BLANCHARD PRECIOUS METALS FUND INC, 497, 1997-12-01

BLANCHARD PRECIOUS METALS FUND INC
497, 1997-12-01

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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

November 30, 1997

B L A N C H A R D

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 six 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. This prospectus relates only to four portfolios of the
Trust and one portfolio of the Company. 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 November 30, 1997, 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 Board of Trustees/Directors of the Funds has approved an Agreement and Plan
of Reorganization, on behalf of each Fund, pursuant to which, on or about
February 27, 1998, all of the assets, and certain liabilities of each Fund would
be acquired in exchange for shares of certain similarly managed funds (the
"Acquiring Funds") that are advised by affiliates of First Union Corporation.
The reorganizations would result in the liquidation and termination of each
Fund. Pursuant to the reorganizations, holders of Shares of each Fund would
receive, tax-free, that number of shares of an Acquiring Fund having a value
equal to the value of such shareholders' Shares immediately prior to the
reorganizations. Consummation of the reorganizations is subject to approval of
the shareholders of the Funds at a meeting scheduled to be held on February 20,
1998.

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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

Prospectus dated November 30, 1997

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

HIGHLIGHTS 1 HOW TO REDEEM 21
- ------------------------------------- -------------------------------------
SUMMARY OF FUND EXPENSES 3 DISTRIBUTION OF SHARES OF THE
- ------------------------------------- FUNDS 23
-------------------------------------
FINANCIAL HIGHLIGHTS 4
- ------------------------------------- TAX MATTERS 24
-------------------------------------
THE FUNDS' INVESTMENT OBJECTIVES
AND POLICIES 6 PERFORMANCE INFORMATION 26
- ------------------------------------- -------------------------------------
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 A 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") 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 dollarweighted 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 September 30, 1997, VCM had more than
$1.9 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 Signet Financial Services, Inc. ("Signet") 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
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........... None None None None None
Maximum Sales Charge 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 projected average net
assets)
Management Fee (after waiver if applicable)(1). 1.00% 1.00% 0.75% 0.75% 0.24%
12b-1 Fees (after waiver if applicable)(2)..... 0.75% 0.75% 0.25% 0.25% 0.00%
Other Expenses................................. 0.79% 0.76% 0.60% 0.53% 1.44%
Total Fund Operating Expenses
(after waivers if applicable)(3)........ 2.54% 2.51% 1.60% 1.53% 1.68%
</TABLE>

(1) The management fee 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
Flexible Tax-Free Bond Fund.

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

(3) The Total Fund Operating Expenses for the fiscal year ending September 30,
1997 were 2.39% for Global Growth Fund, 2.21% for Precious Metals Fund,
1.42% for Flexible Income Fund, 1.38% for Short-Term Flexible Income Fund,
and 1.00% for Flexible Tax-Free Bond Fund. The Total Fund Operating Expenses
for the Short-Term Flexible Income Fund and the Flexible Tax-Free Bond Fund
would have been 1.47% and 2.05%, respectively, absent the voluntary waivers.
Total Fund Operating Expenses in the table above are based on expenses
expected for the fiscal year ended September 30, 1998. Total Fund Operating
Expenses for the Flexible Tax-Free Bond Fund would be 2.44% absent the
voluntary waiver described above in note 1 and note 2.

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".

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

EXAMPLE

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
the maximum sales load. As noted in the table above, the Funds charge no
redemption fees.

<TABLE>
<CAPTION>
BGGF BPMF BFIF BSTFIF BFTFBF
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
1 Year............................................. $ 26 $ 25 $ 16 $ 16 $ 17
3 Years............................................ $ 79 $ 78 $ 51 $ 48 $ 53
5 Years............................................ $135 $134 $ 87 $ 83 $ 91
10 Years........................................... $288 $285 $190 $182 $199
</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 September 30, 1997 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 October 31, 1997 on the Funds' financial statements for the
year ended September 30, 1997 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>
Net realized and Distributions
unrealized from net
gain/(loss) on realized gains
investments, on investments,
Net asset futures Distributions Distributions futures
Year ended value, Net investment contracts, and Total from from net in excess of contracts, and
April 30/ beginning income/ foreign currency investment investment net investment Tax return foreign currency
September 30, of period operating (loss) transactions operations income income(f) of capital transactions
- ------------- --------- ---------------- ---------------- ---------- ------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BGGF
1987 $ 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) -- --
1996(a) $11.53 0.08 0.13 0.21 -- -- --
1997 $11.74 0.23 1.04 1.27 (0.21) -- -- (2.26)
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) 2.75 2.65 -- -- -- --
1996(a) $ 9.77 (0.10) (0.77) (0.87) -- -- -- --
1997 $ 8.90 (0.02) (0.96) (0.98) (0.30) -- -- (2.25)
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 (0.00)(m) -- (0.31) --
1996 $ 4.71 0.28 0.10 0.38 (0.31) -- -- --
1996(a) $ 4.78 0.15 0.04 0.19 (0.13) -- (0.00)(m) --
1997 $ 4.84 0.30 0.15 0.45 (0.30) -- (0.01) --
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) -- --
1996(a) $ 2.99 0.07 0.01 0.08 (0.06) (0.00)(m) (0.01) --
1997 $ 3.00 0.17 0.04 0.21 (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) -- -- --
1996(a) $ 5.16 0.11 0.15 0.26 (0.11) -- -- --
1997 $ 5.31 0.25 0.25 0.50 (0.25) -- -- --
</TABLE>

