
Services, VCM, (October,
1994 to September, 1995);
Consultant, William M.
Mercer Asset Planning Inc.,
(1989 to October 1994).
John S. Hall Vice President Fixed Income Portfolio
Manager,
VCM, since May, 1995;
Senior Fixed Income
Portfolio Manager (1992 to
May, 1995) Hibernia
National Bank
Robert J. King Vice President and Director of Client Services
and
Director of Client Marketing, VCM, since
Services and MarketingSeptember, 1995; Client
Services/Marketing Director
(1990 to September, 1995);
Chase Investment Counsel
Corp.
C. Gregory Weirich Vice President and Sales Sales and Client Service
for
and Client Service for Fixed Income, VCM, since
June,

Fixed Income 1994; Vice President and
Sales Manager, Signet
Employee Benefits
(February, 1993 to June,
1994); Vice President and
Sales, Signet Employee
Benefits (April, 1989 to
February, 1993).
ITEM 29. Principal Underwriters

(a) Federated Securities Corp., the Distributor for shares
of the Registrant, also acts as principal underwriter for the
following open-end investment companies: 111 Corcoran Funds; Annuity
Management Series; Arrow Funds; Automated Government Money Trust;
BayFunds; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash
Trust Series II; Cash Trust Series, Inc.; DG Investor Series; Edward
D. Jones & Co. Daily Passport Cash Trust; Federated Adjustable Rate
U.S. Government Fund, Inc.; Federated American Leaders Fund, Inc.;
Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.;
Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series; Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities
Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and
Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;

Federated Total Return Series, Inc.; Federated U.S. Government Bond
Fund; Federated U.S. Government Securities Fund: 1-3 Years; Federated
U.S. Government Securities Fund: 2-5 Years; Federated U.S. Government
Securities Fund: 5-10 Years; Federated Utility Fund, Inc.; First
Priority Funds; Fixed Income Securities, Inc.; Fortress Utility Fund,
Inc.; High Yield Cash Trust; Independence One Mutual Funds;
Intermediate Municipal Trust; International Series, Inc.; Investment
Series Funds, Inc.; Investment Series Trust; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed Series Trust; Marshall
Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds;
Star Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The
Virtus Funds; Tower Mutual Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S.
Government Securities; Trust for U.S. Treasury Obligations; Vision
Group of Funds, Inc.; andWorld Investment Series, Inc.

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.-
1999.

(b)

(1) (2) (3)

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With
Registrant

Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President,Secretary
Pittsburgh, PA 15222-3779 and Treasurer

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated

Pittsburgh, PA 15222-3779 Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With
Registrant

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.

Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With
Registrant

Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With
Registrant

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --

Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Assistant Secretary,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

ITEM 30. Location of Accounts and Records

The accounts and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:

Blanchard Funds Federated Investors Tower
Pittsburgh, PA

Federated Shareholder Services P.O. Box 8600
Company (Transfer Agent,Dividend Boston, MA
Disbursing Agent and
Portfolio Recordkeeper)

Federated Administrative Federated Investors Tower
Services (Administrator) Pittsburgh, PA

Virtus Capital Management, Inc. 707 East Main Street
(Adviser) Suite 1300
Richmond, VA

Signet Trust Company 7 North Eighth Street
(Custodian) Richmond, VA

ITEM 31. Management Services

Not applicable.

ITEM 32. Undertakings

Registrant hereby undertakes to comply with the provisions
of Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.

Registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the latest annual report to
shareholders, upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, BLANCHARD FUNDS, has
duly caused this Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereto duly authorized, in the City
of Pittsburgh and Commonwealth of Pennsylvania, on the 26th day of
August, 1996.

BLANCHARD FUNDS

BY: /s/C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue
August 26, 1996

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:

NAME TITLE DATE

By:/s/C. Grant Anderson
C. Grant Anderson Attorney In Fact August 26, 1996
ASSISTANT SECRETARY For the Persons
Listed Below

John F. Donahue* Chairman and Trustee
(Chief Executive Officer)

Edward C. Gonzales* President, Treasurer and
Trustee
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Trustee

John T. Conroy, Jr.* Trustee

William J. Copeland* Trustee

James E. Dowd* Trustee

Lawrence D. Ellis, M.D.* Trustee

Edward L. Flaherty, Jr.* Trustee

Peter E. Madden* Trustee

Gregor F. Meyer* Trustee

John E. Murray, Jr.* Trustee

Wesley W. Posvar* Trustee

Marjorie P. Smuts* Trustee

* By Power of Attorney

Exhibit (11) under Form N-1A
Exhibit 23 under Item 601/Reg SK

INDEPENDENT AUDITORS' CONSENT

To the Board of Trustees and Shareholders of
BLANCHARD FUNDS:

We consent to the incorporation by reference in Post-Effective Amendment
No. 37 to Registration Statement (No. 33-3165) of Blanchard Funds
(comprising the following portfolios: Blanchard Global Growth Fund,
Blanchard Precious Metals Fund, Inc., Blanchard Flexible Income Fund,
Blanchard Short-Term Flexible Income Fund and Blanchard Flexible Tax-Free
Bond Fund) of our reports dated June 19, 1996, appearing in the Annual
Reports, which are incorporated by reference in such Registration
Statement, and to the reference to us under the heading `Financial
Highlights''in such Prospectus.

By: DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania,
August 26, 1996

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
INVESTMENT ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995, by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the
"Manager"), and LOMBARD ODIER INTERNATIONAL PORTFOLIO MANAGEMENT LIMITED
(the "Portfolio Manager" or "Lombard") with respect to the following
recital of fact:

R E C I T A L

WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end
non-diversified management investment company under the Investment Company
Act of 1940, as amended (the "1940 Act") and the rules and regulations
promulgated thereunder; and

WHEREAS, th Trust and the Manager have entered into a Management
Agreement to provide for management services for Blanchard Short-Term
Global Income Fund, a series of the Trust (the "Fund"), on the terms and
conditions set forth in the Management Agreement dated of even date
herewith; and

WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and is a member of
the Investment Management Regulatory Organization Limited ("IMRO"), a self-
regulating organization recognized under the Financial Services Act 1986 of
the United Kingdom, and engages in the business of acting as and investment
adviser; and
WHEREAS, the Portfolio Manage proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities
to the Fund on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. Lombard shall act as the Portfolio Manager
for the Fund and shall, in such capacity, supervise the investment and
reinvestment of the cash, securities or other properties comprising the
Fund's portfolio, subject at all times to the direction of the Manager
and the policies and control of the Trust's Trustees. Lombard shall give
the Fund the benefit of its best judgment, efforts and facilities in
rendering its services as Portfolio Manager. The Portfolio Manager may
engage, on behalf of the Fund and with the required consent of the
shareholders thereof, the services of a sub-adviser, subject to any
limitations imposed by the 1940 Act.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Portfolio Manager shall:

(a) at all times adhere to the Fund's investment objectives,
restrictions and limitations as contained in its Prospectus and
Statement of Additional Information;

(b) use the same skill and care in providing such service as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities.

(c) obtain and evaluate pertinent information about significant
developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally or the Fund's portfolio and whether concerning the
individual issuers whose securities are included in the Fund's
portfolio or the activities in which the issues engage, or
with respect to securities which the Portfolio Manager considers
desirable for inclusion in the Fund's portfolio;

(d) determine which issuers and securities shall be represented in
the Fund's portfolio and regularly report thereon to the Manager;

(e) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly report
thereon to the Manager;

(f) take, on behalf of the Fund, all actions which appear to the
Fund and the Manager necessary to carry into effect such purchase
and sale programs and supervisory functions as aforesaid,
including the placing of orders for the purchase and sale of
securities for the Fund and the prompt reporting to the Manager
of such purchases and sales; and

(g) be authorized to give instructions to the Custodian and Sub-
Custodian of the Fund as to deliveries of securities, transfers
of currencies and payments of cash for the account of the Fund,
in relation to the matters contemplated by this Agreement. All
securities or other assets to the Fund shall be held in, the
Custodian or Sub-Custodian appointed by the Fund's Trustees.

3. Broker-Dealer-Relationship. The Portfolio Manager (and/or any
Sub-Adviser) is responsible for decisions to buy and sell securities for
the Fund's portfolio, broker-dealer selection, and negotiation of
brokerage commission rates. The Portfolio Manager' (Sub-Adviser's) primary
consideration in effecting a security transaction will be execution at
the most favorable price. In selecting a broker-dealer to execute each
particular transaction, the Portfolio Manager (Sub-Adviser) will take the
following into consideration: the best net price available, the
reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the
expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price
to the Fund in any transaction may be less favorable than that available
from another broker-dealer if the difference is reasonably justified by
other aspects of the portfolio execution services offered. Subject to
such policies as the Trustees may determine, the Portfolio Manager (Sub-
Adviser) shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement (Sub-Advisory
Agreement) or otherwise solely by reason of its having caused the Fund to
pay a broker for effecting a portfolio investment transaction in excess of
the amount of commission another broker or dealer would have charged
for effecting that transaction, if the Portfolio Manager (Sub-Adviser)
determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided
by such broker or dealer, viewed in terms of either that particular
transaction or the Portfolio Manager's (Sub-Adviser's) overall
responsibilitie with respect to the Fund and to its other clients as to
which it executes investment discretion. The Portfolio Manager (Sub-
Adviser) is further authorized to allocate the orders placed by it on
behalf of the Fund to itself, to its affiliated broker-dealer, if any,
or affiliated broker-dealers of the Manager, or to such brokers and
dealers who also provide research or statistical material, or other
services to the Fund or the Portfolio Manager (Sub-Adviser). Such
allocation shall be in such amounts and proportions as the Portfolio
Manager (Sub-Adviser) shall determine and the Portfolio Manager (Sub-
Adviser) will report on said allocations regularly to the Manager
indicating the brokers to whom such allocations have been made and the
basis therefor.
4. Control by Trustees. Any investment program undertaken by the
Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of
the Board of Trustees of the Trust. The Manager shall provide the
Portfolio Manager with written notice of all such directives, so long as
this Agreement remains in effect.

