BLANCHARD PRECIOUS METALS FUND INC, 497, 1996-08-28

BLANCHARD PRECIOUS METALS FUND INC
497, 1996-08-28

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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
- ------------ --------- ---------- ------------ ---------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
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
- ---------------- ------------- --------- --------- -------- ------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- -- $10.51 31.38% 3.10%* 0.34%* -- $149,018 70%
-- (0.76) $ 9.68 (0.57%) 2.28% 1.42% -- $246,569 120%
-- (0.28) $10.11 7.54% 2.29% 2.27% -- $244,048 85%
-- (0.88) $ 9.62 3.74% 2.28% 2.86% -- $233,300 88%
-- (0.42) $ 9.64 4.61% 2.36% 2.84% -- $193,593 78%
-- (0.31) $ 9.92 6.24% 2.31% 2.31% -- $128,047 109%
-- (0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 138%
-- (1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 166%
(0.22) (0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 221%
-- (0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 91%
-- -- $ 7.19 (10.20%) 3.99%*(j)(k) 0.77%*(j)(l) -- $ 25,837 21%
(0.10) (0.27) $ 6.30 (10.90%) 2.95% (0.40%) -- $ 31,539 56%
-- -- $ 5.29 (16.00%) 3.05% (1.28%) -- $ 24,924 57%
-- -- $ 5.04 (4.70%) 3.09% (1.57%) -- $ 20,900 62%
-- -- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 66%
-- -- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 174%
(1.06) (1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 116%
-- -- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 176%
-- (0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 129%
-- (0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 346%
-- (0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 455%
-- (0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 431%
-- (0.00)(m) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 36%
-- (0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 212%
-- (0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 84%
-- (0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 291%
-- (0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 190%
-- (0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 170%
-- (0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 275%
</TABLE>

(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.

16
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.

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.

23
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.

26
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.

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 Funds 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. 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 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
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 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.

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 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 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 less than
the underlying security's 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.

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 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.

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 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

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 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.

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
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.")

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 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.

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 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

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.

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

(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 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.

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) 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.

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 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.

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 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.

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 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.

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.

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:

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 Directors.

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 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

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 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.

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 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.

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 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.

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 earnings or net 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 a
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 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.

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, 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 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 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
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:

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 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.

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 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

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.

Cusip 093254100
G01386-10