* Computed on an annualized basis.

(a) The Funds have changed their fiscal year end from April 30 to September 30.
Reflects operations for the period from May 1, 1996 to September 30, 1996.

(b) Reflects operations for the period from June 22, 1988 (date of initial
public investment) to April 30, 1989.

(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.

(g) Based on net asset value.

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

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

<TABLE>
<CAPTION>
Distributions
in excess of net Ratios to Average Net Assets
realized gains ------------------------------------------
on investments, Net
futures investment Expense Average
contracts, and Net asset income/ waiver/ Net assets, Commission
foreign currency Total value, end Total operating reimburse- end of period rate
transactions(f) distributions of period return(g) Expenses (loss) ment(h) (000 omitted) paid(n)
- ---------------- ------------- ---------- --------- -------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-- -- $10.51 31.38% 3.10%* 0.34%* -- $149,018 --
-- (0.76) $ 9.68 (0.57%) 2.28% 1.42% -- $246,048 --
-- (0.28) $10.11 7.55% 2.29% 2.27% -- $244,048 --
-- (0.88) $ 9.62 3.74% 2.28% 2.86% -- $233,300 --
-- (0.42) $ 9.64 4.61% 2.36% 2.84% -- $193,593 --
-- (0.31) $ 9.92 6.24% 2.31% 2.31% -- $128,047 --
-- (0.49) $10.00 6.08% 2.40% 1.72% -- $ 84,780 --
-- (1.28) $10.04 12.91% 2.61% 0.67% -- $109,805 --
(0.22) (0.22) $ 9.71 (1.04%) 2.51% 0.76% -- $ 87,088 --
-- (0.08) $11.53 19.68% 2.54% 0.38% -- $ 71,182 --
-- -- $11.74 1.91% 2.52%* 1.60%* -- $ 67,907 $0.0040
-- (2.47) $10.54 13.20% 2.39% 1.97% -- $ 62,197 $0.0049
-- -- $ 7.19 (10.20%) 3.99%*(j)(k) 0.77%*(j)(l) -- $ 25,837 --
(0.10) (0.27) $ 6.30 (10.90%) 2.95% (0.40%) -- $ 31,539 --
-- -- $ 5.29 (16.00%) 3.05% (1.28%) -- $ 24,924 --
-- -- $ 5.04 (4.70%) 3.09% (1.57%) -- $ 20,900 --
-- -- $ 6.83 35.50% 3.24% (1.46%) -- $ 32,636 --
-- -- $ 8.73 27.80% 2.46% (1.21%) -- $ 68,092 --
(1.06) (1.18) $ 7.12 (4.39%) 2.49% (1.48%) -- $ 75,282 --
-- $ 9.77 37.03% 2.36% (1.27%) -- $129,289 --
-- -- $ 8.90 (8.90%) 2.32%* (1.13%)* -- $ 87,888 $0.0199
-- (2.55) $ 5.37 (15.24%) 2.21% (0.45%) -- $ 67,037 $0.0125
-- (0.21) $ 5.09 6.17% 0.20%* 9.02%* -- $315,845 --
-- (0.47) $ 4.85 4.11% 1.30% 7.10% -- $550,254 --
-- (0.31) $ 4.71 3.74% 1.58% 6.52% -- $262,423 --
-- (0.31) $ 4.78 8.06% 1.56% 6.06% -- $206,235 --
-- (0.13) $ 4.84 3.95% 1.59%* 7.38%* 0.01%* $187,353 --
-- (0.31) $ 4.98 9.53% 1.42% 6.26% -- $155,223 --
-- (0.00)(m) $ 3.00 0.15% 3.03%* 3.89%* -- $ 2,000 --
-- (0.18) $ 2.93 3.72% 0.63% 5.64% 1.42% $ 42,381 --
-- (0.14) $ 2.94 5.34% 1.38% 4.80% 0.75% $ 23,445 --
-- (0.17) $ 2.99 7.47% 1.44% 5.49% 0.40% $177,766 --
-- (0.07) $ 3.00 2.61% 1.39%* 5.26%* 0.25%* $158,034 --
-- (0.17) $ 3.04 7.24% 1.38% 5.63% 0.09% $133,878 --
-- (0.21) $ 4.77 (0.48%) 0.00%* 6.79%* 2.22%* $ 23,267 --
-- (0.24) $ 5.03 10.74% 1.00% 4.87% 1.17% $ 19,496 --
-- (0.22) $ 5.16 6.86% 1.05% 4.43% 1.25% $ 22,723 --
-- (0.11) $ 5.31 5.02% 1.01%* 4.83%* 1.23%* $ 22,570 --
-- (0.25) $ 5.56 9.59% 1.00% 4.46% 1.05% $ 24,077 --
<CAPTION>
Distributions
in excess of net
realized gains
on investments,
futures
contracts, and Portfolio
foreign currency turnover
transactions(f) rate
- ----------------- ---------
<S> <C>
-- 70%
-- 120%
-- 85%
-- 88%
-- 78%
-- 109%
-- 138%
-- 166%
(0.22) 221%
-- 91%
-- 47%
-- 49%
-- 21%
(0.10) 56%
-- 57%
-- 62%
-- 66%
-- 174%
(1.06) 116%
176%
-- 36%
-- 97%
-- 129%
-- 346%
-- 455%
-- 347%
-- 87%
-- 101%
-- 36%
-- 212%
-- 84%
-- 291%
-- 21%
-- 80%
-- 190%
-- 170%
-- 275%
-- 25%
-- 163%
</TABLE>