5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Portfolio Manager shall at all times
conform to:

(a) all applicable provisions of the 1940 Act;

(b) the provisions of the Registration Statement of the Trust under
the Securities Act of 1933 and the 1940 Act;

(d) as a member of IMRO and in light of the IMRO Rules, the
Portfolio Manager places on record that it regards this Agreement
as not necessitating any ancillary agreement with the Fund or the
Manager on the grounds that, within the meanings of the IMRO
Rules, and for purposes thereof, (a) the Fund is an open-ended
investment company and a business investor, (b) the Manager is a
Professional Investor and (c) the subject matter of this
Agreement is a scheme management activity.

6. Expenses. The expenses connected with the Fund shall be borne by
the Portfolio Manager as follows:

The Portfolio Manager shall maintain, at its expense and without cost
to the Manager or the Fund, a trading function in order to carry out its
obligations under subparagraph (f) of paragraph 2 hereof to place orders
for the purchase and sale of portfolio securities for the Fund.

7. Delegation of Responsibilities. Upon request of the Manager and
with the approval of the Trust's Trustees, the Portfolio Manager may
perform services on behalf of the Fund which are not required by this
Agreement. Such services will be performed on behalf of the Fund and
the Portfolio Manager's costs in rendering such services may be billed
monthly to the Manager, subject to examination by the Manager's
independent accountants. Payment or assumption by the Portfolio Manager
of any Fund expense that the Portfolio Manager is not required to pay or
assume under this Agreement shall not relieve the Manager or the Portfolio
Manager of any of their obligations to the Fund or obligate the Portfolio
Manager to pay or assume any similar Fund expense on any subsequent
occasions.

8. Compensation. For the services to be rendered and the facilities
furnished hereunder the Manager shall pay the Portfolio Manager monthly
compensation at the annual rate of .35% of the first $10 million of the
Fund's average daily net assets, .30% of the next $10 million of
average daily net assets, .25% of the next $10 million of average daily
net assets, .20% of the next $10 million of average daily net assets,
and .15% of average daily net assets in excess of $40 million.
Compensation under this Agreement shall be calculated and accrued daily
and the amounts of the daily accruals shall be paid on a monthly basis. If
this Agreement becomes effective subsequent to the first day of a month or
shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a
manner consistent with the calculation of the fees as set forth above.
Payment of the Portfolio Manager's compensation for the preceding month
shall be made as promptly as possible after the end of each month.
9. Expense Limitation. If for any fiscal year the total of all
ordinary
business expenses of the Fund, including all investment advisory
fees but
excluding brokerage commissions, distribution fees, taxes, interest
and
extraordinary expenses and certain other excludable expenses, would
exceed the most restrictive expense limits imposed by any statute or
regulatory authority of any jurisdiction in which shares of the Fund
are offered for sale, the management fee, which the Manager would
otherwise receive from the Fund, shall be reduced in order to reduce such
excess expenses; however, the Manager will not be required to reimburse
the Fund for any ordinary business expenses which exceed the amount of
its management fee for such fiscal year. The fee which the Portfolio
Manager would otherwise receive from the Manager pursuant to paragraph 8 of
this Agreement should also be reduced proportionately, but only to the
extent of such fee. For example, the Manager's fee is reduced by 1/4,
the Portfolio Manager's fee from the Manager will also be reduced by
1/4. Such reduction shall be deducted from the monthly fee otherwise
payable to the Portfolio Manager by the Manager. For the purposes of this
paragraph, the term "fiscal year" shall exclude the portion of the
current fiscal year which shall have elapsed prior to the date hereof and
shall include the portion of the then current fiscal year which shall have
elapsed at the date of termination of this Agreement.

10. Non-Exclusivity. The services of the Portfolio Manager to the
Manager are not deemed to be exclusive, and the Portfolio Manager
shall be free to render investment advisory or other services to others
(including investment companies or investment trusts) and to engage in
other activities (i) so long as its services under the Agreement are not
impaired thereby; and (ii) provided that it does not render investment
advisory services to other U.S. investment companies which specialize in
marketing publicly offered, "no-load/low-load" mutual funds (i.e.,
those that are sold either with no sales charge or with a front-end or
back-end sales charge of up to 2.0%), without first terminating this
Agreement in accordance with the provisions set forth below or receiving
written permission to do so from the Manager. If either the Portfolio
Manager or the Manager terminates this Agreement, by giving sixty (60)
days' written notice, in accordance with Section 14 hereof, the
Portfolio Manager agrees that for a period of six months following the
effective date of termination, it will not render investment advisory
services to other U.S. investment companies which specialize in publicly
marketing "no-load/low-load" mutual funds (as previously defined)
unless the Portfolio Manager has obtained prior written approval from
the Manager to enter such potential advisory agreements. It is recognized
that the Portfolio Manager has an existing agreement with another U.S.
investment company to manage "full load" mutual funds (i.e., those that
are sold with a front-end or back-end sales charge of 2.0% or more) and
that the Portfolio Manager is free to render these services and to enter
into additional such agreements to manage "full load" mutual funds at
any time.

11. Indemnity for Taxes. Notwithstanding any other provision of
this Agreement, the Manager shall indemnify and save the Portfolio Manager
and each of its affiliates, officers, directors and employees (each
individually referred to as an "Indemnified Party") harmless from,
against, for and in respect of all taxes imposed by the United Kingdom on
the Manager or the Fund, in relation to the matters contemplated by this
Agreement in the event that any such tax is amended or charged on an
Indemnified Party as a branch or agent of the Manager or the Fund.

12. Term. This Agreement shall become effective at the cost of
business on the date hereof and shall remain in force and effect,
subject to Section 14
hereof, for an initial term of two years.
13. Renewal. Following the expiration of its initial two-year
term, the Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:

(a) (i) by the Trust's Trustees or (ii) by the vote of a majority
of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and

(b) by the affirmative vote of a majority of the Trustees who are
not parties to this Agreement (other than as a Trustee of the
Trust), by votes cast in person at a meeting specifically called
for such purpose.

14. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Trustees or by
vote of a majority of the Fund's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act) or by the Manager or the
Portfolio Manager, on sixty (60) day's written notice to the other party.
This Agreement shall automatically terminate: (a) in the event of its
assignment, the term "assignment" having the meaning defined in Section
2(a)(4) of the 1940 Act, or (b) in the event that the Management
Agreement between the Trust and the Manager shall terminate.

15. Liability of the Portfolio Manager. In th absence of
willful misfeasance, bad faith or gross negligence on the part of the
Portfolio Manager or its officers, directors or employees, or reckless
disregard by the Portfolio Manager of its duties under this Agreement, the
Portfolio Manager shall not be liable to the Manager, the Trust or to any
shareholder of the Trust for any act or omission in the course of or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
16. Liability of Trustees and Shareholders. A copy of the Agreement
and Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts, and notice is hereby
given that the obligations of this instrument are not binding upon any
of the Trustees or shareholders individually but are binding only upon
the assets and property of the Fund.

17. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice.
Until further notice to the other company, it is agreed that the
address of the Manager for this purpose shall be 707 East Main Street,
Suite 1300, Richmond, Virginia 23219, that of the Trust for this
purpose shall be Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3779, and the address of the Portfolio Manager for this purpose
shall be Norfolk House, 13 Southampton Place, London WC1A 2AJ, England.

18. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of a controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of
the 1940 Act reflected in the provision of this Agreement is revised by
rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on, July 12, 1995.
Attest: VIRTUS CAPITAL
MANAGEMENT, INC.

By /s/ E. Christian Goetz /s/ James R. Eads
Title: Sr. Vice President Sr. Vice President

Attest: LOMBARD ODIER INTERNATIONAL
PORTFOLIO MANAGEMENT
LIMITED
By /s/ Jean-Claude Ramel /s/ Robert VanMaasdijk

Exhibit 10 under Form N-1A
Exhibit 9 under Item 601/Reg S-K

BLANCHARD FUNDS
MANAGEMENT CONTRACT

This Contract is made this 12th day of July, 1995 between Virtus
Capital Management, Inc., a Maryland corporation having its principal
place of business in Richmond, Virginia (the "Manager"), and Blanchard
Funds, a Massachusetts business trust having its principal place of
business in Pittsburgh, Pennsylvania (the "Trust").

WHEREAS the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940, as amended, and is
registered as such with the Securities and Exchange Commission; and

WHEREAS Manager is engaged in the business of rendering investment
Management and management services.

NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

1. The Trust hereby appoints Manager as manager for each of the
portfolios ("Funds") of the Trust which executes an exhibit to this
Contract, and Manager accepts the appointments. Subject to the direction
of the Trustees of the Trust, Manager shall provide or procure on behalf of
each of the Funds all management and administrative services. In carrying
out its obligations under this paragraph, the Manager shall: (i) provide
or arrange for investment research and supervision of the investments of
the Funds; (ii) select and evaluate the performance of each Fund's
Portfolio Sub-Manager; (iii) select and evaluate the performance of the
Administrator; and (iv) conduct or arrange for a continuous program of
appropriate sale or other disposition and reinvestment of each Fund's
assets.

2. Manager, in its supervision of the investments of each of the
Funds will be guided by each of the Fund's investment objective and
policies and the provisions and restrictions contained in the Declaration
of Trust and By-Laws of the Trust and as set forth in the Registration
Statements and exhibits and may be on file with the Securities and Exchange
Commission.