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

(j) Net of expense reimbursement.

(k) During the 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 prior 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.

(n) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(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
Corporation ("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

<TABLE>
<CAPTION>
SECTORS MAXIMUM
------- -------
<S> <C>
U.S. Equities Sector 65%
Foreign Equities Sector 65%
U.S. Fixed Income Sector 65%
Foreign Fixed Income Sector 65%
Precious Metals Securities Sector 25%
Emerging Markets Sector 15%
</TABLE>

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 indices comprising the Morgan
Stanley Index for the Foreign Equities Sector) based upon earnings for companies
whose stocks are included in such Indices. 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. ("Moody's") or AA by Standard &
Poor's Ratings Group ("Standard & Poor's").

- --------
*"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.
Standard & Poor's 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. Standard & Poor's
only relationship to MCM is the licensing of certain trademarks and trade names
of Standard & Poor's and of the S&P 500 Index which is determined, composed and
calculated by Standard & Poor's without regard to MCM or the Fund. Standard &
Poor's has no obligation to take the needs of MCM or the 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

- --------
Footnote continued from page 7.

owners of the Fund into consideration in determining, composing or calculating
the S&P 500 Index. Standard & Poor's is not responsible for and has not
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.
Standard & Poor's has no obligation or liability in connection with the
administration, marketing or trading of the Fund.

STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
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. STANDARD & POOR'S 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
STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.

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.

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
denominated 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 obligations exempt from federal income tax, 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'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. On July 18, 1997, Signet Banking
Corporation entered into a definitive Agreement and Plan of Reorganization
whereby Signet Banking Corporation would be acquired by First Union Corporation,
a bank holding company headquartered in Charlotte, North Carolina. VCM, which is
a registered investment adviser, manages, in addition to the Funds, The Virtus
Funds and three fixed income common trust funds.

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, 1997, MCM had over $64.9
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. As of September 30, 1997, OFFITBANK had in excess of $9
billion in assets under management. 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 each Fund's average daily net assets;
and .20% of each Fund's 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, managed in excess of $58
billion in assets as of September 30, 1997. 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 Management, Ltd. is a
Canadian money management firm specializing in bullion and precious metals
mining shares and is a registered investment adviser with the SEC. As of
September 30, 1997, Cavelti Capital Management, Ltd. had $250 million in assets
under management. Peter C. Cavelti, the company's President and the Fund's
portfolio manager since its inception in June 1988, has extensive investment
experience in the field of precious metals and the firm's clients include
government agencies, financial institutions, mining companies and Canadian
closed-end 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; and .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, c/o Signet Financial Services, Inc., P.O. Box 26301, Richmond VA
23260, 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,
third party checks are acceptable for subsequent investments, 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
which may take up to 7 calendar days.

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

PURCHASES BY WIRE. Call Investor Services at 1-800-829-3863 to receive wiring
instructions.

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.

Shareholders will receive detailed confirmations of transactions. In addition,
shareholders will receive periodic statements reporting all account activity,
including dividends paid. Share certificates are not issued.

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 Signet 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 of 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 style 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 SIGNET BEFORE 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 Signet 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 Signet the telephone redemption authorization form which may be obtained
from your Fund or Signet.

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. As long as
the identification procedures described above are followed, neither your Fund
nor Signet 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 Signet 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. All other redemption requests should be made in writing to The
Blanchard Group of Funds, c/o Signet Financial Services, Inc., P.O. Box 26301,
Richmond VA 23260. Where share certificates have been issued, the certificates
should be sent by registered or certified mail with the redemption request.
Signatures on redemption requests for amounts in excess of $25,000 and share
certificates submitted for redemption must be accompanied by signature
guarantees from any eligible guarantor institution approved by Signet 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 Signet pursuant to the Signature Guarantee Guidelines. Copies of the
Signature Guarantee Guidelines and information on STAMP can be obtained from
Signet at 1-800-829-3863. 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
Signet 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 Signet. 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 the average
daily net assets of shares of BFIF, BSTFIF and BFTFBF and .75% of the average
daily net assets of shares of BGGF and BPMF held in the accounts during the
period for which the brokers, dealers, and administrators provide services. Any
fees paid by the Distributor with respect to shares of a Fund pursuant to the
distribution plan will be reimbursed by the Trust or the Company from the assets
of the shares of that Fund.

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

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

GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings 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.

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
------------------ -----------------------------------
<C> <C> <S>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% 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, Inc., Blanchard Flexible Income Fund, and
Blanchard Short-Term Flexible Income Fund from sources within foreign countries
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries which entitle such Funds
to a reduced rate of, or exemption from, taxes on such income. It is impossible
to determine the effective rate of foreign tax in advance since the amount of a
Fund's total assets to be invested in various countries is not known. If more
than 50% of the value of a Fund's total assets at the close of its taxable year
consists of stock or securities of foreign corporations, such Fund may elect to
"pass through" to its shareholders the amount of foreign taxes paid by the Fund.
If the Fund so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Fund, and would be treated as having paid his pro rata share
of such foreign taxes and, therefore, be allowed to either deduct such amount in
computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax.

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

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

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

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

The foregoing discussion of federal income tax consequences is based on tax laws
and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, you should also review the more detailed
discussion of federal income tax considerations relevant to the Funds that is
contained in the Funds' Statements of Additional Information. In addition, you
should consult with your own tax advisor as to the tax consequences of
investments in the Funds.

PERFORMANCE INFORMATION
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Advertisements and communications to investors regarding the Funds may cite
certain performance and ranking information and may make performance comparisons
to other Funds or to relevant indices, as described below. In addition, the
Funds' Portfolio Advisers and other outside analysts may, from time to time,
report on the market outlook for their investments as well as comment on the
historical reasons for these investments including as a hedge against inflation.
The Funds' performance may be calculated both in terms of total return and on
the basis of current yield over any period of time and may include a computation
of a Fund's distribution rate.

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

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

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

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

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

From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Funds Magazine. We may also compare the historical returns
on various investments, performance indices 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.

Advertising and other promotional literature may include charts, graphs and
other illustrations using a Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, a Fund can compare
its performance, or performance for the types of securities in which it invests,
to a variety of other investments, such as bank savings accounts, certificates
of deposit, and Treasury bills.

Advertising and sales literature for a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $3.5 trillion to the more than 6,000 funds available.

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

BLANCHARD FUNDS

Blanchard Funds (the "Trust") is a Massachusetts business trust organized on
January 24, 1986 which currently consists of six 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., P.O. Box 26301, Richmond VA 23260, or by calling 1-
800-829-3863.

ADDITIONAL INVESTMENT INFORMATION
- -------------------------------------------------------------------------------

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 falling U.S. interest rates, the values of outstanding long
term U.S. Government Securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities and the 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 indices 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, BGGF) 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-ISSUED 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 securities of domestic and 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 rates 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 could
be less than those originally paid by the Fund. Further, issuers whose
securities are not publicly traded may not be subject to public disclosure and
other investor protection requirements applicable to publicly traded securities.