3. Each Fund shall pay or cause to be paid all of its own expenses
and its allocable share of Trust expenses, including, without limitatlon,
the expenses of organizing the Trust and continuing its existence;
fees and expenses of trustees and officers of the Trust; fees for
investment Management services and administrative personnel and services;
expenses incurred in the distribution of its shares ("Shares"), including
expenses of administrative support services; fees and expenses of
preparing and printing its Registration Statements under the Securities
Act of 1933 and the Investment Company Act of 1940, as amended, and any
amendments thereto; expenses of registering and qualifying the Trust,
the Funds, and Shares of the Funds under federal and state laws and
regulations; expenses of preparing, printing, and distributing prospectuses
(and any amendments thereto) to shareholders; interest expense, taxes,
fees, and commissions of every kind; expenses of issue (including cost of
Share certificates), purchase, repurchase, and redemption of Shares,
including expenses attributable to a program of periodic issue; charges and
expenses of custodians, transfer agents, dividend disbursing agents,
shareholder servicing agents, and registrars; printing and mailing costs,
auditing, accounting, and legal expenses; reports to shareholders and
governmental officers and commissions; expenses of meetings of Trustees
and shareholders and proxy solicitations therefor; insurance expenses;
association membership dues and such nonrecurring items as may arise,
including all losses and liabilities incurred in administering the Trust
and the Funds. Each Fund will also pay its allocable share of such
extraordinary expenses as may arise including expenses incurred in
connection with litigation, proceedings, and claims and the legal
obligations of the Trust to indemnify its officers and Trustees and agents
with respect thereto.

4. Each of the Funds shall pay to Manager, for all services rendered
to each Fund by Manager hereunder, the fees set forth in the exhibits
attached hereto.

5. If, for any fiscal year, the total of all ordinary business
expenses of the Fund, including all management fees but excluding
distribution fees, taxes, interest and extraordinary expenses and certain
other excludable expenses, would exceed the most restrictive expense limits
imposed by any statute or regulatory authority of any jurisdiction in
which shares of the Fund are offered for sale, the Manager shall reduce its
management fee in order to reduce such excess expenses, but will not be
required to reimburse the Fund for any ordinary business expenses which
exceed the amount of its management fee for such fiscal year. The amount
of any such reduction is to be borne by the Manager and shall be deducted
from the monthly management fee otherwise payable to the Manager during
such fiscal year. For the purposes of this paragraph, the term "fiscal
year" shall exclude the portion of the current fiscal year which shall have
elapsed prior to the date hereof and shall include the portion of the then
current fiscal year which shall have elapsed at the date of termination of
this Agreement.

6. The net asset value of each Fund's Shares as used herein will be
calculated to the nearest 1/10th of one cent.

7. The Manager may from time to time and for such periods as it deems
appropriate reduce its compensation (and, if appropriate, assume expenses
of one
or more of the Funds) to the extent that any Fund's expenses exceed such
lower
expense limitation as the Manager may, by notice to the Funds, voluntarily
declare to be effective.

8. This Contract shall begin for each Fund as of the date of
execution of
the applicable exhibit and shall continue in effect with respect to each
Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant
to an
exhibit during the initial term of this Contract) for two years from the
date of
this Contract set forth above and thereafter for successive periods of one
year,
subject to the provisions for termination and all of the other terms and
conditions hereof if: (a) such continuation shall be specifically
approved at
least annually by the vote of a majority of the Trustees of the Trust,
including
a majority of the Trustees who are not parties to this Contract or
interested
persons of any such party cast in person at a meeting called for that
purpose;
and (b) Manager shall not have notified a Fund in writing at least sixty
(60)
days prior to the anniversary date of this Contract in any year thereafter
that
it does not desire such continuation with respect to that Fund. If a Fund
is
added after the first approval by the Trustees as described above, this
Contract
will be effective as to that Fund upon execution of the applicable
exhibit and
will continue in effect until the next annual approval of this Contract
by the
Trustees and thereafter for successive periods of one year, subject to
approval
as described above.

9. Notwithstanding any provision in this Contract, it may be
terminated at
any time with respect to any Fund, without the payment of any penalty, by
the
Trustees of the Trust or by a vote of the shareholders of that Fund on
sixty (60) days' written notice to Manager.

10. This Contract may not be assigned by Manager and shall
automatically
terminate in the event of any assignment. Manager may employ or contract
with
such other person, persons, corporation, or corporations at its own cost
and expense as it shall determine in order to assist it in carrying out
this Contract.

11. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties under this
Contract on the part
of Manager, Manager shall not be liable to the Trust or to any of the Funds
or
to any shareholder for any act or omission in the course of or connected in
any
way with rendering services or for any losses that may be sustained in
the
purchase, holding, or sale of any security.

12. This Contract may be amended at any time by agreement of the
parties
provided that the amendment shall be approved both by the vote of a
majority of
the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and, where required by Section 15(a)(2) of the
Act, on behalf of a Fund by a majority of the outstanding voting securities
of such Fund as defined in Section 2(a)(42) of the Act.

13. The Manager acknowledges that all sales literature for
investment
companies (such as the Trust) are subject to strict regulatory oversight.
The
Manager agrees to submit any proposed sales literature for the Trust (or
any
Fund) or for itself or its affiliates which mentions the Trust (or any
Fund) to
the Trust's distributor for review and filing with the appropriate
regulatory
authorities prior to the public release of any such sales literature,
provided,
however, that nothing herein shall be construed so as to create any
obligation
or duty on the part of the Manager to produce sales literature for the
Trust (or
any Fund). The Trust agrees to cause its distributor to promptly review
all such
sales literature to ensure compliance with relevant requirements, to
promptly
advise Manager of any deficiencies contained in such sales literature, to
promptly file complying sales literature with the relevant authorities,
and to cause such sales literature to be distributed to prospective
investors in the Trust.

14. A copy of the Agreement and Declaration of Trust of the Trust is
on file with the Secretary of The Commonwealth of Massachusetts, and notice
is hereby given that this instrument is executed on behalf of the Trustees
of the Trust as Trustees and not individually and that the obligations of
this instrument are not binding upon any of the Trustees, or any of the
officers, employees, agents or shareholders of the Trust individually but
are binding only upon the assets and property of the Trust. Notice is also
hereby given that the obligations pursuant to this instrument of a
particular Fund and of the Trust with respect to that particular Fund
shall be limited solely to the assets of that particular Fund.

15. This Contract shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.

16. This Contract will become binding on the parties hereto upon
their execution of the attached exhibits to this Contract.

EXHIBIT A
to the
Management Contract

Blanchard Global Growth Fund
Blanchard 100% Treasury Money Market Fund
Blanchard Short-Term Global Income Fund
Blanchard American Equity Fund
Blanchard Flexible Income Fund
Blanchard Short-Term Bond Fund
Blanchard Flexible Tax-Free Bond Fund
Blanchard Worldwide Emerging Markets Fund

For all services rendered by Manager hereunder, the above-named Funds of
the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee
equal to the following percentage (`the applicable percentage'') of the
average daily net assets of each Fund.

NAME OF FUND PERCENTAGE OF NET ASSETS

Blanchard Global Growth Fund 1% of the first $150 million of average
daily net assets, .875% of the Fund's
average daily net assets in excess of $150
million but not exceeding $300 million and
.75% of the Fund's average daily net
assets in excess of $300 million.

Blanchard 100% Treasury Money .5% of the first $500 million of the
Market Fund Fund's average daily net assets, .475% of
the Fund's average daily net assets in
excess of $500 million but not exceeding
$1 billion, plus .45% of the Fund's
average daily net assets in excess of $1
billion.

Blanchard Short-Term Global
Income Fund .75%

Blanchard American Equity Fund 1.10%

Blanchard Flexible Income Fund .75%

Blanchard Short-Term Bond Fund .75%

Blanchard Flexible Tax-Free
Bond Fund .75%

Blanchard Worldwide Emerging
Markets Fund 1.25%

The portion of the fee based upon the average daily net assets of the Fund
shall be accrued daily at the rate of 1/365th of the applicable percentage
applied to the daily net assets of the Fund.

The advisory fee so accrued shall be paid to Manager daily.

Witness the execution hereof this 12th day of July, 1995.

Attest: Virtus Capital Management, Inc.

/s/ J. David Faulders By /s/ James R. Eads
------------ ------
Assistant Secretary Senior Vice President
Attest: Blanchard Funds

/s/ C. Grant Anderson By:/s/ Joseph A. Machi
Assistant Secretary Vice President

EXHIBIT B
to the
Management Contract

BLANCHARD GROWTH & INCOME FUND
BLANCHARD CAPITAL GROWTH FUND

The Trust shall pay to Manager, on behalf of the Funds, monthly
compensation at the annual rate of 1.10% of each Fund's average daily net
assets, .40% of which, which would otherwise be received by VCM and paid
to The Chase Manhattan Bank, N.A. ("Chase") for portfolio Management
services, shall be paid to Chase directly by the Capital Growth Portfolio
and the Growth & Income Portfolio, respectively, under separate
investment Management agreements between Chase and the Capital Growth
Portfolio and Chase and the Growth & Income Portfolio.

The portion of the fee based upon the average daily net assets of the
Funds shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of each Fund.

Witness the due execution hereof this 12th day of July, 1995.

Attest: VIRTUS CAPITAL
MANAGEMENT, INC.

/s/J. David Faulders By /s/ James R. Eads
Assistant Secretary Senior Vice President

Attest: BLANCHARD FUNDS

/s/ C. Grant Anderson By /s/ Joseph S. Machi
Assistant Secretary Vice President

Exhibit 1 under Form N-1A
Exhibit 15 under Item 601/Reg S-K

EXHIBIT B
to the
Distribution Plan

BLANCHARD FUNDS
BLANCHARD ASSET ALLOCATION FUND

This Distribution Plan is adopted by Blanchard Funds with respect
to the portfolio of the Trust set forth above ("Portfolio").
The fees to be paid by FSC and reimbursed by the Portfolio shall
not exceed the annual rate of .25 of 1% of the average aggregate net
asset value of the held during the month.
Witness the due execution hereof this 1st day of December, 1995.