The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are 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 Standard & Poor's 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 Standard & Poor's 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 Standard & Poor's 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.

The Blanchard Group of Funds are available through Signet Financial Services,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which 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.

The Blanchard Group of Funds are available through Signet Financial Servies,
Inc., member NASD, and are advised by an affiliate, Virtus Capital Management,
Inc., which 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.

B L A N C H A R D

(2414) 00/01/05/06/07PC0897
G01386-01 (11/97)

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 November 30, 1997 (the
"Prospectus"), pursuant to which Blanchard Precious Metals Fund, Inc. (the
"FUND" or the "COMPANY") 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 10
Computation of Net Asset Value..........................................11
Performance Information 12
Portfolio Transaction 13
Dividends, Capital Gains Distributions
and Tax Matters 14
The Management of the Fund 20
Management Services 24
Portfolio Management Services...........................................25
Custodian 25
Administrative Services 25
Distribution Plan 25
Description of the FUND 26
Shareholder Reports 26

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: November 30, 1997

<PAGE>

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.

<PAGE>

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.

<PAGE>

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.

<PAGE>

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.")

<PAGE>

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.

<PAGE>

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

<PAGE>

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);

<PAGE>

(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 year ended September
30, 1997, and for the period from May 1, 1996 through September 30, 1996, and
for the fiscal years ended April 30, 1996 and 1995, were 97%, 36%, 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.

<PAGE>

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.

<PAGE>

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:

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

Prices provided by independent pricing services may be determined without
relying exclusively 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 on exchange
quotations.

<PAGE>

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 aggregate annualized total return, reflecting the initial
investment and reinvestment of all dividends and distributions, for the fiscal
year ended September 30, 1997, and for the period from May 1, 1996 through
September 30, 1996 was (15.24%) and (8.90%), respectivley. For the fiscal year
ended April 30, 1996 and since inception (June 22, 1988 through September 30,
1997) the FUND's aggregate annualized rates of return were 37.03% and 1.27%,
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

<PAGE>

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 the fiscal year ended September 30,
1997, and for the period from May 1, 1996 through September 30, 1996, and for
the fiscal years ended April 30, 1996, 1995 and 1994, the FUND incurred
brokerage commission expenses of $354,829, $305,931, $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.

<PAGE>

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. Please note that the below-listed and defined
"Short-Short Gain Test" has been repealed pursuant to the Taxpayer Relief Act of
1997, effective for taxable years beginning after the date of enactment. For
purposes of the FUND, the effective date of the repeal will be October 1, 1997.
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.

<PAGE>

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

<PAGE>

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).

<PAGE>

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.

<PAGE>

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

<PAGE>

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.

<PAGE>

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.

<S> <C>

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
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934 Director of the Fund; Chairman of the Board,
Children's Hospital of Pittsburgh
formerly, Senior Partner, Ernst &
Young LLP; Director, MED 3000 Group,
Inc.; Director, Member of Executive
Committee, 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 Director of the Fund; Director and Member of the
Birthdate: July 4, 1918 Executive Committee, Michael Baker, Inc.; formerly, Vice Chairman and
Director, PNC Bank, N.A., and
PNC Bank Corp. and Director, Ryan Homes, Inc.; Director or
Trustee of the Funds.

James E. Dowd
571 Hayward Mill Road
Concord, MA Director of the Fund; Attorney-at-law; Director,
Birthdate: May 18, 1922 The Emerging Germany Fund, Inc.; Director or Trustee of the Funds.

<PAGE>

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.@
Miller Ament Henny & Kochuba
205 Ross Street Director of the Fund; Attorney of Counsel, Miller,
Pittsburgh, PA Ament, Henny & Kochuba; Director, Eat'N Park
Birthdate: June 18, 1924 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 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
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL 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.

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;
Director or Trustee of the Funds.

<PAGE>

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA Director of the Fund; Professor, International
Birthdate: September 14, 1925 Politics; Management Consultant; Trustee, Carnegie Endowment for
International Peace, RAND
Corporation, Online Computer Library Center, Inc., National
Defense University, and U.S. Space
Foundation; President Emeritus, University of Pittsburgh;
Founding Chairman; National Advisory
Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and
Czech Management Center, Prague; 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; 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; Treasurer of some of
the Funds.

<PAGE>

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.