BLANCHARD FUNDS

By:/s/ Edward C. Gonzales
President

Exhibit 1 under Form N-1A
Exhibit 6 under Item 601/Reg S-K

Exhibit C
to the
Distributor's Contract

BLANCHARD FUNDS
BLANCHARD ASSET ALLOCATION FUND

The following provisions are hereby incorporated and made part of
the Distributor's Contract dated July 12, 1995, between Blanchard
Funds and Federated Securities Corp. with respect to the Class of the
Fund set forth above:
1. The Trust hereby appoints FSC to select a group of financial
institutions ("Financial Institutions") to sell shares of the above-
listed series and Class ("Shares"), at the current offering price
thereof as described and set forth in the prospectuses of the Trust.
2. FSC will enter into separate written agreements with various firms
to provide the services set forth in Paragraph 1 herein. During the
term of this Agreement, the Trust will reimburse FSC for payments
made by FSC to obtain services pursuant to this Agreement, a monthly
fee computed at the annual rate of up to .25 of 1% of the average
aggregate net asset value of the Shares held during the month. For
the month in which this Agreement becomes effective or terminates,
there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during
the month. The fees paid hereunder shall be in an amount equal to
the aggregate amount of periodic fees paid by FSC to Financial
Institutions pursuant to Paragraph 3 herein.
3. FSC, in its sole discretion, may pay Financial Institutions a
periodic fee in respect of Shares owned from time to time by their
clients or customers. The schedules of such fees and the basis upon
which such fees will be paid shall be determined from time to time
by the Trust's Board of Trustees.
4. FSC may from time-to-time and for such periods as it deems
appropriate reduce its compensation to the extent any Class'
expenses exceed such lower expense limitation as FSC may, by notice
to the Trust, voluntarily declare to be effective.
5. FSC will prepare reports to the Board of Trustees of the Trust on a
quarterly basis showing amounts paid to the various firms and the
purpose for such payments.
6. In the event any amendment to this Agreement materially increases
the fees set forth in Paragraph 2, such amendment must be approved
by a vote of a majority of the outstanding voting securities of the
appropriate Fund or Class.
In consideration of the mutual covenants set forth in the
Distributor's Contract dated July 12, 1995 between Blanchard Funds and
Federated Securities Corp., Blanchard Funds executes and delivers this
Exhibit on behalf of the Blanchard Asset Allocation Fund and first set
forth in this Exhibit.
Witness the due execution hereof this 1st day of December 1, 1995.

ATTEST: BLANCHARD FUNDS

/s/ John W. McGonigle By:/s/ Edward C. Gonzales
Secretary President
(SEAL)

ATTEST: FEDERATED SECURITIES CORP.

/s/ Byron F. Bowman By:/s/ Edward C. Gonzales

Secretary Executive Vice President

(SEAL)

Exhibit 10 under Form N-1A
Exhibit 9 under Item 601/Reg S-K

EXHIBIT C
to the
Management Contract

BLANCHARD ASSET ALLOCATION FUND

For all services rendered by Manager hereunder, the above-named Fund
of the Trust shall pay to Manager and Manager agrees to accept as full
compensation for all services rendered hereunder, an annual management fee
equal to 1% of the average daily net assets of the Fund.

The portion of the fee based upon the average daily net assets of the
Fund shall be accrued daily at the rate of 1/365th of 1% applied to the
daily net assets of the Fund.

The management fee so accrued shall be paid to Manager monthly.
Witness the due execution hereof this December 1, 1995.

Attest: VIRTUS CAPITAL MANAGEMENT, INC.

/s/ J. David Faulders By: /s/ E. Christian Goetz
Assistant Secretary Senior Vice President

Attest: BLANCHARD FUNDS
/s/ C. Grant Anderson By: /s/ Richard B. Fisher
Assistant Secretary Vice President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"),
and CAVELTI CAPITAL MANAGEMENT, LTD., a Canadian money management firm (the
"Portfolio Manager" or "Cavelti") with respect to the following recital of
fact:

R E C I T A L

WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end,
non-diversified, management investment company under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
promulgated thereunder; and

WHEREAS, the Portfolio is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment adviser; and

WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate series, with each such series representing interests
in a separate portfolio of securities and other assets; and

WHEREAS, the Trust offers shares in one series called the Blanchard
Global Growth Fund (such series, being referred to as the "Fund"); and
WHEREAS, the Trust and the Manager have entered into an agreement of
even date herewith to provide for management services for the Fund on the
terms and conditions set forth therein (the "Management Agreement"); and

WHEREAS, the Portfolio Manager proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities
to the Fund with respect to the Precious Metals Securities and Bullion
sector of the Fund's portfolio on the terms and conditions hereinafter set
forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. Cavelti shall act as a Portfolio Manager
for the Fund and shall, in such capacity, supervise the investment and
reinvestment of a portion of the cash, securities or other properties
comprising the Precious Metals Securities and Bullion sector of the Fund's
portfolio, subject at all times to the direction of the Global Asset
Allocation Strategist, the Manager and the policies and control of the
Trust's Board of Trustees. Cavelti shall give the Fund the benefit of
its best judgment, efforts and facilities in rendering its services as
Portfolio Manager.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Portfolio Manager shall:

(a) use the same skill and care in providing such service as it
uses in providing services to fiduciary accounts for which it
has investment responsibilities;

(b) obtain and evaluate pertinent information about significant
developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally or the Fund's portfolio and whether concerning the
individual issuers whose securities are included in the Fund's
portfolio or the activities in which the issuers engage, or with
respect to securities which the Portfolio Manager considers
desirable for inclusion in the Fund's portfolio;

(c) determine which issuers and securities shall be represented in
the Fund's portfolio and regulary report thereon to the Trust's
Board of Trustees;

(d) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly report
thereon to the Trust's Board of Trustees; and

(e) take, on behalf of the Fund, all actions which appear to the
Trust and the Manager necessary to carry into effect such
purchase and sale programs and supervisory functions as
aforesaid, including the placing of orders for the purchase and
sale of securities for the Fund and the prompt reporting to the
Manager of such purchases and sales.

3. Broker-Dealer Relationships. The Portfolio Manager is
responsible for decisions to buy and sell securities for the Fund's
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Portfolio Manager's primary consideration in effecting a
security transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, the
Portfolio Manager will take the following into consideration: the best net
price available, the reliability, integrity and financial condition of the
broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of the Fund on a continuing basis. Accordingly, the price to
the Fund in any transaction may be less favorable than that available from
another broker-dealer if the difference is reasonably justified by
other aspects of the portfolio execution services offered. Subject to such
policies as the Board of Trustees may determine, the Portfolio Manager
shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of its having
caused the Fund to pay a broker for effecting a portfolio investment
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the Portfolio
Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that
particular transaction or the Portfolio Manager's overall responsibilities
with respect to the Fund and to its other clients as to which it exercises
investment discretion. The Portfolio Manager is further authorized to
allocate the orders placed by it on behalf of the Fund to any affiliated
broker-dealer or to such brokers and dealers who also provide
research or statistical material, or other services to the Fund or the
Portfolio Manager. Such allocation shall be in such amounts and
proportions as the Portfolio Manager shall determine and the Portfolio
Manager will report on said allocations regularly tothe Board of Trustees
of the Trust indicating the brokers to whom such allocations have been made
and the basis therefor.

4. Control by Board of Trustees. Any investment program undertaken by
the Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the
Board of Trustees of the Trust. The Manager shall provide the Portfolio
Manager with written notice of all such directives, so long as this
Agreement remains in effect.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Portfolio Manager shall at all times
conform to:

(a) all applicable provisions of the 1940 Act;

and

(b) the provisions of the Registration Statement of the Trust under
the Securities Act of 1933 and the 1940 Act; and

6. Expenses. The Portfolio Manager shall maintain, at its expense
and without cost to the Manager or the Fund, a trading function in order to
carry out its obligations under subparagraph (e) of paragraph 2 hereof to
place orders for the purchase and sale of portfolio securities for the
Fund.

7. Delegation of Responsibilities. Upon request of the Manager and
with the approval of the Trust's Board of Trustees, the Portfolio Manager
may perform services on behalf of the Fund which are not required by this
Agreement. Such services will be performed on behalf of the Fund and the
Portfolio Manager's cost in rendering such services may be billed monthly
to the Manager, subject to examination by the Manager's independent
accountants. Payment or assumption by the Portfolio Manager of any Fund
expense that the Portfolio Manager is not required to pay or assume under
this Agreement shall not relieve the Manager or the Portfolio Manager of
any of their obligations to the Fund or obligate the Portfolio Manager to
pay or assume any similar Fund expense on any subsequent occasions.

8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager the
greater of (i) $25,000 per annum, or (ii) a monthly fee at the annual
rate of .30% of the sector's first $150 million of average daily net
assets; plus .2625% of the sector's average daily net assets in excess of
$150 million but less than $300 million; plus .225% of the sector's average
daily net assets in excess of $300 million. Compensation under this
Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the
last day of a month, compensation for that part of the month this
Agreement is in effect shall be prorated in a manner consistent with the
calculation of the fees as set forth above. Payment of the Portfolio
Manager's compensation for the preceding month shall be made as promptly as
possible after the end of each month.

9. Non-Exclusivity. The services of the Portfolio Manager to the
Manager are not to be deemed to be exclusive, and the Portfolio Manager
shall be free to render investment advisory or other services to others
(including other investment companies) and to engage in other activities,
so long as its services under this agreement are not impaired thereby. The
Portfolio Manager shall give 60 days' notice to the Manager if it intends
to perform investment advisory services for any investment company similar
to that of the Trust.

10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect for an
initial term of two years, and shall remain in effect thereafter if
approved in the manner set forth in Section 11 hereof.

11. Renewal. Following the expiration of its initial two year term,
this Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:
(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a
majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and

12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Board of
Trustees or by vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), or by the
Manager or the Portfolio Manager, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate: (a) in the
event of its assignment, the term "assignment" having the meaning defined
in Section 2(a)(4) of the 1940 Act, or (b) in the event that the Management
Agreement between the Fund and the Manager shall terminate.

15. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of the
1940 Act reflected in the provision of this Agreement is revised by rule,
regulation or order of the Securities and Exchange commission, such
provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the day and year
first above written.

Attest: CAVELTI CAPITAL MANAGEMENT, LTD.

By: /s/ Carol Cavelti By: /s/ Peter Cavelti
Title: Corporate Secretary President

Attest: VIRTUS CAPITAL MANAGEMENT, INC.

By: /s/ E. Christian Goetz By: /s/ James R. Eads
Title: Senior Vice President Senior Vice President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the
"Manager"), and FIDUCIARY INTERNATIONAL INC., a registered investment
adviser (the "Global Allocation Strategist") with respect to the following
recital of fact:

R E C I T A L

WHEREAS, BLANCHARD FUNDS (the "Trust") is registered as an
open-end, non-diversified, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
and regulations promulgatedthereunder; and

WHEREAS, the Global Allocation Strategist engages in the business of
acting as an investment adviser and may, under applicable securities and
banking laws, provide the services hereinafter set forth; and

WHEREAS, the Trust is authorized to issue shares of beneficial
interest in
separate series, with each such series representing interests in a
separate
portfolio of securities and other assets; and

WHEREAS, one series of the Trust is called the Blanchard Global
Growth Fund (such series, being referred to as the "Fund"); and
WHEREAS, the Trust and the Manager have entered into an agreement
of even date herewith (the "Management Agreement") to provide for
management services for the Fund on the terms and conditions set forth
therein; and

WHEREAS, the Global Allocation Strategist proposes to render
investment advisory services to the Manager, in connection with
the Manager's responsibilities to the Fund, with respect to
reviewing, evaluating and allocating the assets of the Fund among its
investment sectors.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. The Global Allocation Strategist shall
review, evaluate and allocate the percentages in which the total assets of
the Fund will be invested, subject at all times to the direction of
the Manager and the policies and control of the Trust's Board of
Trustees. The Global Allocation Strategist shall give the Fund the
benefit of its best judgment, efforts and facilities in rendering its
services to the Fund.

2. Investment Analysis and Implementation. In carrying out its
obligations under paragraph 1 hereof, the Global Allocation Strategist
shall:

(a) use the same skill and care in providing such service as it
uses in
providing services to accounts for which it has discretionary
investment
responsibilities;
(b) obtain and evaluate pertinent information about
significant
developments and economic, statistical and financial data, whether
affecting the economy generally or the Fund's portfolio and whether
concerning the individual foreign issuers whose securities are
included in the Fund's portfolio or the activities in which the issuers
engage, or with respect to securities which the Global Allocation
Strategist considers desirable for inclusion in the Fund's portfolio;

(c) determine what percentage of the total assets of the Fund
will be
allocated to each of the Fund's investment sectors and regularly
report
thereon to the Trust's Board of Trustees;

(d) formulate and implement continuing programs for the
review,
evaluation and allocation of the Fund's investments and regularly
report
thereon to the Trust's Board of Trustees; and

(e) take, on behalf of the Fund, all actions which (i) appear
to the
Trust and the Manager necessary to carry into effect such programs
and
supervisory functions, or (ii) are indicated in accordance with
Section 3
hereof.

3. Control by Board of Trustees. Any investment program undertaken
by the Global Allocation Strategist pursuant to this Agreement, as well
as any other activities undertaken by the Global Allocation Strategist on
behalf of the Fund, shall at all times be subject to any directives of the
Board of Trustees of the Trust. The Manager shall provide the Global
Allocation Strategist with written notice of all such directives, so long
as this Agreement remains in effect.

4. Compliance with Applicable Requirements. In carrying out its
obligations
under this Agreement, the Global Allocation Strategist shall at all
times
conform to:

(a) all applicable provisions of the 1940 Act; and

(b) the provisions of the Registration Statement of the Trust
under the
Securities Act of 1933 and the 1940 Act; and

5. Delegation of Responsibilities. Upon the request of the Manager
and with the approval of the Trust's Board of Trustees, the Global
Allocation Strategist may at its option perform services on behalf of the
Fund which are not required by this Agreement. Such services will be
performed on behalf of the Fund and the Global Allocation Strategist's
cost in rendering such services may be billed monthly to the Manager,
subject to examination by the Manager's independent accountants.
Payment or assumption by the Global Allocation Strategist of any Fund
expense that the Global Allocation Strategist is not required to pay or
assume under this Agreement shall not relieve the Manager or the
Global Allocation Strategist of any of their obligations to the Fund or
obligate the Global Allocation Strategist to pay or assume any similar
Fund expense on any subsequent occasions.

6. Expenses. The Global Allocation Strategist shall bear all
expenses
necessary to carry out its obligations under this Agreement. No other
expenses connected with the Fund shall be borne by the Global Allocation
Strategist.

7. Compensation. For the services to be rendered hereunder, the
Manager shall pay the Global Allocation Strategist monthly compensation at
the following annual rate: .08% of the Fund's average net assets up to $150
million; plus .07% of the Fund's average daily net assets in excess of
$150 million but less than $300 million; plus .06% of the Fund's average
daily net assets in excess of $300 million. Compensation under this
Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. If this Agreement becomes
effective subsequent to the first day of a month or shall terminate
before the last day of a month, compensation for that part of the month
this Agreement is in effect shall be prorated in a manner consistent
with the calculation of the fees as set forth above. Payment of the
Global Allocation Strategist's compensation for each month shall be made
as promptly as possible after the end of such month.

8. Non-Exclusivity. The services of the Global Allocation Strategist
to the Manager are not to be deemed to be exclusive, and the Global
Allocation Strategist shall be free to render investment advisory or
other services to others (including the services it presently provides to
the International Income Fund and International Equity Fund portfolios
of FT Series, Inc., and other investment companies) and to engage in
other activities, so long as its services under this agreement are not
impaired thereby: provided, however, that the Global Allocation
Strategist shall not perform investment advisory services as an asset
allocator for any registered investment company with objectives and
strategies similar to that of the Fund except where the Manager is
acting as investment adviser to such registered investment company.

9. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect for an
initial term of two years, and shall remain in effect thereafter if
approved in the manner set forth in Section 10 hereof.

10. Renewal. Following the expiration of its initial two year term,
this Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:

(a) (i) by the Trust's Board of Trustees or by the vote of a
majority of
the Fund's outstanding voting securities (as defined in Section
2(a)(42) of
the 1940 Act), and

11. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Board of
Trustees or by vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), or by
the Manager or the Global Allocation Strategist, on sixty (60)
days' written notice to the other party. This Agreement shall
automatically terminate: (a) in the event of its assignment, the term
"assignment" having the meaning defined in Section 2(a)(4) of the 1940 Act,
or (b) in the event that the Management Agreement between the Fund
and the Manager shall terminate.

12. Liability of the Global Allocation Strategist. In the absence of
willful
misfeasance, bad faith or gross negligence on the part of the Global
Allocation
Strategist, its officers, directors or employees, or reckless disregard
by the
Global Allocation Strategist of its duties under this Agreement, the
Global
Allocation Strategist shall not be liable to the Manager, the Trust or
to any
shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security. Any
actions taken by the Global Allocation Strategist for the sole purpose
of correctly complying with an instruction of the Trust or the Manager
or a directive pursuant to Section 3 hereof shall be deemed to be taken
without willful misfeasance, bad faith or gross negligence.

13. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address
of the Manager for this purpose shall be 707 East Main Street, Suite
1300, Richmond, Virginia 23219, that of the Trust for this purpose
shall be Federated Investors Tower, Pittsburgh, Pennsylvania 15222-
3779, and the address of the Global Allocation Strategist for this purpose
shall be 2 World Trade Center, 94th floor, New York, New York 10048.
14. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of
the 1940 Act reflected in the provision of this Agreement is revised by
rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and
year first above written.

Attest: FIDUCIARY INTERNATIONAL,
INC.

By: Mary A. Mullin By: Anne M. Tatlock
Title: Vice President President

Attest: VIRTUS CAPITAL MANAGEMENT,
INC.