Joeseph S. Machi
Federated Investors Tower
Pittsburgh, PA Vice President and Assistant Treasurer; Vice
Birthdate: May 22, 1962 President and Assistant Treasurer of some of
the Funds.

</TABLE>

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

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

As referred to in the list of Trustees and Officers, "Funds" includes the
following investment companies: 111 Corcoran Funds; 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 Investment Portfolios; Federated
Investment Trust; 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.; 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 Obligations Trust II; Money
Market Trust; Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument
Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds;
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; Wesmark Funds; and World Investment Series, Inc.

Fund Ownership

As of October 29, 1997, Officers and Directors own less than 1% of the
outstanding shares of each Fund.

To the best knowledge of the FUND, as of October 29, 1997, the following
shareholders owned 5% or more of the outstanding shares of the FUND: Charles
Schwab & Co., Inc., San Francisco, CA, owned approximately 1,163,337 shares
(9.60%), and National Financial Services Corp., New York, NY, for the exclusive
benefit of its customers, owned approximately 727,618 shares (6.00%).

<PAGE>

Officers and Trustees Compensation

- ------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION PAID
NAME, POSITION FROM TO TRUSTEES FROM THE
WITH THE COMPANY THE COMPANY* FUND AND FUND COMPLEX**
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
John F. Donahue, $0 $0 for the Fund Complex
Chairman and Director
Thomas G. Bigley, $205 $3,217 for the Fund
Director Complex
John T. Conroy, Jr., $226 $3,538 for the Fund
Director Complex
William J. Copeland, $226 $3,538 for the Fund
Director Complex
James E. Dowd, Trustee $226 $3,538 for the Fund
Complex
Lawrence D. Ellis, M.D., $205 $3,217 for the Fund
Director Complex
Edward L. Flaherty, Jr., $226 $3,538 for the Fund
Director Complex
Edward C. Gonzales, $0 $0 for the Fund Complex
President and Director
Peter E. Madden, Director $205 $3,217 for the Fund
Complex
John E. Murray, Jr., $205 $3,217 for the Fund
J.D., S.J.D., Director Complex
Wesley W. Posvar, $205 $3,217 for the Fund
Director Complex
Marjorie P. Smuts $205 $3,217 for the Fund
Director Complex

* The aggregate compensation for the fiscal year ended 9/30/97 is provided
for the COMPANY which is comprised of one portfolio.

** The total compensation is provided for the Fund Complex, which consists of
the COMPANY, The Virtus Funds, and the Trust. The information is provided
for Blanchard Funds and Blanchard Precious Metals Fund, Inc. and The Virtus
Funds for the fiscal year ended 9/30/97.

MANAGEMENT SERVICES

Manager of the Fund

The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which is 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 September 30, 1997, and for the period from May 1, 1996
through September 30, 1996, VCM earned $774,283 and $442,945, respectively, none
of which was voluntarily waived. 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.

<PAGE>

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 year ended September 30, 1997, and for
the period from May 1, 1996 through September 30, 1996, the aggregate amount
paid or accrued by VCM to the Portfolio Manager under the Sub-Advisory Agreement
was $223,284 and $132,884, respectively. For the fiscal year ended April 30,
1996, the aggregate amounts paid or accrued by VCM or the prior manager to the
Portfolio Manager under the Sub-Advisory Agreement was $263,638. For the fiscal
years ended April 30, 1995 and 1994, the aggregate amounts paid or accrued by
the prior manager to the Portfolio Manager under the Sub-Advisory Agreement were
$227,033 and $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% on the
first $10 million of average net assets of each of the six respective portfolios
and .025% 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. For the fiscal year ended September 30, 1997,
and for the period from May 1, 1996 through September 30, 1996, and for the
fiscal year ended April 30, 1996, Federated Administrative Services earned
$78,467, $42,307 and $73,038, respectively, in administrative services fees. For
the fiscal years ended April 30, 1995 and 1994, the administrative services fees
were included as part of the Management fee.

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 September 30, 1997, and for the period from
May 1, 1996 through September 30, 1996, and for the fiscal year ended April 30,
1996, the FUND accrued payments under the Plan amounting to $558,212, $332,209
and $630,406, respectively.

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 year ended September 30, 1997, are
incorporated herein by reference from the FUND's Annual Report dated September
30, 1997. A copy of the FUND'S Annual Report may be obtained without charge by
contacting Signet Financial Services, Inc. at 1-800-829-3863.

Cusip 093254100
G01386-10