By: E. Christian Goetz By: James R. Eads
Title: Sr. Vice President Sr. Vice President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"),
and INVESTMENT ADVISERS, INC., a registered investment adviser (the
"Portfolio Manager" or "IAI") with respect to the following recital of
fact:

R E C I T A L

WHEREAS, the Portfolio Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment adviser; and

WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate series, with each such series representing interests
in a separate
portfolio of securities and other assets; and

WHEREAS, the Portfolio Manager proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities
to the Fund with respect to the U.S. Fixed Income Securities sector of the
Fund's portfolio on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. IAI shall act as a Portfolio Manager for
the Fund and shall, in such capacity, supervise the investment and
reinvestment of portion of the cash, securities or other properties
comprising the U.S. Fixed Income Securities sector of the Fund's portfolio,
subject at all times to the direction of the Global Asset Allocation
Strategist, the Manager and the policies and control of the Trust's Board
of Trustees. IAI shall give the Fund the benefit of its best judgment,
efforts and facilities in rendering its services as Portfolio Manager.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Portfolio Manager shall:

(a) use the same skill and care in providing such service as it
uses in providing services to fiduciary account for which it
has investment responsibilities;

(c) determine which issuers and securities shall be represented in
the Fund's portfolio and regularly report thereon to the Trust's
Board of Trustees;

(d) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly report
thereon to the Trust's Board of Trustees; and

3. Broker-Dealer Relationships. The Portfolio Manager is
responsible for decisions to buy and sell securities for the Fund's
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Portfolio Manager's primary consideration in effecting a
security transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction, the
Portfolio Manager will take the following into consideration: the best
net price available, the reliability, integrity and financial condition of
the broker-dealer; the size of and difficulty in executing the order; and
the value of the expected contribution of the broker-dealer to the
investment performance of the Fund on a continuing basis. Accordingly,
the price to the Fund in any transaction may be less favorable than that
available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Board of Trustees may determine, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason
of its having caused the Fund to pay a broker for effecting a portfolio
investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Portfolio Manager determines in good faith that such amount of commission
was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Portfolio Manager's overall
responsibilities with respect to the Fund and to its other clients as to
which it exercises investment discretion. The Portfolio Manager is further
authorized to allocate the orders placed by it on behalf of the Fund to any
affiliated broker-dealer or to such brokers and dealers who also provide
research or statistical material, or other services to the Fund or the
Portfolio Manager. Such allocation shall be in such amounts and
proportions as the Portfolio Manager shall determine and the Portfolio
Manager will report on said allocations regularly to the Board of Trustees
of the Trust indicating the brokers to whom such allocations have been made
and the basis therefor.

4. Control by Board of Trustees. Any investment program undertaken
by the Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the
Board of Trustees of the Trust. The Manager shall provide the Portfolio
Manager with written notice of all such directives, so long as this
Agreement remains in effect.

5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Portfolio Manager shall at all times
conform to:

(a) all applicable provisions of the 1940 Act; and

(b) the provisions of the Registration Statement of the Trust
under the Securities Act of 1933 and the 1940 Act; and

8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager the
greater of (i) $25,000 per annum, or (ii) a monthly fee at the annual rate
of .20% of the sector's first $150 million of average daily net assets;
plus .175% of the sector's average daily net assets in excess of $150
million but less than $300 million; plus .15% of the sector's average
daily net assets in excess of $300 million. Compensation under this
Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the last
day of a month, compensation for that part of the month this Agreement is
in effect shall be prorated in a manner consistent with the calculation of
the fees as set forth above. Payment of the Portfolio Manager's
compensation for the preceding month shall be made as promptly as possible
after the end of each month.

9. Non-Exclusivity. The services of the Portfolio Manager to the
Manager are not to be deemed to b exclusive, and the Portfolio Manager
shall be free to render investment advisory or other services to
others (including other investment companies) and to engage in other
activities, so long as its services under this agreement are not impaired
thereby. The Portfolio Manager shall give 60 days notice to the Manager if
it intends to perform investment advisory services for any investment
company similar to that of the Trust.

(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a
majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and

12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Board of
Trustees or by vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), or by the
Manager or the Portfolio Manager, on sixty (60) days' written notice to the
other party. This Agreement shall automatically terminate: (a) in the
event of its assignment, the term "assignment" having the meaning defined
in Section 2(a)(4) of the 1940 Act, or (b) in the event that the Management
Agreement between the Fund and the Manager shall terminate.

14. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of
the Manager for this purpose shall be 707 East Main Street, Suite 1300,
Richmond, Virginia 23219, that of the Trust for this purpose shall b
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, and the
address of the Portfolio Manager for this purpose shall be 3700 First Bank
Place, P. O. Box 357, Minneapolis, Minnesota 55400-0357
15. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of the
1940 Act reflected in the provision of this Agreement is revised by
rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the day and year
first above written.

Attest: INVESTMENT ADVISERS, INC.
By: Christopher J. Smith By: Larry R. Hill
Title: Sr. Vice President Executive Vice President
& General Counsel
Attest: VIRTUS CAPITAL MANAGEMENT,
INC.
By: E. Christian Goetz By: James R. Eads
Title: Sr. Vice President Senior Vice President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995, by and between
LOMBARD ODIER INTERNATIONAL PORTFOLIO MANAGEMENT LIMITED (the "Portfolio
Manager") and WLO Global Management (the "Sub-Adviser" or "WLO") with
respect to the following recital of fact:

R E C I T A L

WHEREAS, Blanchard Funds (the "Trust") is registered as an open-end,
non-diversified, management investment company under the Investment
Advisers Act of 1940, as amended (the "1940 Act"), and the rules and
regulations promulgated thereunder; and

WHEREAS, the Trust and Virtus Capital Management, Inc. (the "Manager")
have entered into a Management Agreement to provide for management
services for Blanchard Short-Term Global Income Fund, a series of the
Trust (the "Fund"), on the terms and conditions set forth in the
Management Agreement dated of even date herewith; and

WHEREAS, the Portfolio Manager and the Manager have entered into an
Investmen Advisory Agreement to provide for investment advisory services
for the Fund, on the terms and conditions set forth in the Investment
Advisory Agreement dated the date hereof; and

WHEREAS, the Sub-Adviser is investment adviser under the Investment
Advisers Act of 1940, as amended, and engages in the business of acting as
an investment adviser; and

WHEREAS, the Sub-Adviser proposes to render investment advisory
services to the Manager and the Portfolio Manager in connection with the
Manager and the Portfolio Manager's responsibilities to the Fund on the
terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable considerations, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. WLO shall act as the Sub-Adviser for the
Fund and shall, in such capacity, supervise the investment and reinvestment
of the cash, securities or other properties comprising the Fund's U.S.
portfolio, subject at all times to the direction of the Manager and the
Portfolio Manager and the policies and control of the Trust's Trustees.
WLO shall give the Fund the benefit of its best judgment, efforts and
facilities in rendering its services as Sub-Adviser.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Sub-Adviser shall:

(a) at all times adhere to the Fund's investment objectives,
restrictions and limitations as contained in its Prospectus and
Statement of Additional Information;

(b) use the same skill and care in providing such service as it
uses in providing services to fiduciary accounts for which it has
investment responsibilities;

(c) obtain and evaluate pertinent informatio about significant
developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally or the Fund's U.S. portfolio and whether concerning
the individual issuers whose securities are included in the
Fund's U.S. portfolio or the activities in which the issuers
engage, or with respect to securities which the Sub-Adviser
considers desirable for inclusion in the Fund's U.S. portfolio;

(d) determine which issuers and securities shall be represented in
the Fund's portfolio and regularly report thereon to the Manager
and the Portfolio Manager;

(e) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly report
thereon to the Manager and the Portfolio Manager;

(f) take, on behalf of the Fund, all actions which appear to the
Fund, the Manager and the Portfolio Manager necessary to carry
into effect such purchase and sale programs and supervisory
functions as aforesaid, including the placing of orders for the
purchase and sale of securities for the Fund and the prompt
reporting to the Manager and the Portfolio Manager of such
purchases and sales; and

(g) be authorized to give instructions to the Custodian and Sub-
Custodian of the Fund as to deliveries of securities,
transfers of currencies and payments of cash for the account of
the Fund, in relation to the matters contemplated by this
Agreement. All securities or other assets of the Fund shall be
held by the Custodian or Sub-Custodian appointed by the Fund's
Trustees.

3. Broker-Dealer Relationships. The Sub-Adviser is responsible for
decisions to buy and sell securities for the Fund's U.S. portfolio,
broker-dealer selection, and negotiation of brokerage commission rates.
The Sub-Adviser's primary consideration in effecting a security
transaction will be execution at the most favorable price. In
selecting a broker-dealer to execute each particular transaction,
the Sub-Adviser will take the following into consideration: the
best net price available, the reliability, integrity and financial
condition of the broker-dealer; the size of and difficulty in
executing the order and the value of the expected contribution of
the broker-dealer to the investment performance of the Fund on a
continuing basis. Accordingly, the price to the Fund in any transaction
may be less favorable than that available from another broker-dealer if
the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Trustees may
determine, the Sub-Adviser shall not be deemed to have acted unlawfully
or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker for
effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
that transaction, if the Sub-Adviser determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Sub-
Adviser's overall responsibilities with respect to the Fund and to its
other clients as to which it exercises investment discretion. The Sub-
Adviser is further authorized to allocate the orders placed by it on behalf
of the Fund to itself, to its affiliated broker-dealer, if any, or
affiliated broker-dealers of the Manager or the Portfolio Manager, or to
such brokers, and dealers who also provide research or statistical
material, or other services to the Fund or the Sub-Adviser. Such
allocation shall be in such amounts and proportions as the Sub-Adviser
shall determine and the Sub-Adviser will report on said allocations
regularly to the Manager and the Portfolio Manager indicating the
brokers to whom such allocations have been made and the basis therefor.

4. Control by Trustees. Any investment program undertaken by the
Sub-Adviser, pursuant to this Agreement, as well as any other
activities undertaken by the Sub-Adviser on behalf of the Fund pursuant
thereto, shall at all times be subject to any directives of the Board of
Trustees of the Trust. The Manager shall provide the Sub-Adviser with
written notice of all such
directives, so long as this Agreement remains in effect.

5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Sub-Adviser shall at all times
conform to:

(a) all applicable provisions of the 1940 Act;

(b) the provisions of the Registration Statement of the Trust under
the Securities Act of 1933 and the 1940 Act; and

6. Expenses. The expenses connected with the Fund shall be borne
by the Sub-Adviser as follows:

The Sub-Adviser shall maintain, at its expense and without cost
to the Manager or the Fund, a trading function in order to carry out its
obligations under subparagraph (f) of paragraph 2 hereof to place orders
for the purchase and sale of U.S. portfolio securities for the Fund.

7. Delegation of Responsibilities. Upon request of the Manager
or the Portfolio Manager and with the approval of the Trust's Trustees, the
Sub-Adviser may perform services on behalf of the Fund which are not
required by this Agreement. Such services will be performed on
behalf of the Fund and the Sub-Adviser's costs in rendering such
services may be billed monthly to the Manager or the Portfolio Manager,
as the case may be, subject to examination by the Manager or the
Portfolio Manager's independent accountants. Payment or assumption by
the Sub-Adviser of any Fund expense that the Sub-Adviser is not required
to pay or assume under this Agreement shall not relieve the Portfolio
Manager or the Sub-Adviser of any of their obligations to the Fund or to
the Manager or obligate the Sub-Adviser pay or assume any similar
Fund expense on any subsequent occasions.

8. Compensation. For the services to be rendered and the
facilities
furnished hereunder, the Portfolio Manager shall pay the Sub-Adviser one-
half of the fees the Portfolio Manager receives from the Manager.
Compensation under this Agreement shall be paid on a monthly basis. If
this Agreement becomes effective subsequent to the first day of a month
or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated. Payment
of the Sub-Adviser's compensation for the preceding month shall be made
as promptly as possible after the end of each month.

9. Non-Exclusivity. The services of the Sub-Adviser to the Portfolio
Manager and the Manager are not deemed to be exclusive, and the Sub-
Adviser shall be free to render investment advisory or other services
to others (including investment companies or investment trusts) and to
engage in other activities (I) so long as its services under this
Agreement are not impaired thereby; and (ii) provided that it does not
render investment advisory services to other U.S. investment companies
which specialize in marketing publicly offered, "no-load/low-load" mutual
funds (i.e., those that are sold either with no sales charge or with a
front-end or back-end sales charge of up to 2.0%), without first
terminating this Agreement in accordance with the provisions set forth
below or receiving written permission to do so from the Portfolio
Manager and the Manager.

If either the Portfolio Manager or the Sub-Adviser terminates this
Agreement, by giving sixty (60) days' written notice, in accordance with
Section 12 hereof, the Sub-Adviser agrees that for a period of six months
following the effective date of termination, it will not render investment
advisory services to other U.S. investment companies which specialize
in publicly marketing "no-load/low-load" mutual funds (as previously
defined) unless the Sub-Adviser has obtained prior written approval from
the Manager and the Portfolio Manager to enter such potential advisory
agreements.

10. Term. This Agreement shall become effective at the close of
business on the date hereof and shall remain in force and effect,
subject to Section 12 hereof, for an initial term of two years.

11. Renewal. Following the expiration of its initial two-year
term, the Agreement shall continue in force and effect from year to year
provided that such continuance is specifically approved at least annually:

(a) (i) by the Trust's Trustees or (ii) by the vote of a majority
of the Fund's outstanding voting securities (as defined in
Section 2(a)(42) of the 1940 Act), and

12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Trustees or by
vote of a majority of the Fund's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act), or by the Portfolio Manager
or the Sub-Adviser, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate: (a) in the event of
its assignment, the term "assignment" having the meaning defined in
Section 2(a)(4) of the 1940 Act, or (b) in the event that the Investment
Advisory Agreement between the Manager and the Portfolio Manager shall
terminate.

13. Liability of the Sub-Adviser. In the absence of willful
misfeasance, bad faith, gross negligence on the part of the Sub-Adviser or
its officers, partners or employees, or reckless disregard by the Sub-
Adviser of its duties under this Agreement, the Sub-Adviser shall not be
liable to the Portfolio Manager, the Manager, the Trust or to any
shareholder of the Trust for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.

14. Liability of Trustees and Shareholders. A copy of the Agreement
and Declaration of Trust of the Trust is on file with the
Secretary of the Commonwealth of Massachusetts and notice is hereby given
that the obligations of this instrument are not binding upon any of
the Trustees or shareholders individually but are binding only upon the
assets and property of the Fund.

15. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of
the Portfolio Manager for this purpose shall be Norfolk House, 12
Southampton Place, London WC1A 2AJ, England and the address of
the Sub-Adviser for this purpose shall be 117 E. Colorado Boulevard,
Pasadena, California 91105. It is agreed that copies of any notices
under this Agreement shall be delivered or mailed postage paid to the
Manager and that of the Trust for this purpose shall be Federated
Investors Tower, Pittsburg, Pennsylvania 15222-3779.

16. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of a controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of
the 1940 Act reflected in the provision of this Agreement is revoked by
rule, regulation or order of the Securities and Exchange Commission,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the day and
year first above written.

Attest: LOMBARD ODIER INTERNATIONAL
PORTFOLIO MANAGEMENT LIMITED
By: /s/ Jean Claude Ramel By: /s/ Robert Van Maasdijk
Title: Company Secretary Managing Director

Attest: WLO GLOBAL MANAGEMENT
By: /s/ Ilene S. Harker By: /s/W. Curtis Livingston
Title: Secretary Director

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 12th day of July, 1995 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the
"Manager"), and MARTIN CURRIE INCORPORATED, a registered investment
adviser (the "Portfolio Manager" or "Martin Currie") with respect to the
following recital of fact:

R E C I T A L

WHEREAS, the Portfolio is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and engages in
the business of acting as an investment adviser; and

WHEREAS, the Portfolio Manager is a member of the Investment
Management Regulatory Organization Limited ("IMRO") of the United
Kingdom and is thereby regulated by IMRO in the conduct of its investment
business for United Kingdom investors and engages in the business of acting
as an investment adviser; and

WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate series, with each such series representing
interests in a separate portfolio of securities and other assets; and
WHEREAS, the Trust offers shares in one series called the Blanchard
Global Growth Fund (such series, being referred to as the "Fund"); and

WHEREAS, the Trust and the Manager have entered into an agreement
dated of even date herewith to provide for management services for the
Fund on the terms and conditions set forth therein (the "Management
Agreement"); and

WHEREAS, the Portfolio Manager proposes to render investment
advisory services to the Manager in connection with the Manager's
responsibilities to the Fund with respect to the Emerging Markets sector
of the Fund's portfolio on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. Martin Currie shall act as a Portfolio
Manager for the Fund and shall, in such capacity, supervise the investment
and reinvestment of a portion of the cash, securities or other properties
comprising the Emerging Markets sector of the Fund's portfolio, subject at
all times to the direction of the Global Asset Allocation Strategist, the
Manager and the policies and control of the Trust's Board of Trustees.
Martin Currie shall give the Fund the benefit of its best judgment,
efforts and facilities in rendering its services as Portfolio Manager.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Portfolio Manager shall:

(a) use the same skill and care in providing such service as it uses
in providing services to fiduciary accounts for which it has
investment responsibilities;
(b) obtain and evaluate pertinent information about significant
developments and economics, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy
generally or the Fund's portfolio and whether concerning the
individual issuers whose securities are included in the Fund's
portfolio or the activities in which the issuers engage, or
with respect to securities which the Portfolio Manager considers
desirable for inclusion in the Fund's portfolio;

(c) determine which issuers and securities shall be represented in
the Fund's portfolio and regularly report thereon to the Trust's
Board of Trustees;

(d) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly
report thereon to the Trust's Board of Trustees; and

3. Broker-Dealer Relationships. The Portfolio Manager is
responsible for decisions to buy and sell securities for the Fund's
portfolio, broker-dealer selection, and negotiation of brokerage
commission rates. The Portfolio Manager's primary consideration in
effecting a security transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular
transaction, the Portfolio Manager will take the following into
consideration: the best net price available, the reliability, integrity
and financial condition of the broker-dealer; the size of and difficulty in
executing the order, and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Trustees may determine, the Portfolio Manager shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of its having caused the Fund to pay a broker
for effecting a portfolio investment transaction in excess of the amount
of commission another broker or dealer would have charged for
effecting that transaction, if the Portfolio Manager determines in good
faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or the
Portfolio Manager's overall responsibilities with respect to the Fund and
to its other clients as to which it exercises investment discretion. The
Portfolio Manager is further authorized to allocate the orders placed by
it on behalf of the Fund to any affiliated broker-dealer or to such
brokers and dealers which also provide research or statistical material,
or other services to the Fund or the Portfolio Manager. Such allocation
shall be in such amounts and proportions as the Portfolio Manager shall
determine and the Portfolio Manager will report on said allocations
regularly to the Board of Trustees of the Trust indicating the brokers to
whom such allocations have been made and the basis therefor.

4 Control by Board of Trustees. Any investment program undertaken by
the Portfolio Manager pursuant to this Agreement, as well as any other
activities undertaken by the Portfolio Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the
Board of Trustees of the Trust. The Manager shall provide the Portfolio
Manager with written notice of all such directives, so long as this
Agreement remains in effect.

5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Portfolio Manager shall at all times
conform to:

(a) all applicable provisions of the 1940 Act; and

(b) the provisions of the Registration Statement of the Trust under
the Securities Act of 1933 and the 1940 Act; and

6. Expenses. The Portfolio Manager shall maintain, at its
expense and without cost to the Manager or the Fund, a trading function
in order to carry out its obligations under subparagraph (e) of paragraph 2
hereof to place orders for the purchase and sale of portfolio securities
for the Fund.

7. Delegation of Responsibilities. Upon request of the Manager and
with the approval of the Trust's Board of Trustees, the Portfolio
Manager may perform services on behalf of the Fund which are not required
by this Agreement. Such services will be performed on behalf of the
Fund and the Portfolio Manager's cost in rendering such services may be
billed monthly to the Manager, subject to examination by the Manager's
independent accountants. Payment or assumption by the Portfolio Manager
of any Fund expense that the Portfolio Manager is not required to pay or
assume under this Agreement shall not relieve the Manager or the Portfolio
Manager of any of their obligations to the Fund or obligate the Portfolio
Manager to pay or assume any similar Fund expense on any subsequent
occasions.

8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager the
greater of (i) $25,000 per annum, or (ii) a monthly fee at the annual
rate of .50% of the sector's first $150 million but less than $300
million; plus .4375% of the sector's average daily net assets in excess
of $150 million but less than $300 million; plus.375% of the sector's
average daily net assets in excess of $300 million. Compensation under
this Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. The compensation paid to the
Portfolio Manager will not be reduced by the amount of brokerage
commissions received by the Portfolio Manager or its affiliated broker-
dealer pursuant to Section 17(e)(2) of the 1940 Act. If this
Agreement becomes effective subsequent to the first day of a month or
shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculation of the fees as set forth above. Payment of
the Portfolio Manager's compensation for the preceding month shall be made
as promptly as possible after the end of each month.

9. Non-Exclusivity. The services of the Portfolio Manager to the
Manager are not to be deemed to be exclusive, and the Portfolio Manager
shall be free to render investment advisory or other services to
others (including other investment companies) and to engage in other
activities, so long as its services under this agreement are not impaired
thereby. The Portfolio Manager shall give 60 days' notice to the Manager
if it intends to perform investment advisory services for any investment
company similar to that of the Trust.

`11. Renewal. Following the expiration of its initial two year
term, this Agreement shall continue in force and effect from year to
year, provided that such continuance is specifically approved at least
annually:

(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a
majority of the Fund's outstanding voting securities (as
defined in Section 2(a)(42) of the 1940 Act), and

12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Board of
Trustees or by vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), or by the
Manager or the Portfolio Manager, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate: (a) in the
event of its assignment, the term "assignment" having the meaning defined
in Section 21(a)(4) of the 1940 Act, or (b) in the event that the
Management Agreement between the Fund and the Manager shall terminate.
Extraordinary expenses necessarily incurred by the Portfolio Manager in
connection with the termination of this Agreement shall be paid by the
Manager to the extent that such extraordinary expenses are not paid by the
Fund.

15. Questions of Interpretation. Any question of interpretation of
any term or provision of this Agreement having a counterpart in or
otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the
absence of any controlling decision of any such court, by rules,
regulations or orders of the Securities and Exchange Commission issued
pursuant to said Act. In addition, where the effect of a requirement of the
1940 Act reflected in the provision of this Agreement is revised by
rule, regulation or order of the Securities and Exchange Commission, such
provision shall be deemed to incorporate the effect of such rule,
regulation or order.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their respective officers on the day and year
first above written.

Attest: MARTIN CURRIE INCORPORATED
By: J. M. C. Livingston By: W. M. C. Kennedy
Title: Compliance Officer President

Attest: VIRTUS CAPITAL MANAGEMENT,
INC.
By: E. Christian Goetz By: James R. Eads
Title: Sr. Vice President Sr. Vice President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made as of this 1st day of March, 1996 by and
between VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the
"Manager"), and MELLON CAPITAL MANAGEMENT CORPORATION, a Delaware
corporation (the "Portfolio Manager" or "MCMC") with respect to the
following recital of fact:

R E C I T A L

WHEREAS, the Portfolio Manager is registered as an investment manager
under the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment adviser; and

WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate series, with each such series representing interests
in a separate portfolio of securities and other assets; and

WHEREAS, the Trust offers shares in one series called the Blanchard
Asset Allocation Fund (such series, being referred to as the "Fund"); and
WHEREAS, the Trust and the Manager have entered into an agreement of
even date herewith to provide for management services for the Fund on the
terms and conditions set forth therein (the "Management Agreement"); and

WHEREAS, the Portfolio Manager proposes to render investment advisory
services to the Manager in connection with the Manager's responsibilities
to the Fund on the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:

1. Investment Management. MCMC shall act as a Portfolio Manager for
the Fund and shall, in such capacity, supervise the investment and
reinvestment of the cash, securities or other properties comprising the
Fund's portfolio, subject at all times to the direction of the Manager and
the policies and control of the Trust's Board of Trustees. MCMC shall give
the Fund the benefit of its best judgment, efforts and facilities in
rendering its services as Portfolio Manager.

2. Investment Analysis and Implementation. In carrying out its
obligation under paragraph 1 hereof, the Portfolio Manager shall:

(a) use the same skill and care in providing such service as it
uses in providing services to fiduciary accounts for which it
has investment responsibilities;

(c) determine which issuers and securities shall be represented in
the Fund's portfolio and regulary report thereon to the Trust's
Board of Trustees;

(d) formulate and implement continuing programs for the purchases
and sales of the securities of such issuers and regularly report
thereon to the Trust's Board of Trustees; and

3. Broker-Dealer Relationships. The Portfolio Manager is
responsible for decisions to buy and sell securities for the Fund's
portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Portfolio Manager's primary consideration in effecting a
security transaction will be its best efforts to execute at the most
favorable price. In selecting a broker-dealer to execute each particular
transaction, the Portfolio Manager will take the following into
consideration: the net price available, the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the
difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies as the Board of
Trustees may determine, the Portfolio Manager shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Fund to pay a broker
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Portfolio Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed
in terms of either that particular transaction or the Portfolio Manager's
overall responsibilities with respect to the Fund and to its other clients
as to which it exercises investment discretion. Subject to the provisions
of the Investment Company Act of 1940, the Portfolio Manager is further
authorized to allocate the orders placed by it on behalf of the Fund to any
affiliated broker-dealer or to such brokers and dealers who also
provide research or statistical material, or other services to the Fund
or the Portfolio Manager. Such allocation shall be in such amounts and
proportions as the Portfolio Manager shall determine and the Portfolio
Manager will report on said allocations regularly tothe Board of Trustees
of the Trust indicating the brokers to whom such allocations have been made
and the basis therefor.

5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Portfolio Manager shall at all times
conform to:
(a) all applicable provisions of the 1940 Act;

and

(b) the provisions of the Registration Statement of the Trust under
the Securities Act of 1933 and the 1940 Act; and

8. Compensation. For the services to be rendered and the facilities
furnished hereunder, the Manager shall pay the Portfolio Manager a monthly
fee at the annual rate of .50% of the Fund's average daily net assets up to
$50 million; .375% on net assets between $50 million and $200 million; and
.25 % on net assets in excess of $200 million. Compensation under this
Agreement shall be calculated and accrued daily and the amounts of the
daily accruals shall be paid monthly. If this Agreement becomes effective
subsequent to the first day of a month or shall terminate before the last
day of a month, compensation for that part of the month this Agreement is
in effect shall be prorated in a manner consistent with the calculation
of the fees as set forth above. Payment of the Portfolio Manager's
compensation for the preceding month shall be made as promptly as possible
after the end of each month.

(a) (i) by the Trust's Board of Trustees or (ii) by the vote of a
majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act), and

(b) by the affirmative vote of a majority of the trustees who are
not parties to this Agreement or interested persons of a party to
this Agreement (other than as a trustee of the Trust), by votes
cast in person at a meeting specifically called for such
purpose.
12. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Trust's Board of
Trustees or by vote of a majority of the Fund's outstanding voting
securities (as defined in Section 2(a)(42) of the 1940 Act), by the
Manager, or by the Portfolio Manager on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate: (a) in the
event of its assignment, the term "assignment" having the meaning defined
in Section 2(a)(4) of the 1940 Act, or (b) in the event that the Management
Agreement between the Fund and the Manager shall terminate.

13. Liability of the Portfolio Manager. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the Portfolio
Manager or its officers, directors or employees, or reckless disregard by
the Portfolio Manager of its duties under this Agreement, the Portfolio
Manager shall not be liable to the Manager, the Trust or to any shareholder
of the Trust for any act or omission in the course of, or connected with,
rendering services hereunder or for any losses that may be sustained in
the purchase, holding or sale of any security. Manager shall jointly and
severally indemnify Portfolio Manager and its directors, officers,
employees or agents (the `Covered Parties'') against any and all expenses,
losses, damages, liabilities, excise taxes, demands, charges, and claims of
any kind or nature whatsoever (including without limitation, attorney's
fees and expenses) (`Claim'') the Covered Parties may incur as a result of
or relating to (i) any investment decision or other action taken or omitted
in the good faith exercise of their powers hereunder or otherwise related
to the Sub-Advisory Agreement, excepting matters as to which Covered
Parties shall be finally adjudged to have been guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard; provided,
however, that this section shall not apply to any Claim alleging willful
misfeasance, bad faith, gross negligence, or reckless disregard that is
settled or compromised by, or dismissed upon motion of, Portfolio Manager
without the prior agreement of Manager with respect to Manager's
obligations hereunder or an express written waiver by Portfolio Manager of
Portfolio Manager's rights hereunder, (ii) any material misrepresentation,
omission or inaccuracy of information in any document related to the Trust
giving rise to such Claim, or (iii) any breach by Manager of any provision
of this
Sub-Advisory Agreement.

Attest: MELLON CAPITAL MANAGMENT
CORPORATION

/s/ Barbara Daugherty By/s/ Robert M. Boyles

Title: Senior Vice President President

Attest: VIRTUS CAPITAL MANAGEMENT, INC.

/s/ E. Christian Goety By/s/ Garry M. Allen
Title: Senior Vice President President

Exhibit 10 under Form N-1A
Exhibit 5 under Item 601/Reg S-K

BLANCHARD FUNDS
SUB-ADVISORY AGREEMENT

THIS AGREEMENT is made this 1st day of December, 1995 by and between
VIRTUS CAPITAL MANAGEMENT, INC., a Maryland corporation (the "Manager"),
and MELLON CAPITAL MANAGEMENT CORPORATION, a Delaware corporation (the
"Portfolio Manager" or "MCMC") with respect to the following recital of
fact: