CHAPMAN FUNDS INC, 497, 1998-03-10

CHAPMAN FUNDS INC
497, 1998-03-10

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FILED PURSUANT TO RULE 497(E)
FILE NOS.: 33-25716; 811-5697

Prospectus Dated: March 10, 1998

DEM EQUITY FUND
INVESTOR SHARES

The DEM Equity Fund (the "Fund"), is a series of The Chapman Funds, Inc.
(the "Company"), an open-end, management investment company, known as a series
fund (the Fund and each other series of the Company are herein referred to as a
"Series"). The Fund is a non-diversified portfolio that seeks aggressive
long-term growth through capital appreciation through investment in the Domestic
Emerging Markets market segment that it believes is positioned for growth. The
"Domestic Emerging Markets" market segment is comprised of companies that are
controlled by African Americans, Asian Americans, Hispanic/Latino Americans or
women that are located in the United States and its territories ("DEM
Companies"). Both capital appreciation and income will be considered in the
selection of investments, but primary emphasis will be on capital appreciation.
BECAUSE OF THE NATURE OF THE FUND'S INVESTMENTS AND CERTAIN STRATEGIES IT MAY
USE, AN INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS AND MAY NOT BE APPROPRIATE
FOR ALL INVESTORS.
------------------------

The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Investor Shares are offered by this Prospectus directly from the Fund's
distributor, The Chapman Co. (herein sometimes referred to as the
"Distributor"). Investor Shares are subject to a 12b-1 fee of up to .75% of
average daily net assets, currently set at .50% of average daily net assets, and
a front-end load of up to 4 3/4% of the offering price. The minimum initial
investment in Investor Shares is $25 and the minimum subsequent investment is
$25.

This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated the same date as
this prospectus and containing additional information about the Fund has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference in its entirety into this Prospectus. A copy of the
Statement of Additional Information may be obtained without charge by calling
The Chapman Co. at (800) 752-1013.

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TABLE OF CONTENTS

<TABLE>
<S> <C>
Fund Expenses.......................................................................... 2
Investment Objectives.................................................................. 3
Risk Factors........................................................................... 7
Management............................................................................. 9
Purchase of Shares..................................................................... 11
Redemption of Shares................................................................... 14
Net Asset Value........................................................................ 16
Dividends.............................................................................. 17
Taxes.................................................................................. 17
Other Information...................................................................... 19
</TABLE>

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

DOMESTIC EMERGING MARKETS-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK AND
DEM-TM- AND DEM INDEX-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
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FUND EXPENSES

The following table lists the costs and expenses an investor will incur
either directly or indirectly as a stockholder of the Fund based on an estimate
of the Fund's operating expenses for the current fiscal year:

<TABLE>
<CAPTION>
DEM EQUITY FUND
INVESTOR SHARES
-----------------
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................... 4 3/4%
Maximum Deferred Sales Load................................................................... 0%
Maximum Sales Load Imposed on Reinvested Dividends and other Distributions.................... 0%
Redemption Fee (as a percentage of amount redeemed)........................................... 0%

ANNUAL EXPENSES (as a percentage of net assets)(1)
Management Fees............................................................................... 0.90%
12b-1 Fees (after Investor Share fee waiver)(2)............................................... 0.50%
Other Expenses(3)............................................................................. 0.89%
Total Fund Operating Expenses(4)
(estimated)................................................................................. 2.29%
</TABLE>

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

(1) See "MANAGEMENT."

(2) The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .75% (up to .25% service fee
and .50% distribution fee) of the average daily net assets of the Fund
attributable to Investor Shares. The Distributor has voluntarily limited
such fee during the first fiscal year of the Fund to an aggregate of .50%
(.25% service fee and .25% distribution fee) of average daily net assets;
however, there can be no assurance that the Distributor will continue to
voluntarily limit the amount of such fee in the future.

(3) Based upon estimated amounts of expenses for the Fund's current fiscal year.

(4) Estimated Total Fund Operating Expenses are currently $344,000 net of the
fee amount expected to be waived pursuant to the Distributor's voluntary fee
limitation.

In the absence of the Distributor's voluntary fee limitation, estimated
Total Fund Operating Expenses would currently be $381,500.

The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses (excluding offering expenses) at the levels set
forth in the table above.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment assuming
a 5% annual return, reinvestment of all dividends and distributions at net asset
value and redemption at the end of the period:

<TABLE>
<CAPTION>
INVESTOR
SHARES
-----------
<S> <C>
1 Year.............................................................................. $ 70
3 Years............................................................................. $ 116
</TABLE>

2
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Association of Securities Dealers, Inc. (the "NASD") THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OF THE FUND AND ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover, while the examples assume a
5% annual return, the Fund's performance will vary and may result in a return
greater or less than 5%. For a further description of the various costs and
expenses incurred in the Fund's operation, see "MANAGEMENT."

INVESTMENT OBJECTIVES

GENERAL

The Fund seeks aggressive long-term growth through capital appreciation
through investment in the Domestic Emerging Markets market segment that it
believes is positioned for growth. The "Domestic Emerging Markets" market
segment is comprised of companies that are controlled by African Americans,
Asian Americans, Hispanic/Latino Americans or women that are located in the
United States and its territories. Both capital appreciation and income are
considered in choosing specific investments, but the primary emphasis is on
capital appreciation. The Fund retains maximum flexibility as to the types of
investments it may make and is permitted to invest in portfolio companies with
large and small market capitalizations. Some of these investments may involve
the purchase of securities directly from portfolio companies in initial or other
public offerings of their securities. See "RISK FACTORS--Investment in Small
Companies." The Fund's principal investment objective of long-term growth
through capital appreciation through investment in equity securities of
companies in the Domestic Emerging Markets market segment is not a "fundamental
policy" of the Fund and can therefore be changed by the Company's Board of
Directors without stockholder approval.

In determining whether a specific portfolio company is "controlled" by
African Americans, Asian Americans, Hispanic/Latino Americans or women, the Fund
will apply the following criteria: at least 10% of the company's outstanding
voting securities must be beneficially owned by members of one or more of the
listed groups or at least one of the company's top three executive officers must
be a member of one or more of the listed groups.

The Fund will seek to identify businesses that are DEM Companies through
research by Chapman Capital Management, Inc. (the "Investment Advisor"). Such
research will include: requests to specific companies for details of their
ownership and management; independent research for the details of specific
companies' ownership and management including company visits and checks with
government agencies for companies that have registered as minority or
women-owned business enterprises or are recognized as such by government
agencies; the review of business lists compiled by magazines and other
publications which list DEM Companies; the examination of companies that
generally market themselves as DEM Companies; and the review of annual reports
and other regulatory filings.

The Fund believes that the Domestic Emerging Markets market segment
represents one of America's fastest growing market segments and includes
well-diversified, high-growth segments of the economy including but not limited
to communications, media/entertainment, environmental services, applied/
advanced technology, financial services and value-oriented consuming.

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the market is warranted, the Fund has reserved the right to invest a significant
proportion or all of its assets in the securities of non-DEM Companies that
otherwise meet the Fund's investment objectives, or alternatively, the Fund may
hold cash (U.S. dollars) and/or invest any portion or all of its assets in high
quality short-term debt securities and money market instruments. The securities
of non-DEM Companies that otherwise meet the Fund's investment objectives may or
may not involve less risk than DEM Companies. Accordingly, to the extent that
the Fund adopts a temporary defensive posture in which it invests in non-DEM
Companies, the Fund's investments will continue to present significant risks.
See "RISK FACTORS--Investment in Small Companies," "Non-Publicly Traded
Securities," "--Non-Diversified Status." The decision to adopt a temporary
defensive posture may be affected by such factors as market conditions
generally, the Investment Advisor's views on the direction of movement of the
stock prices of specific targeted portfolio companies and other related factors.
It is impossible to predict when or for how long the Fund will employ defensive
strategies, and to the extent it is so invested, the Fund may not achieve its
investment objectives. The Fund will also invest in the instruments described
above pending investment of the net proceeds of this offering.

While the Fund invests in portfolio companies with large and small market
capitalizations, the Fund believes that investing in small companies may offer
the potential for significant long-term capital appreciation. Most of the Fund's
investments are in marketable common stocks or marketable securities convertible
into common stock traded on an exchange or in the over-the-counter markets. To
the extent the Fund invests in companies with smaller market capitalizations,
the securities of such companies may be traded in such over-the-counter markets
as the OTC Bulletin Board SM and the Pink Sheets SM. See "RISK
FACTORS--Investment in Small Companies."

The Fund does not invest in foreign securities (including American
Depository Receipts).

The Fund's investment objectives and policies, other than those specified in
the Statement of Additional Information under "INVESTMENT PROGRAM--Fundamental
Policies," may be changed by the Board of Directors without the approval of
stockholders.

ILLIQUID SECURITIES/PRIVATE VENTURE CAPITAL FUNDS

While the Fund intends to concentrate on publicly traded securities, it may
also invest in non-publicly traded securities of DEM Companies, such as those of
privately-held companies or private placements of public companies. The portion
of the Fund's assets invested in these non-publicly traded securities will vary
over time depending on investment opportunities and other factors; however, an
investment in such securities will be considered illiquid and therefore be
subject to the Fund's limitation on the purchase of illiquid securities. The
Fund may not invest more than 15% of its net assets in illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market and securities that are restricted securities as defined in
Rule 144 under the Securities Act ("Illiquid Securities"). Illiquid Securities
include securities which have not been registered under the Securities Act,
sometimes referred to as private placements, and are purchased directly from the
issuer or in the secondary market. The Fund will seek to invest in the
securities of private companies that the Investment Advisor believes have the
potential for above average capital appreciation in anticipation of their
initial public offering. To the extent that the Fund is permitted to invest in
Illiquid Securities, the Fund may be deemed to act as an underwriter to
portfolio companies. See "RISK FACTORS--Non-Publicly Traded Securities" and
"INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information.

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Investment Advisor believes that the Fund's investments in Private Funds offers
individual investors a unique opportunity to participate in investment
opportunities typically available only to large institutions and accredited
investors. Although the Fund's investments in Private Funds are limited to a
maximum of 10% of the Fund's assets, these investments are highly speculative
and volatile and may produce gains or losses in this portion of the Fund that
exceed those of the Fund's other holdings and of more mature companies
generally.

To the extent that these Private Funds are investment companies for purposes
of the 1940 Act, the Fund's ability to invest in them will be limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of total assets with respect to any one investment
company and, (iii) 10% of the Fund's total assets in the aggregate. In addition,
Fund stockholders will remain subject to the Fund's expenses while also bearing
their pro rata share of the operating expenses of the Private Funds. The ability
of the Fund to dispose of interests in Private Funds is very limited and will
involve the risks described under "RISK FACTORS--Non-Publicly Traded Securities"
and "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information. In valuing the Fund's holdings of interests
in Private Funds, the Fund will be relying on the most recent reports provided
by the Private Funds themselves prior to calculation of the Fund's net asset
value. These reports, which are provided on an infrequent basis, often depend on
the subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "NET ASSET VALUE." The
securities of Private Funds will typically themselves be classified as Illiquid
Securities by the Board of Directors. Accordingly, the Fund's total investment
in Illiquid Securities, including Private Funds, is limited to 15% of the Fund's
assets with no more than 10% of the Fund's assets invested in Private Funds.

BORROWING

The Fund may not issue senior securities, borrow money or pledge its assets,
except that it may borrow from banks in amounts aggregating not more than
33 1/3% of the value of the Fund's total assets (calculated when the loan is
made) to take advantage of investment opportunities and may pledge up to 33 1/3%
of the value of its total assets to secure such borrowings. The Fund may
purchase securities on margin pursuant to margin arrangements with banks up to
the limits set forth above for bank borrowings. The Fund is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitations for temporary purposes such as clearance of portfolio transactions
and share redemptions.

The use of borrowings by the Fund may involve leverage that creates an
opportunity for increased net income, but also creates special risks. In
particular, if the Fund borrows or otherwise uses leverage to invest in
securities, any investment gains made on the securities in excess of interest or
other amounts paid by the Fund will cause the net asset value of the Fund's
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on borrowed money) to the Fund, the net
asset value of the Fund's shares will decrease faster than would otherwise be
the case.

To reduce these risks, the Fund will limit its borrowings to 33 1/3% of the
value of its total assets. If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings.

OPTIONS

5
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the underlying security at the exercise price at any time during the option
period. A covered call option sold by the Fund, which is a call option with
respect to which the Fund owns the underlying security, exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or to possible continued holding
of a security which might otherwise have been sold to protect against
depreciation in the market price of the security. A covered put option sold by
the Fund exposes the Fund during the term of the option to a decline in price of
the underlying security. A put option sold by the Fund is covered when, among
other things, cash or liquid securities are placed in a segregated account with
the Fund's custodian to fulfill the obligation undertaken.

To close out a position when writing covered options, the Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
has previously written on the security. To close out a position as a purchaser
of an option, the Fund may make a "closing sale transaction," which involves
liquidating its position by selling the option previously purchased. The Fund
will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the same thereof. The Fund intends to treat options in
respect of specific securities that are not traded on a national securities
exchange or the Nasdaq National Market and the securities underlying covered
call options written by the Fund as Illiquid Securities subject to the Fund's
investment limitation on Illiquid Securities set forth above.

SECURITIES LENDING/REPURCHASE AGREEMENTS

The Fund may, but is not required to, utilize various investment techniques
for hedging, risk management and other investment purposes. These investment
techniques may include, but are not limited to, lending of portfolio securities
and entering into "repurchase agreements." Up to 20% of the Fund's assets may be
invested pursuant to such techniques for hedging and risk management purposes or
when, in the opinion of the Investment Advisor, such techniques can be expected
to yield a higher investment return than other investment options.

To the extent that the Fund seeks to increase its income by lending
portfolio securities, such securities loans will be secured by collateral in
cash, cash equivalents, U.S. government securities, or such other collateral as
may be permitted under the Fund's investment program and by regulatory agencies.
The Fund may enter into repurchase agreements pertaining to the securities in
which it may invest with securities dealers or member banks of the Federal
Reserve System. Repurchase agreements facilitate portfolio management and allow
the Fund to earn additional revenue. If the Fund enters into repurchase
agreements, it will do so in order to increase liquidity or as a temporary
investment while the Fund is evaluating the acquisition of suitable investments.
See "INVESTMENT PROGRAM" in the Statement of Additional Information.

The Fund's investment policy of not investing in foreign securities
(including American Depository Receipts) is a fundamental policy which it may
not change without the approval of the holders of a majority of its outstanding
voting securities. For more information about the Fund and its investment
objectives and policies, including fundamental policies, see "INVESTMENT
PROGRAM" in the Statement of Additional Information.

As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments. Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction costs on the sale
of securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. See "TAXES" and "PORTFOLIO
TRANSACTIONS," "TAXATION" and "INVESTMENT PROGRAM--Portfolio Turnover" in the
Statement of Additional Information.

6
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RISK FACTORS

INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.

An investment in the Fund's shares does not constitute a complete investment
program since it involves the greater market risks inherent in seeking higher
returns and is not recommended for short-term or risk averse investors. No
assurance can be given that securities of small emerging companies will
appreciate, that a sufficient number of appropriate investments will be
available or that the Fund's particular investment choices will be successful.
The prices of securities in which the Fund may invest may also be more volatile
than securities of issuers with larger market capitalizations and the Fund's net
asset value may therefore be subject to greater fluctuation than other
investment companies that invest in equity securities.

INVESTMENT IN SMALL COMPANIES

Because the Fund intends to invest substantially all of its assets in
securities of emerging companies with small market capitalizations, an investor
should be aware of certain special considerations and risk factors relating to
investments in such companies. No assurance can be given that securities of
small emerging companies will appreciate, that a sufficient number of
appropriate investments will be available or that the Fund's particular
investment choices will be successful. Investors should also be aware of
considerations and risks relating to the Fund's investment practices. An
investment in the Fund should not itself be considered a balanced investment
program and is intended to provide diversification as part of a more complete
investment program. The Fund is intended for long-term investors not seeking
current income, who have the financial ability to accept greater investment risk
in exchange for the potential of higher than average, long-term capital
appreciation.

Investing in small capitalization stocks can involve greater risk than is
customarily associated with investing in securities of larger, more established
companies. Small emerging companies may be subject to greater earnings
fluctuation, lack of established markets for products or services, more limited
financial resources and less depth of experienced management. Securities of
small emerging companies generally have more limited marketability and may be
subject to greater price volatility than securities of larger companies. They
may be dependent for management on one or a few key persons, and can be more
susceptible to losses and risks of bankruptcy. Transaction and trading costs in
smaller capitalization stocks may be higher than those of larger capitalization
companies, primarily because of more limited volumes and fewer active market
makers. These risks are in addition to the risks normally associated with any
strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such as the
OTC Bulletin Board-SM- and the Pink Sheets-SM- where the trading market is
thinner and the spread between bid and offer prices is often larger than on the
major exchanges or Nasdaq system. The nature of these trading markets subjects
the Fund to the risk that should the need arise to rapidly liquidate its
position in such securities, for example to cover net redemptions, the Fund's
activities could aversely affect the market price of such securities, resulting
in a requirement that the Fund sell its position below the price that is deemed
to be representative of their value and, accordingly, the value of the Fund's
net assets could be adversely affected.

NON-PUBLICLY TRADED AND ILLIQUID SECURITIES

The Fund may invest up to 15% of its net assets in Illiquid Securities,
which term includes securities that are illiquid by virtue of the absence of a
readily available market and securities that are restricted securities as
defined in Rule 144 under the Securities Act. Illiquid Securities include
securities which have not been registered under the Securities Act, sometimes
referred to as private placements, and are purchased directly from the issuer or
in the secondary market. Illiquid Securities may involve a high degree of
business and financial risk and may result in substantial losses. These
securities are less liquid than publicly traded securities, and the Fund may
take longer to liquidate these positions than would be the case for publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosure and other investor
protection requirements applicable to companies whose securities are publicly
traded. The Fund's investment in

7
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Illiquid Securities is subject to the risk that should the Fund desire to sell
any of these securities when a ready buyer is not available at a price that is
deemed to be representative of their value, for example to cover net
redemptions, the value of the Fund's net assets could be adversely affected. See
"INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information.

LIMITED EXPERIENCE OF THE INVESTMENT ADVISOR

The Investment Advisor has acted as investment manager for various balanced
and equity portfolios and currently advises a money market fund that is a Series
of the Company. Further, the Investment Advisor has acted and is currently
acting as an investment advisor and manager for DEM, Inc., a closed-end,
non-diversified management investment company which concentrates on DEM Company
securities. However, prior to advising the Fund, the Investment Advisor had not
acted as an advisor to an open-end management investment company investing in an
equity portfolio.

NON-DIVERSIFIED STATUS

The Fund is classified as non-diversified under the 1940 Act, which means
that the Fund is not limited by that Act in the proportion of its assets that
may be invested in the securities of a single issuer. However, the Fund intends
to comply with the diversification requirements imposed by the U.S. Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. See "TAXATION" in the Fund's Statement of Additional
Information. As a non-diversified investment company, the Fund may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers and, as a result, may be subject to greater risk with respect to its
portfolio securities.

POTENTIAL CONFLICT OF INTEREST

The Fund may utilize the Distributor, The Chapman Co., a broker-dealer
registered under the Securities Exchange Act of 1934, as amended, and a member
of the NASD, in connection with the purchase or sale of portfolio securities in
certain circumstances. As of February 26, 1998, the Investment Advisor is a
wholly-owned subsidiary of Chapman Capital Holdings, Inc. Mr. Nathan A. Chapman,
Jr., the President and Chairman of the Board of Directors of the Company, is
also the President and Chairman of the Board of Directors of the Investment
Advisor and Chapman Capital Holdings, Inc. As of February 26, 1998, the
Distributor is a wholly-owned subsidiary of Chapman Holdings, Inc. Mr. Nathan A.
Chapman, Jr. is also the President and Chairman of the Board of Directors of the
Distributor and the President and Chairman of the Board of Directors of Chapman
Holdings, Inc. See "MANAGEMENT--Investment Advisor" below and "MANAGEMENT" in
the Fund's Statement of Additional Information. Mr. Chapman owns approximately
92% of the outstanding voting securities Chapman Capital Holdings, Inc. and
approximately 62% of the outstanding voting securities of Chapman Holdings, Inc.
Accordingly, these relationships represent a potential conflict of interest with
respect to commissions and other fees on brokerage transactions conducted on the
Fund's behalf by the Distributor. A majority of the Company's Board of Directors
are independent directors and such Directors have adopted procedures in
compliance with the 1940 Act to address such conflict. See "MANAGEMENT" and
"PORTFOLIO TRANSACTIONS" in the Fund's Statement of Additional Information.

USE OF LEVERAGE

The use of borrowings by the Fund to carry out its investment objectives may
involve leverage that creates an opportunity for increased net income, but also
creates special risks. In particular, if the Fund borrows or otherwise uses
leverage to invest in securities, any investment gains made on the securities in
excess of interest or other amounts paid by the Fund will cause the net asset
value of the Fund's shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on borrowed
money) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case.

8
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MANAGEMENT

BOARD OF DIRECTORS

The Fund is managed by the Company's Board of Directors. All of the
Directors are members of minority groups. The Board of Directors approves all
significant agreements between the Fund and other Series of the Company and
between the Fund and persons who furnish services to the Fund, including the
Fund's agreements with the Investment Advisor and the Distributor. The Board of
Directors delegates to the Company's officers and the Investment Advisor
responsibility for day-to-day operations of the Fund. All of the officers of the
Company are directors, officers or employees of the Investment Advisor and/or
the Distributor.

THE INVESTMENT ADVISOR

The Investment Advisor, Chapman Capital Management, Inc., has been retained
under an investment advisory and administrative services agreement (the
"Advisory Agreement") to provide investment advice and, in general, to conduct
the management and investment program of the Fund in accordance with the Fund's
investment objectives, policies, and restrictions and under the supervision and
control of the Company's Board of Directors. The Investment Advisor was
established in 1988 and is located at The World Trade Center--Baltimore, 401
East Pratt Street, 28th Floor, Baltimore, Maryland 21202. As of February 26,
1998, the Investment Advisor is a wholly-owned subsidiary of Chapman Capital
Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling stockholder,
President and Chairman of the Board of Directors of Chapman Capital Holdings,
Inc., is President and Chairman of the Board of Directors of the Company and
President and Chairman of the Board of Directors of the Investment Advisor.

The Investment Advisor has sole investment discretion for the Fund and makes
all decisions affecting assets in the Fund's portfolio under the supervision of
the Company's Board of Directors and in accordance with the Fund's stated
policies. The Investment Advisor selects investments for the Fund and places
purchase and sale orders on behalf of the Fund. The Investment Advisor receives
from the Fund an advisory fee at an annual rate of .9 of 1% of the value of the
Fund's average weekly net assets during the preceding month payable monthly in
arrears and an administration fee of .15 of 1% of the Fund's average weekly net
assets during the preceding month payable monthly in arrears.

The Investment Advisor has been in the investment advisory business since
1988 and has served as the investment advisor to a money market Series of the
Company since 1988 and a closed-end non-diversified investment company investing
in DEM Companies since 1995. In addition, the Investment Advisor serves as
portfolio manager to private accounts. As of February 28, 1998, the Investment
Advisor had approximately $507 million in assets under management.

PORTFOLIO MANAGEMENT

Nathan A. Chapman, Jr. who has been the President and Chief Executive
Officer of the Investment Advisor since 1988, is primarily responsible for
management of the Fund's assets. Mr. Chapman is and has been the President and
Chairman of the Board of Directors of the Company since its organization in
1988. Mr. Chapman also is and has been President and Chairman of the Board of
Directors of DEM, Inc. since its inception in 1995. Mr. Chapman founded the
Distributor in 1987 and has been its President and Chairman of the Board since
its inception. The Distributor is a full-service brokerage and investment
banking firm. As Mr. Chapman is the chief executive officer of a brokerage and
investment banking firm, he does not devote his full time to the management of
the Fund's portfolio.

THE DISTRIBUTOR

The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at The World Trade Center--Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore,

9
<PAGE>
Maryland 21202. As of February 26, 1998, the Distributor is a wholly-owned
subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is the
controlling stockholder, President and Chairman of the Board of Directors of
Chapman Holdings, Inc., is President and Chairman of the Board of Directors of
the Company and the Distributor.

The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .75% (up to .25% service fee and
.50% distribution fee) of the average daily net assets of the Fund attributable
to the Investor Shares pursuant to a distribution plan (the "Distribution Plan")
adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act. The Distributor
has voluntarily limited such fee during the first fiscal year of the Fund to an
aggregate of .50% (.25% service fee and .25% distribution fee) of average daily
net assets; however, there can be no assurance that the Distributor will
continue to voluntarily limit the amount of such fee in the future. Amounts paid
to the Distributor under the Distribution Plan may be used by the Distributor to
cover expenses that are primarily intended to result in, or that are primarily
attributable to, (i) the sale of the shares of the Fund, (ii) ongoing servicing
and/or maintenance of the accounts of the Fund's stockholders, and (iii)
sub-transfer agency services, sub-accounting services or administrative services
related to the sale of the shares of the Fund, all as set forth in the
Distribution Plan. Payments under the Distribution Plan are not tied exclusively
to the distribution expenses actually incurred by the Distributor and the
payments may exceed distribution expenses actually incurred. The Board of
Directors of the Company evaluates the appropriateness of the Distribution Plan
on a continuing basis and in doing so considers all relevant factors, including
expenses borne by the Distributor and amounts received under the Distribution
Plan.

The Distributor or its affiliates may, at their own expense, provide
promotional incentives to parties who support the sale of shares of the Fund,
consisting of securities dealers who have sold Fund shares or others, including
banks and other financial institutions, under special arrangements. In some
instances, these incentives may be offered only to certain institutions whose
representatives provide services in connection with the sale or expected sale of
significant amounts of Fund shares.

Listed below are persons affiliated with both the Company and the
Distributor.

<TABLE>
<CAPTION>
NAME AND
PRINCIPAL BUSINESS ADDRESS WITH DISTRIBUTOR WITH COMPANY
- ------------------------------ ----------------------------- --------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. Director, President, Chief Director, President
The Chapman Co. Executive Officer
401 East Pratt Street
28th Floor
Baltimore, MD 21202

Earl U. Bravo, Sr. Director, Senior Vice Secretary and Assistant
The Chapman Co. President, Secretary and Treasurer
401 East Pratt Street Assistant Treasurer
28th Floor
Baltimore, Maryland 21202

M. Lynn Ballard Controller, Treasurer Treasurer and Assistant
The Chapman Co. and Assistant Secretary
401 East Pratt Street Secretary
28th Floor
Baltimore, Maryland 21202
</TABLE>

EXPENSES

10
<PAGE>
to the Company, but not to a particular Series, will be allocated to each Series
on the basis of relative net assets. Similarly, expenses attributable to a
particular Series, but not to a particular class, will be allocated to each
class thereof on the basis of relative net assets. General Company expenses may
include but are not limited to: insurance premiums; Director fees; expenses of
maintaining the Company's legal existence; and fees of industry organizations.
General Series expenses may include but are not limited to: audit fees;
brokerage commissions; registration of the shares of a Series with the SEC and
notification fees to the various state securities commissions; fees of the
Series' Administrator, Custodian and Transfer Agent or other "service
providers," costs of obtaining quotations of portfolio securities; and pricing
of Series shares.

Class-specific expenses relating to distribution fee payments associated
with a Rule 12b-1 plan for a particular class of shares and any other costs
relating to implementing or amending such plan (including obtaining stockholder
approval of such plan or any amendment thereto), will be borne solely by
stockholders of such class or classes. Other expense allocations which may
differ among classes, or which are determined by the Board of Directors to be
class-specific, may include but are not limited to: printing and postage
expenses related to preparing and distributing required documents such as
stockholder reports, prospectuses, and proxy statements to current stockholders
of a specific class; SEC registration fees and state "blue sky" fees incurred by
a specific class; litigation or other legal expenses relating to a specific
class; Director fees or expenses incurred as a result of issues relating to a
specific class; and different transfer agency fees attributable to a specific
class.

Notwithstanding the foregoing, the Investment Advisor or other service
provider may waive or reimburse the expenses of a specific class or classes to
the extent permitted under Rule 18f-3 under the 1940 Act.

BROKERAGE

The Distributor may effect brokerage transactions for the Fund in compliance
with the requirements of the 1940 Act.

CUSTODIAN

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.

TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT

FPS Services, Inc., 3200 Horizon Drive, PO Box 61503, King of Prussia,
Pennsylvania 19406, (800) 831-3175, serves as transfer and dividend paying agent
and accounting agent (the "Transfer Agent") for the Fund's shares pursuant to an
Investment Company Services Agreement. FPS Services, Inc. performs the following
duties in its capacity as Transfer Agent to the Fund: maintains the records of
stockholder's accounts; answers stockholder inquiries concerning accounts;
processes purchases and redemptions of Fund shares; acts as dividend and
distribution disbursing agent; and performs other stockholder service functions.
Stockholder inquiries should be addressed to the Transfer Agent at (800)
831-3175. As accounting agent, FPS Services, Inc. performs certain accounting
and pricing services for the Fund, including the daily calculation of the Fund's
net asset value. For its transfer and dividend paying agency services under the
Investment Company Services Agreement, the Transfer Agent is compensated by a
monthly fee calculated according to a fee schedule approved by the Board of
Directors of the Company.

PURCHASE OF SHARES

Investor Shares of the Fund may be purchased directly from the Fund at the
net asset value per share, plus the applicable sales load, next determined after
receipt of the order in proper form by the Transfer Agent. There is a sales load
in connection with the purchase of shares which is reduced on purchases
involving large amounts and which may be eliminated in certain circumstances
described under Purchase

11
<PAGE>
of Shares--Purchase Price." The Fund reserves the right to reject any purchase
order and to suspend the offering of shares of the Fund. The Fund will not
accept a check endorsed over by a third-party. The minimum initial investment is
$25, and the minimum subsequent is $25. The Fund reserves the right to vary the
initial investment minimum and minimums for additional investments at any time.

Purchase orders for Investment Shares of the Fund which are received by the
Transfer Agent in proper form prior to the close of regular trading hours on the
New York Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m. Eastern time) on
any day that the Fund calculates its net asset value, are priced according to
the net asset value determined on that day. Purchase orders for shares of the
Fund received after the close of the NYSE on a particular day are priced as of
the time the net asset value per share is next determined.

Purchases may be made in one of the following ways:

PURCHASES BY MAIL

Investor Shares may be purchased initially by completing the Investment
Application included in this Prospectus and mailing it to the Transfer Agent,
together with a check payable to DEM Equity Fund Investor Shares, c/o FPS
Services, Inc., 3200 Horizon Drive, PO Box 61503, King of Prussia, PA
19406-0903. All checks for purchase of shares must be drawn on U.S. banks and
payable in U.S. dollars.

Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to DEM Equity Fund Investor Shares, c/o UMB
Bank, N.A., PO Box 412797, Kansas City, MO 64141-2797. Please enclose the stub
of your account statement along with the amount of the investment and the name
of the account for which the investment is to be made and the account number.
Please note: A $20 fee will be charged to your account for any payment check
returned to the Custodian.

PURCHASES THROUGH BROKER/DEALERS

The Fund may accept telephone orders from broker-dealers or service
organizations which have been previously approved by the Fund. It is the
responsibility of such broker-dealers or service organizations to promptly
forward purchase orders and payments for the same to the Fund. Shares of the
Fund may be purchased through broker-dealers, banks and bank trust departments
who may charge the investor a transaction fee or other fee for their services at
the time of purchase.

Wire orders for shares of the Fund received by the Transfer Agent prior to
4:00 p.m., Eastern Time, are confirmed to that day's public offering price.
Orders received by the Transfer Agent after 4:00 p.m., Eastern Time, are
confirmed at the public offering price on the following business day.

PURCHASE PRICE

Shares of the Fund are offered at the public offering price which is the net
asset value per share, plus any applicable sales charge. The sales charge is a
variable percentage of the offering price depending upon

12
<PAGE>
the amount of the sale. No sales charge will be assessed on the reinvestment of
distributions. The sales charge will be assessed as follows:

<TABLE>
<CAPTION>
TOTAL SALES LOAD
---------------------------------------------------
DEALER'S
AS A % OF REALLOWANCE AS A
OFFERING AS A % OF NET % OF OFFERING
AMOUNT OF TRANSACTION PRICE AMOUNT INVESTED PRICE
- --------------------------------------------------------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
Less than $50,000.............................................. 4.75% 4.97% 4.25%
$50,000 to $99,999.99.......................................... 4.25% 4.46% 3.75%
$100,000 to $249,999.99........................................ 3.75% 3.88% 3.25%
$250,000 to $499,999.99........................................ 3.25% 3.38% 3.00%
$500,000 to $749,999.99........................................ 2.75% 2.81% 2.50%
$750,000 to $999,999.99........................................ 2.25% 2.32% 2.00%
$1,000,000 and above........................................... 1.25% 1.28% 1.00%
</TABLE>

The Distributor will pay the appropriate dealer concession to those selected
dealers who have entered into an agreement with the Distributor. The dealer's
concession may be changed from time to time. The Distributor may from time to
time offer incentive compensation to dealers (which sell shares of the Fund
subject to sales charges) allowing such dealers to retain an additional portion
of the sales load. A dealer who receives all of the sales load may be considered
an "underwriter" under the Securities Act of 1933, as amended. All such sales
charges are paid to the securities dealer involved in the trade. The foregoing
schedule of sales charges applies to single purchases and to purchases made
under a Letter of Intent and pursuant to the Rights of Accumulation, both of
which are described below.

RIGHT OF ACCUMULATION

Reduced sales loads apply to any purchase of Investor Shares by an investor
where the aggregate investment in Investor Shares including such purchase, is
$50,000 or more. If, for example, an investor previously purchased and still
holds Investor Shares, with an aggregate current market value of $40,000 and
subsequently purchases Investor Shares having a current value of $20,000, the
sales load applicable to the subsequent purchase would be reduced to 4.25% of
the offering price. All present holdings of Investor Shares may be combined to
determine the current offering price of the aggregate investment in ascertaining
the sales load applicable to each subsequent purchase. To qualify for reduced
sales loads, at the time of a purchase an investor must notify the Transfer
Agent. The reduced sales load is subject to confirmation of an investor's
holdings through a check of appropriate records.

LETTER OF INTENT

By signing a Letter of Intent form, available from the Distributor, an
investor becomes eligible for the reduced sales load applicable to the total
number of Investor Shares purchased in a 13-month period (beginning up to 90
days prior to the date of execution of the Letter of Intent) pursuant to the
terms and conditions set forth in the Letter of Intent less any redemptions by
such investor during such period. A minimum initial purchase of $5,000 is
required. To compute the applicable sales load, the offering price of Investor
Shares you hold (on the date of submission of the Letter of Intent) that may be
used toward "Right of Accumulation" benefits described above may be used as a
credit toward completion of the Letter of Intent.

The Transfer Agent will hold in escrow 5% of the amount of shares indicated
in the Letter of Intent for payment of a higher sales load if the investor does
not purchase the full amount of shares indicated in the Letter of Intent. The
escrow will be released when the investor fulfills the terms of the Letter of
Intent by purchasing the specified amount. Assuming completion of the total
minimum investment specified under a Letter of Intent, an adjustment will be
made to reflect any reduced sales load applicable to shares purchased during the
90-day period prior to the submission of the Letter of Intent. In addition, if
the

13
<PAGE>
investor's purchases qualify for a further sales load reduction, the sales load
will be adjusted to reflect the investor's total purchase at the end of 13
months.

If the total purchases are less than the amount specified, the investor will
be requested to remit an amount equal to the difference between the sales load
actually paid and the sales load applicable to the aggregate purchases actually
made. If such remittance is not received within 20 days, the Transfer Agent, as
attorney-in-fact pursuant to the terms of the Letter of Intent, will redeem an
appropriate number of Investor Shares held in escrow to realize the difference.
Signing a Letter of Intent does not bind the investor to purchase, or the Fund
to sell, the full amount indicated at the sales load in effect at the time of
signing, but the investor must complete the intended purchase to obtain the
reduced sales load. At the time an investor purchases Investor Shares, he or she
must indicate his or her intention to do so under a Letter of Intent.

PURCHASES BY WIRE

To order Investor Shares by wiring federal funds, the Transfer Agent must
first be notified by calling (800) 831-3175 to request an account number and
furnish the Fund with your tax identification number. Following notification to
the Transfer Agent, federal funds and registration instructions should be wired
through the Federal Reserve System to:

UMB BANK, N.A.
ABA #10-10-00695
FOR: FPS SERVICES, INC.
A/C 98-7037-071-9
FBO "DEM EQUITY FUND INVESTOR SHARES"
ACCOUNT OF (EXACT NAME(S) OF ACCOUNT REGISTRATION)
STOCKHOLDER ACCOUNT #____________

A completed application with signature(s) of registrant(s) must be filed
with the Transfer Agent immediately subsequent to the initial wire. Investors
should be aware that some banks may impose a wire service fee. Stockholders may
be subject to 31% federal income tax withholding if original application is not
received.

REDEMPTION OF SHARES

Stockholders may redeem their Investor Shares without charge on any business
day that the NYSE is open. See "Net Asset Value." Redemptions will be effective
at the net asset value per share next determined after the receipt by the
Transfer Agent of a redemption request meeting the requirements described below.
The Fund normally sends redemption proceeds on the next business day, but in any
event redemption proceeds are sent within seven calendar days of receipt of a
redemption request in proper form. Payment may also be made by wire directly to
any bank previously designated by the stockholder in a stockholder account
application. There is a $9.00 charge for redemptions by wire which will be
deducted from redemption proceeds. Please note that the stockholder's bank also
may impose a fee for wire service. The Fund will not honor redemption requests
of stockholders who recently purchased shares by check until it is reasonably
satisfied that the purchase check has cleared, which may take up to fifteen days
from the purchase date. To avoid delays of this kind, you may wish to purchase
by wire if you are planning on redeeming your shares in the near future.

Except as noted below, redemption requests received in proper form by the
Transfer Agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates its per share net value are effective that
day.

Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.

Investor Shares of the Fund may be redeemed through certain brokers,
financial institutions or service organizations, banks and bank trust
departments who may charge the investor a transaction fee or other

14
<PAGE>
fee for their services at the time of redemption. Such fees would not otherwise
be charged if the shares were directly redeemed from the Fund.

The Fund will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Investment
Advisor or the Board of Directors, result in the necessity of the Fund selling
assets under disadvantageous conditions and to the detriment of the remaining
stockholders of the Fund.

Pursuant to the Company's Charter, payment for shares redeemed may be made
either in cash or in-kind, or partly in cash and partly in-kind. However, the
Fund has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem its
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund, during any 90 day period for any one stockholder. Payments in
excess of this limit will also be made wholly in cash unless the Board of
Directors believes that economic conditions exist which would make such a
practice detrimental to the best interests of the Fund. Any portfolio securities
paid or distributed in-kind would be valued as described under "Net Asset
Value." In the event that an in-kind distribution is made, a stockholder may
incur additional expenses, such as the payment of brokerage omissions, on the
sale or other disposition of the securities received from the Fund. In-kind
payments need not constitute a cross-section of the Fund's portfolio. Where a
stockholder has requested redemption of all or a part of the stockholder's
investment, and where the Fund completes such redemption in-kind, the Fund will
not recognize gain or loss for federal tax purposes, on the securities used to
complete the redemption but the stockholder will recognize gain or loss equal to
the difference between the fair market value of the securities received and the
stockholder's basis in the Fund shares redeemed. Investor Shares may be redeemed
in one of the following ways:

REDEMPTION BY MAIL

Shares may be redeemed by submitting a written request for redemption to the
Transfer Agent at FPS Services, Inc., 3200 Horizon Drive, PO Box 61503, King of
Prussia, PA 19406-0903.

A written redemption request to the Transfer Agent must: (i) identify the
stockholder's account number, (ii) state the number of shares or dollars to be
redeemed and (iii) be signed by each registered owner exactly as the shares are
registered. A redemption request for amounts above $25,000 or redemption
requests for which proceeds are to be mailed somewhere other than the address of
record, must be accompanied by signature guarantees. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in Rule 14Ad-15
under the Securities Exchange Act of 1934. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealers guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. The Transfer Agent may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians.

A redemption request will not be deemed to be properly received until the
Transfer Agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
Transfer Agent at (800) 831-3175.

REDEMPTION BY TELEPHONE

Stockholders who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
shareholder of the account with signature guarantees as described previously.

15
<PAGE>
Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting a stockholder to correctly state his or her Fund account
number, the name in which his or her account is registered, his or her banking
institution, bank account number and the name in which his or her bank account
is registered. To the extent that the Fund fails to use reasonable procedures to
verify the genuineness of telephone instructions, it and/or its service
contractors may be liable for any such instructions that prove to be fraudulent
or unauthorized.

The Fund reserves the right to refuse a wire or telephone redemption if it
is believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by the Fund.

ADDITIONAL INFORMATION

The Fund also reserves the right to involuntarily redeem an investor's
account where the account is worth less than the minimum initial investment
required when the account is established, presently $25. (Any redemption of
shares from an inactive account established with a minimum investment may reduce
the amount below the minimum initial investment, and could subject the account
to redemption initiated by the Fund.) The Fund will advise the stockholder of
such intention in writing at least sixty (60) days prior to effecting such
redemption, during which time the stockholder may purchase additional shares in
any amount necessary to bring the account back to $25. The Fund currently does
not intend to exercise this right; however, no assurance can be made that the
Fund will not determine to exercise this right in the future.

If the Board of Directors determines that it would be detrimental to the
best interest of the remaining stockholders of the Fund to make payment in cash,
the Fund may pay the redemption price in whole or in part by distribution in
kind of readily marketable securities, from the Fund, within certain limits
prescribed by the U.S. Securities and Exchange Commission. Such securities will
be valued on the basis of the procedures used to determine the net asset value
at the time of the redemption. If shares are redeemed in kind, the redeeming
stockholder will incur brokerage costs in converting the assets into cash.

Securities are valued through valuations obtained from a commercial pricing
service or at the most recent mean of the bid and asked prices provided by
investment dealers in accordance with procedures established by the Board of
Directors.

NET ASSET VALUE

16
<PAGE>
instances where the price determined above is deemed not to represent fair
market value, the price is determined in such manner as the Board may prescribe.
Investments in short-term debt securities having a maturity of 60 days or less
are valued at amortized cost if their term of maturity from the date of purchase
was less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their term to maturity from the date of purchase when acquired by
the Fund was more than 60 days, unless this is determined by the Board of
Directors not to represent fair value. All other securities and assets are taken
at fair value as determined in good faith by the Board of Directors, although
the actual calculation may be done by others. Income and expenses (including
advisory and administration fees) are accrued daily and taken into account in
computing net asset value.

DIVIDENDS

The Fund calculates its dividends, if any, from net investment income. Net
investment income includes interest accrued and dividends earned on the Fund's
portfolio securities for the applicable period less applicable expenses. The
Fund declares dividends, if any, from its net investment income quarterly and
net realized capital gains annually unless such capital gains are used to offset
losses carried forward from prior years, in which case no such capital gains
will be distributed.

Dividends paid by the Fund with respect to Investor Shares and Institutional
Shares are calculated in the same manner and at the same time. Both classes will
share proportionately in the investment income and expenses of the Fund, except
that the per share dividends of Investor Shares will differ from the per share
dividends of Institutional Shares as a result of additional distribution
expenses applicable to Investor Shares.

Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in additional
Investor Shares of the Fund at net asset value. The election to receive
dividends in cash may be made on the account Application or subsequently, by
writing to the Transfer Agent at FPS Services, Inc., 3200 Horizon Drive, PO Box
61503, King of Prussia, Pennsylvania 19406, or by calling the Transfer Agent at
(800) 831-3175. Any check in payment of dividends or other distributions which
cannot be delivered by the Post Office or which remains uncashed for a period of
more than one year may be reinvested in the stockholder's account at the then
current net asset value and the dividend option may be changed from cash to
reinvest. Dividends are reinvested on the ex-dividend date at the net asset
value determined at the close of business on that date. Please note that shares
purchased shortly before the record date for a dividend or distribution may have
the effect of returning capital although such dividends and distributions are
subject to taxes.

TAXES

The following discussion reflects applicable tax laws as of the date of this
Prospectus.

TAXATION OF THE FUND

The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company (a "RIC") for federal income tax purposes in
accordance with Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, the Fund (see "OTHER INFORMATION--Capital
Stock"), must satisfy certain tests regarding the source of its income,
diversification of its assets and distribution of its income. If the Fund
otherwise qualifies as a regulated investment company and the Fund distributes
to its stockholders at least 90% of its investment company taxable income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the distributed amount in any calendar year is less than
a sum of (i) 98% of its ordinary income; (ii) 98% of its capital gain net
income; and (iii) any prior year underdistributions.

17
<PAGE>
If in any year the Fund fails to qualify under Subchapter M as a regulated
investment company, the Fund would incur a corporate income tax on its taxable
income for the year, and the entire amount of the Fund's distribution would
generally be characterized as ordinary income.

TAXATION OF STOCKHOLDERS

DISTRIBUTIONS

In general, all distributions to stockholders attributable to the Fund's
investment company taxable income will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of the Fund.

The Fund intends to distribute any net capital gain annually and intends to
designate the appropriate term of those capital gain distributions for tax
purposes. In general, if the Fund designates a dividend as a capital gain
dividend, it will designate the dividend as a 20% rate gain distribution, an
unrecaptured Section 1250 gain distribution or a 28% rate gain distribution.
Capital gains dividends are taxable to stockholders regardless of whether the
dividends are paid in cash or reinvested in additional shares of the Fund and
regardless of how long a stockholder has held shares in the Fund. Distributions
of short-term capital gain dividends result in ordinary income

Stockholders receiving distributions in the form of additional shares the
Fund will be treated for federal income tax purposes as having received the
amount of cash used to purchase such shares. In general, the basis of such
shares will equal the price paid for such shares.

SALES OF SHARES

In general, if a share of the Fund is redeemed, the stockholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and the stockholder's adjusted basis in the share. Any gain or loss
realized upon a sale of shares by a stockholder who is not a dealer in
securities will generally be treated as capital gain or loss and capital gain or
loss will be long-term capital gain or loss if the shares that were sold had
been held for more than one year. Long-term capital gains on shares held more
than one year but not more than 18 months by individuals will be taxed at no
higher than a 28% rate, and long-term capital gains on shares held more than 18
months by individuals will be taxed at no higher than a 20% rate. However, any
loss recognized by a stockholder on shares held for six months or less will be
treated as a long-term capital loss to the extent of any long-term capital gain
distributions received by the stockholder and the stockholder's share of
undistributed net capital gain. In addition, any loss realized on a sale of
shares will be disallowed to the extent the shares disposed of are replaced
within a period beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss.

BACKUP WITHHOLDING

The Fund may be required to withhold federal income tax at the rate of 31%
of any dividend or redemption payments made to certain stockholders if such
stockholders have not provided a correct taxpayer identification number and
certain required certifications to the Company, or if the Secretary of the
Treasury notifies the Company that the taxpayer identification number provided
by a stockholder is not correct or that the stockholder has previously
underreported its interest and dividend income. Stockholders can credit such
withheld income taxes against their income tax liabilities.

The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "Taxation" in the Fund's
Statement of Additional Information.

18
<PAGE>
OTHER INFORMATION

CAPITAL STOCK

The Company was incorporated on November 22, 1988 under the laws of the
State of Maryland under the name The Chapman Funds, Inc. It is a registered
open-end, management investment company under the 1940 Act set up as a "series
fund" which is a mutual fund divided into separate portfolios, each of which is
treated as a separate entity for certain matters under the 1940 Act and for
other purposes. A stockholder of one Series is not deemed to be a stockholder of
any other Series. The Fund is non-diversified under the 1940 Act. See "Risk
Factors--Non-Diversified Status." The Company's charter authorizes the Board to
issue 10 billion full and fractional shares of common stock, par value $.001 per
share, of which 1 billion shares are designated DEM Equity Fund Investor Shares.
Under the Company's charter documents and Maryland law, the board has the power
to classify or reclassify any unissued shares of the Company into one or more
additional classes by setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without stockholder approval, may increase the number of authorized shares of
the Company. All shares of the Fund, when issued, will be fully paid and
nonassessable.

The Fund offers a separate class of shares, the Institutional Shares, to
institutional investors through a separate prospectus. Shares of each class
represent equal pro rata interests in the Fund's common investment portfolio and
accrue dividends and calculate net asset value and performance quotations in the
same manner. However, Institutional Shares are sold without a load and may have
different sales charges and other expenses , which may affect performance.

All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where class voting is required by law or the
matter affects only one class. There is no provision for cumulative voting.

The Company is not required under Maryland law to hold annual meetings of
stockholders for the election of Directors and currently does not intend to do
so. Stockholders have the right to call for a meeting to consider the removal of
one or more of the Company's Directors if the request is made in writing by the
holders of at least 10% of the Company's outstanding voting securities. The
Company will assist in calling the meeting as required under the 1940 Act.

Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Institutional Shares or the other
classes of the Company by contacting the Distributor at the telephone number
listed on the back of this Prospectus.

STOCKHOLDER INQUIRIES

Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.

CONTROLLING STOCKHOLDER

As of February 28, 1998, the Investment Advisor owns one Investor Share and
one Institutional Share of the Fund which comprises 100% of the Fund's
outstanding Common Stock. Because one stockholder owns in excess of 25% of the
issued and outstanding Common Stock of the Fund as of February 28, 1998, such
stockholder is deemed to control the Fund. Accordingly, such stockholder has
significant power to affect the affairs of the Fund or to determine or influence
the outcome of matters submitted to a vote of the stockholders of the Fund.

19
<PAGE>

The Investment Adviser is a wholly-owned subsidiary of Chapman Capital
Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling stockholder of
Chapman Capital Holdings, Inc. is a controlling person (as that term is defined
under the 1940 Act) of Chapman Capital Holdings, Inc. and, therefore, a
controlling person of the Investment Adviser.

THE YEAR 2000 PROBLEM

Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its Investment Advisor and other service providers do
not properly process and calculate date-related information from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Company
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to the computer system that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund.

20
<PAGE>
DEM EQUITY FUND
INVESTOR SHARES

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY

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

PROSPECTUS

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

MARCH 10, 1998

INVESTMENT ADVISOR

CHAPMAN CAPITAL MANAGEMENT, INC.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656

TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT

FPS SERVICES, INC.
3200 Horizon Drive
PO Box 61503
King of Prussia, Pennsylvania 19406
(800) 831-3175

CUSTODIAN

UMB BANK, N.A.
928 Grand Avenue
Kansas City, Missouri 64141-6226

DISTRIBUTOR

THE CHAPMAN CO.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
(800) 752-1013

NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE INCLUDED IN THIS PROSPECTUS OR IN SUPPLEMENTAL SALES
LITERATURE ISSUED BY THE FUND OR ITS DISTRIBUTOR.
<PAGE>
FILED PURSUANT TO RULE 497(E)
FILE NOS.: 33-25716; 811-5697

Prospectus Dated: March 10, 1998

DEM EQUITY FUND
INSTITUTIONAL SHARES

The Fund offers two classes of shares, Investor Shares and Institutional
Shares. Institutional Shares are offered by this Prospectus. Institutional
Shares have no load; however, individual investors may purchase Institutional
Shares only through institutional stockholders of record, broker-dealers,
financial institutions, depository institutions, retirement plans and other
financial intermediaries ("Institutions"). The Institutional Shares impose a
12b-1 fee of up to .25% per annum, which is the economic equivalent of a sales
charge and the minimum initial investment in Institutional Shares is currently
$25,000 with no minimum subsequent investment. The Fund's Investor Shares are
available for purchase by individuals directly and are offered by a separate
prospectus.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
Fund Expenses.......................................................................... 2
Investment Objectives.................................................................. 3
Risk Factors........................................................................... 7
Management............................................................................. 9
Purchase of Shares..................................................................... 12
Redemption of Shares................................................................... 13
Net Asset Value........................................................................ 15
Dividends.............................................................................. 15
Taxes.................................................................................. 16
Other Information...................................................................... 17
</TABLE>

DOMESTIC EMERGING MARKETS-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK
AND DEM-TM- AND DEM INDEX-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
FUND EXPENSES

<TABLE>
<CAPTION>
DEM EQUITY FUND
INSTITUTIONAL
SHARES
-----------------
<S> <C>
STOCKHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................... 0%
Maximum Deferred Sales Load................................................................... 0%
Maximum Sales Load Imposed on Reinvested Dividends and other Distributions.................... 0%
Redemption Fee (as a percentage of amount redeemed)........................................... 0%
ANNUAL EXPENSES (as a percentage of net assets) (1).............................................
Management Fees............................................................................... 0.90%
12b-1 Fees.................................................................................... 0.25%
Other Expenses (2)............................................................................ 0.89%
Total Fund Operating Expenses (estimated)..................................................... 2.04%
</TABLE>

- ------------------------
(1) See "MANAGEMENT."

(2) Based upon estimated amounts of expenses for the Fund's current fiscal year.

EXAMPLE

<TABLE>
<CAPTION>
INSTITUTIONAL
SHARES
---------------
<S> <C>
1 Year..................................................................................... $ 21
3 Years.................................................................................... $ 64
</TABLE>

The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. "Other Expenses" are based on estimated amounts for
the current fiscal year. Long-term investors in the Fund could pay more in 12b-1
fees than the economic equivalent of the maximum front-end sales charges
permitted by the National Association of Securities Dealers, Inc. (the "NASD")
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OF THE
FUND AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the examples assume a 5% annual return, the Fund's performance will vary
and may result in a return greater or less than 5%. For a further description of
the various costs and expenses incurred in the Fund's operation, see
"MANAGEMENT."

2
<PAGE>
INVESTMENT OBJECTIVES

GENERAL

In determining whether a specific portfolio company is "controlled" by
African Americans, Asian Americans, Hispanic/Latino Americans or women, the Fund
will apply the following criteria: at least 10% of the Company's outstanding
voting securities must be beneficially owned by members of one or more of the
listed groups or at least one of the company's top three executive officers must
be a member of one or more of the listed groups.

To achieve the Fund's investment objectives, the Fund invests in a wide
variety of types of portfolio companies and seeks to identify those companies
that are positioned for growth. Among other factors, the Investment Advisor
considers a company's above average earnings growth, high potential profit
margins, innovative products, high quality management, and competitive advantage
in making investment decisions. The Fund believes that the Domestic Emerging
Markets market segment represents one of America's fastest growing market
segments and includes well-diversified, high-growth segments of the economy
including but not limited to communications, media/entertainment, environmental
services, applied/ advanced technology, financial services and value-oriented
consuming.

Under normal circumstances, at least 65% of the value of the Fund's total
assets will be invested in equity securities; however, the Fund retains the
flexibility to respond promptly to changes in market conditions and no minimum
percentage of the Fund's assets must be invested in DEM Companies at any time.
Accordingly, during periods when the Investment Advisor believes a temporary
defensive posture in the market is warranted, the Fund has reserved the right to
invest a significant proportion or all of its assets in the securities of
non-DEM Companies that otherwise meet the Fund's investment objectives, or
alternatively, the Fund may hold cash (U.S. dollars) and/or invest any portion
or all of its assets in high quality short-term debt securities and money market
instruments. The securities of non-DEM Companies that otherwise meet the Fund's
investment objectives may or may not involve less risk than DEM Companies.
Accordingly, to the extent that the Fund adopts a temporary defensive posture in
which it invests in non-DEM Companies, the Fund's investments will continue to
present significant risks. See "RISK FACTORS--Investment in Small Companies,"
"Non-Publicly Traded Securities," "--Non-Diversified Status." The decision to
adopt a temporary defensive posture may be affected by such factors as market
conditions generally, the Investment Advisor's views on the direction of
movement of the stock

3
<PAGE>
prices of specific targeted portfolio companies and other related factors. It is
impossible to predict when or for how long the Fund will employ defensive
strategies, and to the extent it is so invested, the Fund may not achieve its
investment objectives. The Fund will also invest in the instruments described
above pending investment of the net proceeds of this offering.

While the Fund invests in portfolio companies with large and small market
capitalizations, the Fund believes that investing in small companies may offer
the potential for significant long-term capital appreciation. Most of the Fund's
investments are in marketable common stocks or marketable securities convertible
into common stock traded on an exchange or in the over-the-counter markets. To
the extent the Fund invests in companies with smaller market capitalizations,
the securities of such companies may be traded in such over-the-counter markets
as the OTC Bulletin Board(SM) and the Pink Sheets(SM). See "RISK
FACTORS--Investment in Small Companies."

The Fund does not invest in foreign securities (including American
Depository Receipts).

ILLIQUID SECURITIES/PRIVATE VENTURE CAPITAL FUNDS

As an alternative to direct investments in Illiquid Securities, the Fund may
invest up to 10% of its assets in private venture capital funds including United
States private limited partnerships or other investment funds ("Private Funds")
that themselves invest in Illiquid Securities. In selecting Private Funds for
investment, the Fund's Investment Advisor seeks to invest in a mix of Private
Funds that will provide an above average internal rate of return (i.e., the
discount rate at which the present value of an investment's future cash inflows
(dividend income and capital gains) are equal to the cost of the investment).
The Investment Advisor believes that the Fund's investments in Private Funds
offers individual investors a unique opportunity to participate in investment
opportunities typically available only to large institutions and accredited
investors. Although the Fund's investments in Private Funds are limited to a
maximum of 10% of the Fund's assets, these investments are highly speculative
and volatile and may produce gains or losses in this portion of the Fund that
exceed those of the Fund's other holdings and of more mature companies
generally.

4
<PAGE>
To the extent that these Private Funds are investment companies for purposes
of the 1940 Act, the Fund's ability to invest in them will be limited to,
subject to certain exceptions, (i) 3% of the total voting stock of any one
investment company, (ii) 5% of total assets with respect to any one investment
company and, (iii) 10% of the Fund's total assets in the aggregate. In addition,
Fund stockholders will remain subject to the Fund's expenses while also bearing
their pro rata share of the operating expenses of the Private Funds. The ability
of the Fund to dispose of interests in Private Funds is very limited and will
involve the risks described under "RISK FACTORS--Non-Publicly Traded Securities"
and "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities" in the
Statement of Additional Information. In valuing the Fund's holdings of interests
in Private Funds, the Fund will be relying on the most recent reports provided
by the Private Funds themselves prior to calculation of the Fund's net asset
value. These reports, which are provided on an infrequent basis, often depend on
the subjective valuations of the managers of the Private Funds and, in addition,
would not generally reflect positive or negative subsequent developments
affecting companies held by the Private Fund. See "NET ASSET VALUE." The
securities of Private Funds will typically themselves be classified as Illiquid
Securities by the Board of Directors. Accordingly, the Fund's total investment
in Illiquid Securities, including Private Funds, is limited to 15% of the Fund's
assets with no more than 10% of the Fund's assets invested in Private Funds.

BORROWING

The Fund may not issue senior securities, borrow money or pledge its assets,
except that it may borrow from banks in amounts aggregating not more than
33 1/3% of the value of the Fund's total assets (calculated when the loan is
made) to take advantage of investment opportunities and may pledge up to 33 1/3
of the value of its total assets to secure such borrowings. The Fund may
purchase securities on margin pursuant to margin arrangements with banks up to
the limits set forth above for bank borrowings. The Fund is also authorized to
borrow an additional 5% of its total assets without regard to the foregoing
limitations for temporary purposes such as clearance of portfolio transactions
and share redemptions.

OPTIONS

The Fund may invest up to 15% of its total assets, represented by the
premium paid, in the purchase of call and put options in respect of specific
securities in which the Fund may invest. The Funds may write covered call and
put option contracts to the extent of 15% of the value of its net assets at the
time such option contracts are written. A call option gives the purchaser of the
option the right to buy, and obligates the writer to sell, the underlying
security at the exercise price at any time during the option period. Conversely,
a put option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying security at the exercise price at any time
during the option period. A covered call option sold by the Fund, which is a
call option with respect to which the Fund owns the underlying security, exposes
the Fund during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or to
possible continued holding of a security which might otherwise have been sold to
protect against depreciation in the market price of the security. A covered put
option sold by the Fund exposes the Fund during the term of the option to a
decline in price of the

5
<PAGE>
underlying security. A put option sold by the Fund is covered when, among other
things, cash or liquid securities are placed in a segregated account with the
Fund's custodian to fulfill the obligation undertaken.

SECURITIES LENDING/REPURCHASE AGREEMENTS

6
<PAGE>
RISK FACTORS

INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS ASSOCIATED WITH AN
INVESTMENT IN THE FUND.

INVESTMENT IN SMALL COMPANIES

Investing in small capitalization stocks can involve greater risk than is
customarily associated with investing in securities of larger, more established
companies. Small emerging companies may be subject to greater earnings
fluctuation, lack of established markets for products or services, more limited
financial resources and less depth of experienced management. Securities of
small emerging companies generally have more limited marketability and may be
subject to greater price volatility than securities of larger companies. They
may be dependent for management on one or a few key persons, and can be more
susceptible to losses and risks of bankruptcy. Transaction and trading costs in
smaller capitalization stocks may be higher than those of larger capitalization
companies, primarily because of more limited volumes and fewer active market
makers. These risks are in addition to the risks normally associated with any
strategy seeking capital appreciation by investing in a portfolio of equity
securities. Furthermore, such companies are often traded on markets such as the
OTC Bulletin Board-SM- and the Pink Sheets-SM-where the trading market is
thinner and the spread between bid and offer prices is often larger than on the
major exchanges or Nasdaq system. The nature of these trading markets subjects
the Fund to the risk that should the need arise to rapidly liquidate its
position in such securities, for example to cover net redemptions, the Fund's
activities could aversely affect the market price of such securities, resulting
in a requirement that the Fund sell its position below the price that is deemed
to be representative of their value and, accordingly, the value of the Fund's
net assets could be adversely affected.

NON-PUBLICLY TRADED AND ILLIQUID SECURITIES

7
<PAGE>
requirements applicable to companies whose securities are publicly traded. The
Fund's investment in Illiquid Securities is subject to the risk that should the
Fund desire to sell any of these securities when a ready buyer is not available
at a price that is deemed to be representative of their value, for example to
cover net redemptions, the value of the Fund's net assets could be adversely
affected. See "INVESTMENT PROGRAM--Non-Publicly Traded and Illiquid Securities"
in the Statement of Additional Information.

LIMITED EXPERIENCE OF THE INVESTMENT ADVISOR

However, prior to advising the Fund, the Investment Advisor had not acted as
an advisor to an open-end management investment company investing in an equity
portfolio.

NON-DIVERSIFIED STATUS

POTENTIAL CONFLICT OF INTEREST

The Fund may utilize the Distributor, The Chapman Co., a broker-dealer
registered under the Securities Exchange Act of 1934, as amended, and a member
of the NASD, in connection with the purchase or sale of portfolio securities in
certain circumstances. As of February 26, 1998, the Investment Advisor is a
wholly-owned subsidiary of Chapman Capital Holdings, Inc. Mr. Nathan A. Chapman,
Jr., the President and Chairman of the Board of Directors of the Company, is
also the President and Chairman of the Board of Directors of the Investment
Advisor and Chapman Capital Holdings, Inc. As of February 26, 1998, the
Distributor is a wholly-owned subsidiary of Chapman Holdings, Inc. Mr. Nathan A.
Chapman, Jr. is also the President and Chairman of the Board of Directors of the
Distributor and the President and Chairman of the Board of Directors of Chapman
Holdings, Inc. See "MANAGEMENT--Investment Advisor" below and "MANAGEMENT" in
the Fund's Statement of Additional Information. Mr. Chapman owns approximately
92% of the outstanding voting securities of Chapman Capital Holdings, Inc. and
approximately 62% of the outstanding voting securities of Chapman Holdings, Inc.
Accordingly, these relationships represent a potential conflict of interest with
respect to commissions and other fees on brokerage transactions conducted on the
Fund's behalf by the Distributor. A majority of the Company's Board of Directors
are independent directors and such Directors have adopted procedures in
compliance with the 1940 Act to address such conflict. See "MANAGEMENT" and
"PORTFOLIO TRANSACTIONS" in the Fund's Statement of Additional Information.

USE OF LEVERAGE

8
<PAGE>
MANAGEMENT

BOARD OF DIRECTORS

THE INVESTMENT ADVISOR

PORTFOLIO MANAGEMENT

THE DISTRIBUTOR

The Distributor, The Chapman Co., is a registered broker-dealer and a member
of the NASD. The Distributor is located at The World Trade Center--Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore,

9
<PAGE>
Maryland 21202. As of February 26, 1998, the Distributor is a wholly-owned
subsidiary of Chapman Holdings, Inc. Nathan A. Chapman, Jr., who is the
controlling stockholder, President and Chairman of the Board of Directors of
Chapman Holdings, Inc., is also the President and Chairman of the Board of
Directors of the Company and the Distributor.

The Distributor receives a fee for stockholder servicing and distribution
services at an annual rate of up to a total of .25% of the average daily net
assets of the Fund attributable to the Institutional Shares pursuant to a
distribution plan (the "Distribution Plan") adopted by the Fund pursuant to Rule
12b-1 under the 1940 Act. Amounts paid to the Distributor under the Distribution
Plan will compensate the Distributor or enable the Distributor to compensate
other persons, including any other distributor of the Institutional Shares or
institutional stockholders of record of the Institutional Shares, including but
not limited to retirement plans, broker-dealers, depository institutions, and
other financial intermediaries, who own Institutional Shares on behalf of
investors, including their customers, clients or (in the case of retirement
plans) participants, and companies providing certain services to such investors,
for providing (a) services primarily intended to result in the sale of the
Institutional Shares and (b) stockholder servicing, administrative and
accounting services to such investors, all as set forth in the Distribution
Plan. Payments under the Distribution Plan are not tied exclusively to the
distribution expenses actually incurred by the Distributor and the payments may
exceed distribution expenses actually incurred. The Board of Directors of the
Company evaluates the appropriateness of the Distribution Plan on a continuing
basis and in doing so considers all relevant factors, including expenses borne
by the Distributor and amounts received under the Distribution Plan.

Listed below are persons affiliated with both the Company and the
Distributor.

Earl U. Bravo, Sr. Director, Senior Vice Secretary and Assistant
The Chapman Co. President, Secretary and Treasurer
401 East Pratt Street Assistant Treasurer
28th Floor
Baltimore, Maryland 21202

M. Lynn Ballard Controller, Treasurer Treasurer and Assistant
The Chapman Co. and Assistant Secretary
401 East Pratt Street Secretary
28th Floor
Baltimore, Maryland 21202
</TABLE>

EXPENSES

The Investment Advisor bears all expenses in connection with the performance
of its advisory and administrative services. The Company bears all expenses
incurred in its operations. Expenses attributable to the Company, but not to a
particular Series, will be allocated to each Series on the basis of relative net

10
<PAGE>
assets. Similarly, expenses attributable to a particular Series, but not to a
particular class, will be allocated to each class thereof on the basis of
relative net assets. General Company expenses may include but are not limited
to: insurance premiums; Director fees; expenses of maintaining the Company's
legal existence; and fees of industry organizations. General Series expenses may
include but are not limited to: audit fees; brokerage commissions; registration
of the shares of a Series with the SEC and notification fees to the various
state securities commissions; fees of the Series' Administrator, Custodian and
Transfer Agent or other "service providers," costs of obtaining quotations of
portfolio securities; and pricing of Series shares.

BROKERAGE

The Distributor may effect brokerage transactions for the Fund in compliance
with the requirements of the 1940 Act.

CUSTODIAN

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian for the Fund's portfolio securities.

TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT

11
<PAGE>
PURCHASE OF SHARES

Individual investors may purchase Institutional Shares only through
Institutions (institutional stockholders of record, broker-dealers, financial
institutions, depository institutions, retirement plans and other financial
intermediaries). The Fund reserves the right to make Institutional Shares
available to other investors in the future. References in this Prospectus to
stockholders or investors are generally to Institutions as the record holders of
the Institutional Shares.

Each Institution separately determines the rules applicable to its customers
investing in the Fund, including minimum initial and subsequent investment
requirements and the procedures to be followed to effect purchases, redemptions
and exchanges of Institutional Shares.

Orders for the purchase of Institutional Shares are placed with an
Institution by its customers. The Institution is responsible for the prompt
transmission of the order to the Transfer Agent.

Shares of the Fund may be purchased by Institutions directly from the Fund
at the net asset value next determined after receipt of the order in proper form
by the Transfer Agent. There is no sales load in connection with the purchase of
shares. The Fund reserves the right to reject any purchase order and to suspend
the offering of shares of the Fund. The Fund will not accept a check endorsed
over by a third-party. The minimum initial investment is $25,000, with no
minimum subsequent investment. The Fund reserves the right to vary the initial
investment minimum and minimums for additional investments at any time. There is
no minimum investment requirement for qualified retirement plans.

Purchase orders for shares of the Fund which are received by the Transfer
Agent in proper form prior to the close of regular trading hours on the New York
Stock Exchange, Inc. (the "NYSE") (currently 4:00 p.m. Eastern time) on any day
that the fund calculates its net asset value, are priced according to the net
asset value determined on that day. Purchase orders for the shares of the Fund
received after the close of the NYSE on a particular day are priced as of the
time the net asset value per share is next determined.

Purchases may be made in one of the following ways:

PURCHASE BY MAIL

An Institution can make an initial purchase of Institutional Shares by
completing the Investment Application included with this Prospectus and mailing
it to the Transfer Agent, together with a check payable to DEM Equity Fund
Institutional Shares, c/o FPS Services, Inc., 3200 Horizon Drive, PO Box 61503,
King of Prussia, PA 19406-0903. All checks for purchase of shares must be drawn
on U.S. banks and payable in U.S. dollars.

Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to DEM Equity Fund Institutional Shares, c/o UMB
Bank, N.A., PO Box 412797, Kansas City, MO 64141-2797. Please enclose the stub
of your account statement along with the amount of the investment and the name
of the account for which the investment is to be made and the account number.
Please note: A $20 fee will be charged to your account for any payment check
returned to the Custodian.

The Fund may accept telephone orders from Institutions which have been
previously approved by the Fund. It is the responsibility of such Institutions
to promptly forward purchase orders and payments for the same to the Fund.
Institutional Shares may be purchased through broker-dealers, banks and bank
trust departments who may charge the investor a transaction fee or other fee for
the services at the time of purchase. Such fees would not otherwise be charged
if the shares were purchased directly from the Fund.

PURCHASE BY WIRE

To order shares for purchase by wiring federal funds, the Transfer Agent
must first be notified by calling (800) 831-3175 to request an account number
and furnish the Fund with your tax identification

12
<PAGE>
number. Following notification to the Transfer Agent, federal funds and
registration instructions should be wired through the Federal Reserve System to:

UMB BANK, N.A.
ABA #10-10-00695
FOR: FPS SERVICES, INC.
A/C 98-7037-071-9
FBO "DEM EQUITY FUND INSTITUTIONAL SHARES"
ACCOUNT OF (EXACT NAME(S) OF ACCOUNT REGISTRATION)
SHAREHOLDER ACCOUNT #____________

A completed application with signature(s) of registrant(s) must be filed
with the Transfer Agent immediately subsequent to the initial wire. Investors
should be aware that some banks may impose a wire service fee. Stockholders may
be subject to 31% withholding if an original application is not received.

REDEMPTION OF SHARES

An investor of the Fund may redeem (sell) shares on any day that the Fund's
net asset value is calculated (see "NET ASSET VALUE" below). Requests for the
redemption of Institutional Shares are placed with an Institution by its
customers, which is then responsible for the prompt transmission of this request
to the Transfer Agent.

Institutions may redeem Institutional Shares without charge on any business
day that the NYSE is open (see "NET ASSET VALUE"). Redemptions will be effective
at the net asset value per share next determined after the receipt by the
Transfer Agent of a redemption request meeting the requirements described below.
The Fund normally sends redemption proceeds on the next business day, but in any
event redemption proceeds are sent within seven calendar days of receipt of a
redemption request in proper form. Payment may also be made by wire directly to
any bank previously designated by the Institution in an account application.
There is a $9.00 charge for redemption by wire. Please note that the
Institution's bank also may impose a fee for wire service. The Fund will not
honor redemption requests of Institutions who recently purchased shares by check
until it is reasonably satisfied that the purchase check has cleared, which may
take up to fifteen days from the purchase date. To avoid delays of this kind, an
Institution may wish to purchase by wire if it is planning on redeeming its
shares in the near future.

Redemption requests received after the close of the NYSE are effective as of
the time the net asset value per share is next determined.

13
<PAGE>
brokerage commissions, on the sale or other disposition of the securities
received from the Fund. In-kind payments need not constitute a cross-section of
the Fund's portfolio. Where an Institution has requested redemption of all or a
part of the Institution's investment, and where the Fund completes such
redemption in-kind, the Fund will not recognize gain or loss for federal tax
purposes, on the securities used to complete the redemption but the stockholder
will recognize gain or loss equal to the difference between the fair market
value of the securities received and the stockholder's basis in the Fund shares
redeemed. Shares may be redeemed in one of the following ways:

REDEMPTION BY MAIL

Shares may be redeemed by submitting a written request for redemption to the
Transfer Agent at FPS Services, Inc., 3200 Horizon Drive, PO Box 61503, King of
Prussia, PA 19406-0903.

A written redemption request to the Transfer Agent must: (i) identify the
stockholder's account number, (ii) state the number of shares or dollars to be
redeemed and, (iii) be signed by each registered owner exactly as the shares are
registered. A redemption request for amounts above $25,000, or redemption
requests for which proceeds are to be mailed somewhere other than the address of
record, must be accompanied by signature guarantees. Signatures must be
guaranteed by an "eligible guarantor institution" as defined in Rule 17Ad-15
under the Securities Exchange Act of 1934. Eligible guarantor institutions
include banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations.
Broker-dealer guaranteeing signatures must be members of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. The Transfer Agent may require additional supporting documents for
redemptions made by corporations, executors, administrators, trustees and
guardians.

REDEMPTION BY TELEPHONE

Institutions who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the Transfer
Agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated to
receive redemption proceeds, a written request must be sent to the Transfer
Agent at the address listed above. The request must be signed by each
shareholder of the account or by the account's authorized representative with a
signature guarantee, as described previously.

Neither the Fund nor any of its service contractors will be liable for any
loss or expense in acting upon any telephone instructions that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions are
genuine, the Fund will use such procedures as are considered reasonable,
including requesting an Institution to correctly state its Fund account number,
the name in which its account is registered, its banking institution, bank
account number and the name in which its bank account is registered. To the
extent that the Fund fails to use reasonable procedures to verify the
genuineness of telephone instructions, it and/or its service contractors may be
liable for any such instructions that prove to be fraudulent or unauthorized.

14
<PAGE>
ADDITIONAL INFORMATION

The Fund reserves the right to involuntarily redeem an investor's account
where the account is worth less than the minimum initial investment required
when the account is established, presently $25,000. (Any redemption of shares
from an inactive account established with a minimum investment may reduce the
account below the minimum initial investment, and could subject the account to
redemption initiated by the Fund.) The Fund will advise the Institutional
stockholder of such intention in writing at least sixty (60) days prior to
effecting such redemption, during which time the Institution may purchase
additional shares in any amount necessary to bring the account back to $25,000.
The Fund currently has no intention of exercising its right to involuntarily
redeem accounts but reserves the right to initiate involuntary redemptions in
the future.

NET ASSET VALUE

The net asset value of shares of the Fund is determined each business day as
of the close of trading on the NYSE (currently 4:00 p.m. Eastern Time). Options
and futures contracts are valued at their daily quoted settlement price on the
exchange on which they are traded and are included in such net asset value
determination. The NYSE is scheduled to be open Monday through Friday throughout
the year except for certain Federal and other holidays. The net asset value per
Institutional Share of the Fund is calculated by adding the Institutional
Shares' pro rata share of the value of the Fund's assets, deducting the
Institutional Shares' pro rata share of the Fund's liabilities and the
liabilities specifically allocated to Institutional Shares and then dividing the
result by the total number of outstanding Institutional Shares. Fund securities
listed or traded on a securities exchange for which representative market
quotations are available will be valued at the last quoted sales price on the
security's principal exchange on that day. Securities that are traded
over-the-counter are valued, if bid and asked quotations are available, at the
mean between the current bid and asked prices. If bid and asked quotations are
not available, then over-the-counter securities are valued through valuations
obtained from a commercial pricing service or as determined in good faith by the
Board of Directors. In making this determination the Board considers, among
other things, publicly available information regarding the issuer, market
conditions and values ascribed to comparable companies. In instances where the
price determined above is deemed not to represent fair market value, the price
is determined in such manner as the Board may prescribe. Investments in
short-term debt securities having a maturity of 60 days or less are valued at
amortized cost if their term of maturity from the date of purchase was less than
60 days, or by amortizing their value on the 61st day prior to maturity if their
term to maturity from the date of purchase when acquired by the Fund was more
than 60 days, unless this is determined by the Board of Directors not to
represent fair value. All other securities and assets are taken at fair value as
determined in good faith by the Board of Directors, although the actual
calculation may be done by others. Income and expenses (including advisory and
administration fees) are accrued daily and taken into account in computing net
asset value.

DIVIDENDS

15
<PAGE>
Unless an investor instructs the Fund to pay dividends or distributions in
cash, dividends and distributions will automatically be reinvested in additional
Institutional Shares of the Fund at net asset value. The election to receive
dividends in cash may be made on the account Application or subsequently, by
writing to the Transfer Agent at FPS Services, Inc., 3200 Horizon Drive, PO Box
61503, King of Prussia, Pennsylvania 19406, or by calling the Transfer Agent at
(800) 831-3175. Any check in payment of dividends or other distributions which
cannot be delivered by the Post Office or which remains uncashed for a period of
more than one year may be reinvested in the stockholder's account at the then
current net asset value and the dividend option may be changed from cash to
reinvest. Dividends are reinvested on the ex-dividend date at the net asset
value determined at the close of business on that date. Please note that shares
purchased shortly before the record date for a dividend or distribution may have
the effect of returning capital although such dividends and distributions are
subject to taxes.

TAXES

The following discussion reflects applicable tax laws as of the date of this
Prospectus.

TAXATION OF THE FUND

If in any year the Fund fails to qualify under Subchapter M as a regulated
investment company, the Fund would incur a corporate income tax on its taxable
income for the year, and the entire amount of the Fund's distribution would
generally be characterized as ordinary income.

TAXATION OF STOCKHOLDERS

DISTRIBUTIONS

16
<PAGE>
SALES OF SHARES

BACKUP WITHHOLDING

The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of the Fund and
does not deal with all of the federal income tax consequences applicable to the
Fund, or to all categories of investors, some of which may be subject to special
rules. Prospective investors should consult their own tax advisers regarding the
federal, state, local, foreign and other tax consequences to them of investments
in the Fund. For additional tax information, see "TAXATION" in the Fund's
Statement of Additional Information.

OTHER INFORMATION

CAPITAL STOCK

The Company was incorporated on November 22, 1988 under the laws of the
State of Maryland under the name The Chapman Funds, Inc. It is a registered
open-end, management investment company under the 1940 Act set up as a "series
fund" which is a mutual fund divided into separate portfolios, each of which is
treated as a separate entity for certain matters under the 1940 Act and for
other purposes. A stockholder of one Series is not deemed to be a stockholder of
any other Series. The Fund is non-diversified under the 1940 Act. See "RISK
FACTORS--Non-Diversified Status." The Company's charter authorizes the Board to
issue 10 billion full and fractional shares of common stock, par value $.001 per
share, of which 1 billion shares are designated DEM Equity Fund Institutional
Shares. Under the Company's charter documents and Maryland law, the board has
the power to classify or reclassify any unissued shares of the Company into one
or more additional classes by setting or changing in any one or more respects
their relative rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption. The Board may similarly
classify or reclassify any class of its shares into one or more series and,
without stockholder approval, may increase the number of authorized shares of
the Company. All shares of the Fund, when issued, will be fully paid and
nonassessable.

The Fund offers a separate class of shares, the Investor Shares, to
individual investors through a separate prospectus. Shares of each class
represent equal pro rata interests in the Fund's common investment portfolio and
accrue dividends and calculate net asset value and performance quotations in the

17
<PAGE>
same manner. However, Investor Shares are sold with a sales load and may have
different sales charges and other expenses which may affect performance.

Stockholders of record will receive unaudited semi-annual reports and an
annual report containing financial statements audited by independent auditors.
Investors may obtain information about the Investor Shares or the other classes
of the Company by contacting the Distributor at the telephone number listed on
the back of this Prospectus.

STOCKHOLDER INQUIRIES

Investors may write or call the Distributor or the Transfer Agent at the
addresses and telephone numbers on the back cover of this Prospectus with any
questions relating to their investment.

CONTROLLING STOCKHOLDER

THE YEAR 2000 PROBLEM

Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its Investment Advisor and other service providers do
not properly process and calculate date-related information from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Company
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to the computer systems that it uses and to obtain
satisfactory assurances that comparable steps are being taken by the Fund's
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund.

18
<PAGE>
DEM EQUITY FUND
INSTITUTIONAL SHARES

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY

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

PROSPECTUS

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

MARCH 10, 1998

INVESTMENT ADVISOR

CHAPMAN CAPITAL MANAGEMENT, INC.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656

TRANSFER AND DIVIDEND PAYING AGENT AND ACCOUNTING AGENT

FPS SERVICES, INC.
3200 Horizon Drive
PO Box 61503
King of Prussia, Pennsylvania 19406
(800) 831-3175

CUSTODIAN

UMB BANK, N.A.
928 Grand Avenue
Kansas City, Missouri 64141-6226

DISTRIBUTOR

THE CHAPMAN CO.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202
(410) 625-9656
(800) 752-1013

NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE INCLUDED IN THIS PROSPECTUS OR IN SUPPLEMENTAL SALES
LITERATURE ISSUED BY THE FUND OR ITS DISTRIBUTOR.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DATED: MARCH 10, 1998

DEM EQUITY FUND

INVESTOR SHARES
INSTITUTIONAL SHARES

WORLD TRADE CENTER--BALTIMORE
401 EAST PRATT STREET, 28TH FLOOR
BALTIMORE, MARYLAND 21202
TELEPHONE: (410) 625-9656, (800) 752-1013

This Statement of Additional Information of the DEM Equity Fund (the "Fund")
is not a prospectus and is only authorized for distribution when preceded or
accompanied by the Fund's Investor Shares Prospectus or Institutional Shares
Prospectus dated the same date as this Statement of Additional Information
(each, the "Prospectus"). This Statement of Additional Information contains
additional information to that set forth in the Prospectus and should be read in
conjunction with the Prospectus. A copy of the Prospectus may be obtained
without charge by writing The Chapman Co., World Trade Center--Baltimore, 401
East Pratt Street, 28th Floor, Baltimore, Maryland 21202, or calling at (410)
625-9656, (800) 752-1013.

TABLE OF CONTENTS

<TABLE>
<S> <C>
Investment Program................................................................... B-2
Management........................................................................... B-7
Control Persons and Principal Holders of Securities.................................. B-10
Purchase of Shares................................................................... B-13
Redemption of Shares................................................................. B-14
Portfolio Transactions............................................................... B-14
Taxation............................................................................. B-15
Capital Stock........................................................................ B-16
Performance Information.............................................................. B-17
Counsel to the Company............................................................... B-18
Independent Auditors................................................................. B-18
Financial Statements................................................................. F-1
</TABLE>

DOMESTIC EMERGING MARKETS-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK
AND DEM-TM- AND DEM INDEX-TM- ARE TRADEMARKS OF NATHAN A. CHAPMAN, JR.

A DOMESTIC EMERGING MARKETS INVESTMENT OPPORTUNITY
<PAGE>
INVESTMENT PROGRAM

The following information supplements the discussion of the investment
policies of the Fund found under "INVESTMENT OBJECTIVES" in the Prospectus.

The Fund is a series of The Chapman Funds, Inc. (the "Company"), an
open-end, management investment company, known as a series fund. The Fund is a
non-diversified portfolio that seeks aggressive long-term growth through capital
appreciation through investment in the Domestic Emerging Markets market segment
that it believes is positioned for growth. The "Domestic Emerging Markets"
market segment is comprised of companies that are controlled by African
Americans, Asian Americans, Hispanic/ Latino Americans or women that are located
in the United States and its territories ("DEM Companies"). Both capital
appreciation and income will be considered in the selection of investments, but
primary emphasis will be on capital appreciation. The Fund's principal
investment objective of long-term growth through capital appreciation through
investment in equity securities of companies in the Domestic Emerging Markets
market segment is not a "fundamental policy" of the Fund (as described below)
and can therefore be changed by the Company's Board of Directors without
stockholder approval. See "INVESTMENT OBJECTIVES" in the Prospectus.

NON-PUBLICLY TRADED AND ILLIQUID SECURITIES

The Fund may not invest more than 15% of its net assets in illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market and securities that are restricted securities as
defined in Rule 144 under the Securities Act ("Illiquid Securities"). Illiquid
Securities include securities which have not been registered under the
Securities Act, sometimes referred to as private placements, and are purchased
directly from the issuer or in the secondary market. The Fund will seek to
invest in the securities of private companies that the Investment Advisor
believes have the potential for above average capital appreciation, in
anticipation of their initial public offering. Investment companies do not
typically hold a significant amount of restricted securities or other Illiquid
Securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and an investment company might be unable to dispose of
restricted or other Illiquid Securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. An
investment company might also be required to register Illiquid Securities in
order to dispose of them, resulting in additional expense and delay. Adverse
market conditions could impede a public offering of such securities.

Although the Fund's management believes that investments in Illiquid
Securities offer the opportunity for significant capital gains, these
investments involve a high degree of business and financial risk that can result
in substantial losses in the portion of the Fund's portfolio invested in these
investments. Among these are the risks associated with companies in an early
stage of development or with little or no operating history, companies operating
at a loss or with substantial variation in operating results from period to
period, companies with the need for substantial additional capital to support
expansion or to maintain their competitive positions, or companies with
significant financial leverage. Such companies may also face intense competition
from others including those with greater financial resources or more extensive
development, manufacturing, distribution or other attributes, over which the
Fund will have no control.

PRIVATE FUNDS

B-2
<PAGE>
early stage of development or with little or no operating history, companies
operating at a loss or with substantial variation in operation results from
period to period, companies with the need for substantial additional capital to
support expansion or to maintain a competitive position, or companies with
significant financial leverage. Such companies may also face intense competition
from others including those with greater financial resources or more extensive
development, manufacturing, distribution or other attributes, over which the
Fund will have no control.

Interests in the Private Funds in which the Fund may invest will be subject
to substantial restrictions on transfer and, in some instances, may be
non-transferable for a period of years. Private Funds may participate in only a
limited number of investments and, as a consequence, the return of a particular
Private Fund may be substantially adversely affected by the unfavorable
performance of even a single investment. Certain of the Private Funds in which
the Fund may invest may pay their investment managers a fee based on the
performance of the Fund, which may create an incentive for the manager to make
investments that are riskier or more speculative than would be the case if the
manager was paid a fixed fee. Private Funds are not registered under the 1940
Act and, consequently, are not subject to the restrictions on affiliated
transactions and other protections applicable to regulated investment companies.
The valuation of companies held by Private Funds, the securities of which are
generally unlisted and illiquid, may be very difficult and will often depend on
the subjective valuation of the managers of the Private Funds, which may prove
to be inaccurate. Inaccurate valuations of a Private Fund's portfolio holdings
may affect the Fund's net asset value calculations.

OPTIONS TRANSACTIONS

The Fund may invest up to 15% of its total assets, represented by the
premium paid, in the purchase of call and put options in respect of specific
securities in which the Fund may invest. The Funds may write covered call and
put option contracts to the extent of 15% of the value of its net assets at the
time such option contracts are written. The principal reason for the Fund
writing covered call options is to realize, through the receipt of premiums, a
greater return than would be realized on its portfolio securities alone. In
return for a premium, the writer of a covered call option forfeits the right to
any appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. Similarly, the principal reason for writing
covered put options is to realize income in the form of premiums. The writer of
a covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that the Fund may receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option-writing activities.

Options written ordinarily will have expiration dates between one and nine
months from the date written. The exercise price of the options may be below,
equal to or above the market values of the underlying securities at the time the
options are written. In the case of call options, these exercise prices are
referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. The Fund may write (a) in-the-money call options when the
Investment Advisor expects that the price of the underlying security will remain
stable or decline moderately during the option period, (b) at-the-money call
options when the Advisor expects that the price of the underlying security will
remain stable or advance moderately during the option period and (c)
out-of-the-money call options when the Investment Advisor expects that

B-3
<PAGE>
the premiums received from writing the call option plus the appreciation in
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. In these
circumstances, if the market price of the underlying security declines and the
security is sold at this lower price, the amount of any realized loss will be
offset wholly or in part by the premium received. Out-of-the-money, at-the-money
and in-the-money put options (the reverse of call options as to the relation of
exercise price to market price) may be utilized in the same market environments
that such call options are used in equivalent transactions.

So long as the Fund's obligation as the writer of an option continues, it
may be assigned an exercise notice by the broker-dealer through which the option
was sold, requiring it to deliver, in the case of a call, or take delivery of,
in the case of a put, the underlying security against payment of the exercise
price. This obligation terminates when the option expires or the Fund effects a
closing purchase transaction. The Fund can no longer effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice.

While it may choose to do otherwise, the Fund generally will purchase or
write only those options for which the Investment Advisor believes there is an
active secondary market so as to facilitate closing transactions. There is no
assurance that sufficient trading interest to create a liquid secondary market
on a securities exchange will exist for any particular option or at any
particular time, and for some options no such secondary market may exist. A
liquid secondary market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than anticipated trading activity or
order flow, or other unforeseen events, at times have rendered certain clearing
facilities inadequate and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance that
similar events, or events that otherwise may interfere with the timely execution
of customers' orders, will not recur. In such event, it might not be possible to
effect closing transactions in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise or it
otherwise covers its position.

The Fund intends to treat options in respect of specific securities that are
not traded on a national securities exchange or the Nasdaq National Market and
the securities underlying covered call options written by the Fund as Illiquid
Securities subject to the Fund's investment limitation on Illiquid Securities.
See "INVESTMENT OBJECTIVES" in the Prospectus.

REPURCHASE AGREEMENTS AND LOANS OF SECURITIES

The Fund is authorized to lend securities it holds to brokers, dealers and
other financial organizations, but it will not lend securities to any affiliate
of the Chapman Capital Management, Inc. (the "Investment Advisor") unless the
Fund applies for and receives specific authority to do so from the Securities
and Exchange Commission (the "SEC"). The Fund's loans of securities are
collateralized by cash, letters of credit or U.S. Government securities that are
maintained at all times in a segregated account in an amount equal to the
current market value of the loaned securities. From time to time, the Fund may
pay a part of the interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is unaffiliated with
the Fund and that is acting as a "finder."

By lending its securities, the Fund can increase its income by continuing to
receive interest on the loaned securities, by investing the cash collateral in
short-term instruments or by obtaining yield in the form of interest paid by the
borrower when U.S. Government securities are used as collateral. The portfolio
adheres to the following conditions whenever it lends its securities: (1) the
Fund must receive at least 100% cash collateral or equivalent securities from
the borrower, which amount of collateral is maintained by daily marking to
market; (2) the borrower must increase the collateral whenever the market value
of the securities loaned rises above the level of the collateral; (3) the Fund
must be able to terminate

B-4
<PAGE>
the loan at any time; (4) the Fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) voting rights on
the loaned securities may pass to the borrower, except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Board of
Directors must terminate the loan and regain the Fund's right to vote the
securities. Up to 20% of the Fund's assets may be invested pursuant to such
techniques for hedging and risk management purposes or when, in the opinion of
the Investment Advisor, such techniques can be expected to yield a higher
investment return than other investment options.

The Fund may enter into "repurchase agreements" pertaining to the securities
in which it may invest with securities dealers or member banks of the Federal
Reserve System. A repurchase agreement arises when a buyer such as the Fund
purchases a security and simultaneously agrees to resell it to the vendor at an
agreed-upon future date, normally one day or a few days later. The resale price
is greater than the purchase price, reflecting an agreed-upon interest rate
which is effective for the period of time the buyer's money is invested in the
security and which is related to the current market rate rather than the coupon
rate on the purchased security. Such agreements permit the Fund to keep all of
its assets at work while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. The Fund requires continual maintenance by
its custodian for its account in the Federal Reserve/Treasury Book Entry System
of collateral in an amount equal to, or in excess of, the resale price. In the
event a vendor defaulted on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. In the event of a vendor's bankruptcy, the Fund might
be delayed in, or prevented from, selling the collateral for the Fund's benefit.
The Board of Directors has established procedures, which are periodically
reviewed by the Board, pursuant to which the Investment Advisor monitors the
creditworthiness of the dealers and banks with which the Fund enters into
repurchase agreement transactions.

FUNDAMENTAL POLICIES

The following investment restrictions are fundamental and cannot be changed
without the approval of holders of a majority of the Fund's outstanding voting
shares, which, as used here, means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding shares. The Fund's investment policies that are not designated
fundamental policies may be changed by the Board of Directors without
stockholder approval. The percentage limitations set forth below, as well as
those described in the Prospectus, are measured and applied only at the time an
investment is made or other relevant action is taken by the Fund. The investment
policies adopted by the Fund prohibit the Fund from:

(1) Issuing senior securities, borrowing money or pledging its assets,
except that: (i) the Fund may borrow from banks in amounts aggregating not
more than 33 1/3% of the value of the Fund's total assets (calculated when
the loan is made) to take advantage of investment opportunities and may
pledge up to 33 1/3% of the value of its total assets to secure such
borrowings; (ii) the Fund may purchase securities on margin pursuant to
margin arrangements with banks up to the limits set forth in (i) above for
bank borrowings; and (iii) the Fund may borrow an additional 5% of its total
assets without regard to the foregoing limitations for temporary purposes
such as clearance of portfolio transactions and share redemptions.

(2) Engaging in the business of underwriting securities issued by other
persons, except that to the extent the Fund is permitted to invest in
Illiquid Securities (currently, the Fund may not invest more than 15% of its
net assets in Illiquid Securities), the Fund may be deemed to act as an
underwriter to portfolio companies.

(3) Concentrating investments in particular industries. The Fund's
policy is not to concentrate investments, i.e., to limit its investments in
any one industry, so that it will make no additional

B-5
<PAGE>
investment in any industry if such investment would result in its having
over 25% of the value of its assets at the time in such industry (The
Domestic Emerging Markets market segment is not considered an industry for
this purpose).

(4) Engaging in the purchase and sale of real estate or real estate or
mortgage-backed securities.

(5) Purchasing or selling commodities or commodities contracts.

(6) Making loans to others, except through the purchase of qualified
(publicly distributed bonds, debentures or other securities) debt
obligations, the entry into repurchase agreements and loans of portfolio
securities consistent with the Fund's investment objectives and policies.

(7) Investing in foreign securities (including American Depository
Receipts).

OTHER INVESTMENT POLICIES

The policy of the Fund is not to invest its funds for the purpose of
purchasing working control in companies except when and if, in the judgment of
the Investment Advisor, such investment is deemed advisable. This policy of the
Fund, which is established by the Board of Directors, is subject to change
without stockholder approval.

PORTFOLIO TURNOVER

The Fund does not intend to seek profits through short-term trading, but the
rate of turnover will not be a limiting factor when the Fund deems it desirable
to sell or purchase securities. The Fund's portfolio turnover rate is calculated
by dividing the lesser of purchases or sales of its portfolio securities for the
year by the monthly average value of the portfolio securities. Securities with
remaining maturities of one year or less at the date of acquisition are excluded
from the calculation.

As a result of the Fund's investment policies, under certain market
conditions its portfolio turnover rate may be higher than that of other mutual
funds. For example, options on securities may be sold in anticipation of a
decline in the price of the underlying security (market decline) or purchased in
anticipation of a rise in the price of the underlying security (market rise) and
later sold. To the extent that its portfolio is traded for the short-term, the
Fund will be engaged essentially in trading activities based on short-term
considerations affecting the value of an issuer's stock instead of long-term
investments. Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction costs on the sale
of securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. The Fund cannot accurately
predict its turnover rate, but anticipates that its annual portfolio turnover
will not exceed 200%.

B-6
<PAGE>
MANAGEMENT

DIRECTORS AND OFFICERS

The Directors and executive officers of the Company are listed below.
Directors deemed to be "interested persons" of the Company for purposes of the
Investment Company Act of 1940, as amended (the "1940 Act") are indicated by an
asterisk.

<TABLE>
<CAPTION>
POSITION(S)
HELD WITH
NAME AND ADDRESS REGISTRANT AGE PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------------- --------------- --- --------------------------------------------------------
<S> <C> <C> <C>
*Nathan A. Chapman, Jr. Director and 40 President and Director since 1986 of The Chapman Co.
401 E. Pratt St., 28th Fl President President and Director of Chapman Capital Management,
Baltimore, Maryland 21202 Inc. since 1988. President and Director of DEM, Inc. (a
closed-end investment company managed by the Investment
Advisor) since 1995. President and Director of Chapman
Holdings, Inc.

James B. Lewis Director 50 City Administrator, City of Rio Rancho since March 1996.
401 E. Pratt St., 28th Fl Chief Clerk-State Corporation Commission of New Mexico
Baltimore, Maryland 21202 from April 1995 until March 1996, Chief of Staff, Office
of the Governor of New Mexico from Jan. 1991 to April
1995. Director of DEM, Inc.

Wilfred Marshall Director 62 Principal, Marshall Enterprises since 1994. Director,
401 E. Pratt St., 28th Fl Mayor's Office of Small Business Assistance--City of Los
Baltimore, Maryland 21202 Angeles 1981 until 1994.

Lottie H. Shackelford Director 56 Executive Vice President of Global USA since 1994.
401 E. Pratt St., 28th Fl Independent Consultant, City Director of the City of
Baltimore, Maryland 21202 Little Rock, Arkansas, 1978 to 1995. Director of DEM,
Inc. Director of Chapman Holdings, Inc. since 1997.

*Levi Watkins, Jr., MD Director 53 Professor of Cardiac Surgery and Associate Dean of the
401 E. Pratt St., 28th Fl Johns Hopkins University, School of Medicine since July
Baltimore, Maryland 21202 1994.

Ronald A. White Director 48 Senior Partner, Ronald A. White, P.C., since 1982,
401 E. Pratt St., 28th Fl Director of DEM, Inc.
Baltimore, Maryland 21202

Dr. Benjamin Hooks Director 72 Senior Vice President of The Chapman Co. since May 1993.
401 E. Pratt St., 28th Fl Executive Director of the NAACP from 1977 to April 1993,
Baltimore, Maryland 21202 Director of DEM, Inc.

David Rivers Director 54 Director of Community Development Medical University of
401 E. Pratt St., 28th Fl South Carolina Environmental Hazards Assessment Program
Baltimore, Maryland 21202 since 1994; President, Research Planning and Management
from 1991 to 1994.

*Valerie A. Chapman Vice President 36 Administrator of The Chapman Co. since March 1988. She
401 E. Pratt St., 28th Fl is married to Nathan A. Chapman, Jr.
Baltimore, Maryland 21202
</TABLE>

B-7
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
HELD WITH
NAME AND ADDRESS REGISTRANT AGE PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------------- --------------- --- --------------------------------------------------------
<S> <C> <C> <C>
Earl U. Bravo, Sr. Secretary and 50 Secretary and Assistant Treasurer since 1997 of The
401 E. Pratt St., 28th Fl Assistant Chapman Co. Vice President, Secretary and Assistant
Baltimore, Maryland 21202 Treasurer Treasurer of DEM, Inc. Senior Vice President, Secretary,
Assistant Treasurer and Director of Chapman Holdings,
Inc. since 1997.

M. Lynn Ballard Treasurer and 55 Controller since 1988 and Treasurer and Assistant
401 E. Pratt St., 28th Fl Assistant Secretary since 1997 of The Chapman Co. Treasurer since
Baltimore, Maryland 21202 Secretary 1990, Controller since 1995 and Assistant Secretary
since 1997 of Chapman Capital Management, Inc. Treasurer
and Assistant Secretary of DEM, Inc. Controller,
Treasurer and Assistant Secretary of Chapman Holdings,
Inc. since 1997.
</TABLE>

The address of each director and officer is World Trade Center--Baltimore,
401 E. Pratt Street, 28th Floor, Baltimore, Maryland 21202.

Directors of the Company who are not officers receive from the Company a fee
of $1,000 for each Board of Directors meeting attended and are reimbursed for
all out-of-pocket expenses relating to attendance at meetings. Officers of the
Company do not receive compensation from the Company.

COMPENSATION TABLE

<TABLE>
<CAPTION>
RETIREMENT OR PENSION TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED AS ESTIMATED ANNUAL FROM COMPANY AND
NAME OF PERSON/ COMPENSATION PART OF COMPANY BENEFITS UPON FUND COMPLEX PAID
POSITION FROM COMPANY EXPENSES RETIREMENT TO DIRECTORS
- ------------------------------------- --------------- --------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Nathan A. Chapman, Jr. None None None None
Director, Chairman, President

James Lewis $ 4,000 None None $ 8,000
Director

Lottie Shackelford $ 4,000 None None $ 8,000
Director

Levi Watkins, MD None None None None
Director

Ronald A. White $ 3,000 None None $ 6,000
Director

Dr. Benjamin Hooks $ 4,000 None None $ 5,000
Director

Wilfred Marshall $ 4,000 None None $ 4,000
Director

David Rivers $ 3,000 None None $ 3,000
Director
</TABLE>

Under the Company's charter and Maryland law, Directors and officers of the
Company are not liable to the Company or its stockholders except for receipt of
an improper personal benefit or active and deliberate dishonesty. The Company's
charter requires that it indemnify its Directors and officers against
liabilities unless it is proven that a director or officer acted in bad faith or
with active and deliberate

B-8
<PAGE>
dishonesty or received an improper personal benefit. These provisions are
subject to the limitation under the 1940 Act that no director or officer may be
protected against liability to the Company for willful misfeasance, bad faith,
gross negligence or reckless disregard for the duties of his office.

Levi Watkins, Jr., MD is an interested director of the Company, as defined
under the 1940 Act, because his brother, Donald Watkins, Esquire, is a member of
the Board of Directors of The Chapman Co.

For so long as the Distribution Plan described in the Prospectus section
captioned "MANAGEMENT--The Distributor" remains in effect, the Directors of the
Company who are not "interested persons" of the Company, as defined in the 1940
Act, will be selected and nominated by the Directors who are not "interested
persons" of the Company.

THE INVESTMENT ADVISOR

The Investment Advisor, Chapman Capital Management, Inc., has been retained
under an investment advisory and administrative services agreement ("Advisory
and Administrative Services Agreement") to provide investment advice and, in
general, to conduct the management and investment program of the Fund in
accordance with the Fund's investment objectives, policies, and restrictions and
under the supervision and control of the Company's Board of Directors. The
Investment Advisor was established in 1988 and is located at The World Trade
Center--Baltimore, 401 East Pratt Street, 28th Floor, Baltimore, Maryland 21202.

As of February 26, 1998, the Investment Advisor is a wholly-owned subsidiary
of Chapman Capital Holdings, Inc. Nathan A. Chapman, Jr., who is the controlling
stockholder of Chapman Capital Holdings, Inc. is a controlling person (as that
term is defined under the 1940 Act) of Chapman Capital Holdings, Inc. and,
therefore, a controlling person of the Investment Advisor.

The table below sets forth the names of affiliated persons of the Company
who are also affiliated persons of the Investment Advisor:

<TABLE>
<CAPTION>
NAME AND POSITION WITH
PRINCIPAL BUSINESS ADDRESS INVESTMENT ADVISOR POSITION WITH COMPANY
- --------------------------- ---------------------------- --------------------------
<S> <C> <C>
Nathan A. Chapman, Jr. President and Director President and Director
401 East Pratt St.
28th Floor
Baltimore, MD 21202

Earl U. Bravo, Sr. Director, Secretary and Secretary and Assistant
401 East Pratt St. Assistant Treasurer Treasurer
28th Floor
Baltimore, MD 21202

M. Lynn Ballard Controller, Treasurer and Treasurer and Assistant
401 East Pratt Street Assistant Secretary Secretary
28th Floor
Baltimore, MD 21202
</TABLE>

B-9
<PAGE>
Shares and Institutional Shares on the basis of the net asset value of the Fund
attributable to each such class.

In connection with the provision of advisory services, the Investment
Advisor will obtain and provide investment research and will supervise the
Fund's investments and conduct a continuous program of investment, evaluation
and, if appropriate, sale and reinvestment of the Fund's assets. The Investment
Advisor will place orders for the purchase and sale of portfolio securities and
will solicit brokers to execute transactions, including The Chapman Co., in
accordance with the Company's policies and restrictions regarding brokerage
allocations. The Investment Advisor will furnish to the Company such statistical
information with respect to the investments which the Fund may hold or
contemplate purchasing as the Company may reasonably request. Further, the
Investment Advisor will supply office facilities, data processing services,
clerical, accounting and bookkeeping services, internal auditing services,
executive and other administrative services; provide stationery and office
supplies; prepare reports to the Fund's stockholders, tax returns and reports to
and filings with the SEC and state Blue Sky authorities; calculate the net asset
value of the Fund's shares; provide persons to serve as the Company's officers
and generally assist in all aspects of the Company's operations. The Investment
Advisor will pay for its own costs in providing the above listed services.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

The following table sets forth, to the Company's knowledge, the name, the
number of shares and the percentage of the outstanding shares of the Fund owned
beneficially by each person who owned beneficially 5% or more of the outstanding
shares of Common Stock as of February 28, 1998 the latest practicable date, and
the ownership of all Directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
TOTAL TOTAL
INVESTOR INSTITUTIONAL
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES SHARES %
- ---------------------------------------------------------------- ------------- ----------------- ---
<S> <C> <C> <C>
Chapman Capital Management, Inc. 1 1 100%
(a Washington, DC corporation)
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202

Chapman Capital Holdings, Inc. 1 1 100%
(a Maryland corporation)
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202

Nathan A. Chapman, Jr. 1 1 100%
Chapman Capital Holdings, Inc.
World Trade Center--Baltimore
401 East Pratt Street, 28th Floor
Baltimore, Maryland 21202

All current Directors and executive officers as a group 1 1 100%
</TABLE>

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

(1) The shares of Common Stock are owned beneficially and of record.

(2) The shares of Common Stock are owned beneficially but not of record.

Because the Investment Advisor, Chapman Capital Management, Inc., owns in
excess of 25% of the issued and outstanding Common Stock of the Fund as of
February 28, 1998, such stockholder is deemed to

B-10
<PAGE>
control the Fund. Accordingly, such stockholder has significant power to affect
the affairs of the Fund or to determine or influence the outcome of matters
submitted to a vote of the stockholders of the Fund.

DISTRIBUTOR

The Distributor, The Chapman Co., has been retained under a distribution
agreement (the "Distribution Agreement") to undertake the sale, on a continuous
basis as agent, of the Fund's shares. The Distributor is not obliged to sell any
particular amount of shares.

INVESTOR SHARES

The Distributor is compensated through the payment of a front-end load of up
to 4 3/4% of the offering price on the sale of Investor Shares and pursuant to
the terms of a distribution plan adopted by the Fund pursuant to Rule 12b-1
under the 1940 Act that is applicable to the Investor Shares (the "Investor
Shares Distribution Plan"). See "PURCHASE OF SHARES--Purchase Price" in the
Investor Shares Prospectus. The Distributor receives a fee under the Investor
Shares Distribution Plan for stockholder administrative and distribution
services at an annual rate of up to a total of .75% (up to .25% administrative
fee and .50% distribution fee) of the average daily net assets of the Fund
attributable to the Investor Shares. The Distributor has voluntarily limited
such fee during the first fiscal year of the Fund to an aggregate of .50% of
average daily net assets; however, there can be no assurance that the
Distributor will continue to voluntarily limit the amount of such fee in the
future.

The Distributor will be paid fees under the Investor Shares Distribution
Plan to compensate the Distributor or enable the Distributor to compensate other
persons, ("Service Providers"), including any other distributor of the Investor
Shares, for providing: (i) services primarily intended to result in the sale of
the Investor Shares ("Distribution Services") and (ii) stockholder servicing,
administrative and accounting services ("Administrative Services" and
collectively with Distribution Services, "Services"). Distribution Services may
include, but are not limited to: the printing and distribution to prospective
investors in the Investor Shares of prospectuses and statements of additional
information describing the Fund; the preparation, including printing, and
distribution of sales literature, reports and media advertisements relating to
the Investor Shares; providing telephone services relating to the Fund;
distributing the Investor Shares; costs relating to the formulation and
implementation of marketing and promotional activities, including, but not
limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising, and related travel and entertainment expenses;
and costs involved in obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the Fund may, from time to
time, deem advisable. In providing compensation for Distribution Services in
accordance with the Plan, the Distributor is expressly authorized (i) to make,
or cause to be made, payments reflecting an allocation of overhead and other
office expenses related to providing Services; (ii) to make, or cause to be
made, payments, or to provide for the reimbursement of expenses of, persons who
provide support services in connection with the distribution of the Investor
Shares including, but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding the Fund, and providing any
other Service; and (iii) to make, or cause to be made, payments to compensate
selected dealers or other authorized persons for providing any Services.
Administrative Services may include, but are not limited to, (i) responding to
inquiries of prospective investors regarding the Fund; (ii) services to holders
of Investor Shares not otherwise required to be provided by the Fund's custodian
or any co-administrator; (iii) establishing and maintaining accounts and records
on behalf of holders of Investor Shares; (iv) processing purchase, redemption
and exchange transactions in Investor Shares; and (v) other similar services not
otherwise required to be provided by the Fund's transfer agent or any co-
administrator. Payments under the Plan are not tied exclusively to the
distribution and administrative

B-11
<PAGE>
expenses actually incurred by the Distributor or any Service Provider, and the
payments may exceed expenses actually incurred by the Distributor and/or a
Service Provider. Furthermore, any portion of any fee paid to the Distributor or
to any of its affiliates by the Fund or any of their past profits or other
revenue may be used in their sole discretion to provide services to holders of
Investor Shares or to foster distribution of the Investor Shares.

INSTITUTIONAL SHARES

The Distributor is compensated for the sale of Institutional Shares pursuant
to the terms of a distribution plan adopted by the Fund pursuant to Rule 12b-1
under the 1940 Act that is applicable to the Institutional Shares (the
"Institutional Shares Distribution Plan" and collectively with the Investor
Distribution Plan, the "Distribution Plans"). The Distributor receives a fee
under the Institutional Shares Distribution Plan for stockholder administrative
and distribution services at an annual rate of up to a total of .25% of the
average daily net assets of the Fund attributable to the Institutional Shares.

The Distributor will be paid fees under the Institutional Shares
Distribution Plan to compensate the Distributor or enable the Distributor to
compensate other persons, including any other distributor of the Institutional
Shares or institutional stockholders of record of the Institutional Shares,
including but not limited to retirement plans, broker-dealers, depository
institutions, and other financial intermediaries ("Institutions"), who own
Institutional Shares on behalf of their customers, clients or (in the case of
retirement plans) participants ("Customers") and companies providing certain
services to Customers (collectively with Institutions, "Service Organizations"),
for providing (a) services primarily intended to result in the sale of the
Institutional Shares ("Selling Services") and (b) stockholder servicing,
administrative and accounting services to Customers ("Stockholder Services").

The annual fee paid to the Distributor with respect to Selling Services will
compensate the Distributor, or allow the Distributor to compensate Service
Organizations, to cover certain expenses primarily intended to result in the
sale of the Institutional Shares, including, but not limited to: (i) costs of
payments made to employees that engage in the distribution of the Institutional
Shares; (ii) payments made to, and expenses of, persons who provide support
services in connection with the distribution of the Institutional Shares,
including, but not limited to, office space and equipment, telephone facilities,
processing stockholder transactions and providing any other stockholder services
not otherwise provided by the Fund's transfer agent; (iii) costs relating to the
formulation and implementation of marketing and promotional activities,
including, but not limited to, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (iv) costs of printing and
distributing prospectuses, statements of additional information and reports of
the Fund to prospective holders of the Institutional Shares; (v) costs involved
in preparing, printing and distributing sales literature pertaining to the Fund
and (vi) costs involved in obtaining whatever information, analyses and reports
with respect to marketing and promotional activities that the Fund may, from
time to time, deem advisable.

The annual fee paid to the Distributor with respect to Stockholder Services
will compensate the Distributor, or allow the Distributor to compensate Service
Organizations, for personal service and/or the maintenance of Customer accounts,
including but not limited to (i) responding to Customer inquiries, (ii)
providing information on Customer investments and (iii) providing other
stockholder liaison services and for administrative and accounting services to
Customers, including, but not limited to: (a) aggregating and processing
purchase and redemption requests from Customers and placing net purchase and
redemption orders with the Fund's distributor or transfer agent; (b) providing
Customers with a service that invests the assets of their accounts in the
Institutional Shares; (c) processing dividend payments from the Fund on behalf
of Customers; (d) providing information periodically to Customers showing their
positions in the Institutional Shares; (e) arranging for bank wires; (f)
providing sub-accounting with respect to the Institutional Shares beneficially
owned by Customers or the information to the Fund necessary for sub-accounting;
(g) forwarding stockholder communications from the Fund (for example, proxies,
stockholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers, if required by law and (h) providing
other similar services to the extent permitted under

B-12
<PAGE>
applicable statutes, rules and regulations. Payments under this Institutional
Shares Distribution Plan are not tied exclusively to the selling and stockholder
expenses actually incurred by the Distributor or any Service Organization, and
the payments may exceed expenses actually incurred by the Distributor or any
Service Organization. Furthermore, any portion of any fee paid to the
Distributor or to any of its affiliates by the Fund or any of their past profits
or other revenue may be used in their sole discretion to provide services to
stockholders of the Fund or to foster distribution of the Institutional Shares.

GENERAL INFORMATION

Pursuant to the Distribution Plans, the Distributor provides the Board of
Directors with periodic reports of amounts expended under the Distribution Plans
and the purpose for which the expenditures were made.

The Distribution Plans will continue in effect for so long as their
continuance is specifically approved at least annually by the Board of
Directors, including a majority of the Directors who are not interested persons
of the Company and who have no direct or indirect financial interest in the
operation of the Distribution Plans as the case may be (the "Independent
Directors"). Any material amendment of the Distribution Plans would require the
approval of the Board in the manner described above. A Distribution Plan may not
be amended to increase materially the amount to be spent thereunder without the
approval of the holders of a majority of the relevant class of Shares. A
Distribution Plan may be terminated at any time, without penalty, by the vote of
a majority of the Independent Directors or by a vote of a majority of the
outstanding voting securities of the relevant class.

CUSTODIAN

UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64141-6226, serves
as custodian of the Fund. Under the Custody Agreement, the Bank has agreed to:
(i) maintain a separate account or accounts in the name of the Fund; (ii)
receive, hold and deliver portfolio securities for the account of the Fund;
(iii) collect and receive all income and other payments and distributions on
account of the Fund's portfolio securities; (iv) disburse funds to purchase
portfolio securities, pay dividends and expenses and for other corporate
purposes; and (v) make periodic reports to the Board of Directors concerning the
Fund's operations.

TRANSFER AND DIVIDEND PAYING AGENT/ACCOUNTING AGENT

FPS Services, Inc., 3200 Horizon Drive, PO Box 61503, King of Prussia,
Pennsylvania 19406, (800) 831-3175, serves as transfer and dividend paying agent
and accounting agent for the Fund pursuant to a Investment Company Services
Agreement.

PURCHASE OF SHARES
(APPLICABLE TO INVESTOR SHARES ONLY)

The following information supplements and should be read in conjunction with
the sections in the Fund's Prospectus entitled "PURCHASE OF SHARES." The scale
of sales loads applies to the purchases of Investor Shares made by any
"purchaser," which term includes an individual and/or spouse purchase securities
for his, her or their own account or for the account of any minor children, or a
trustee or other fiduciary purchasing securities for a single trust estate or a
single fiduciary account trust estate or single fiduciary account (including a
pension, profit-sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code or 1986, as
amended (the "Code")) although more than one beneficiary is involved; or a group
of accounts established by or on behalf of the employees of an employer or
affiliated employers pursuant to an employee benefit plan or other program
(including accounts established pursuant to Sections 403(b), 408(k) and 457 of
the Code); or an organized group which has been in existence for more than six
months, provided that it its not organized for the

B-13
<PAGE>
purpose of buying redeemable securities of a registered investment company and
provided that the purchases are made through a central administration or a
single dealer, or by other means with result in economy of sales effort or
expense.

Set forth below is an example of the method of computing the offering price
of the Investor Shares. The example assumes a purchase of Investor Shares
aggregating less than $50,000 subject to the current schedule of sales charges
set forth in the Fund's prospectus at a price based upon the initial net asset
value of the Fund's Investor Shares:

<TABLE>
<S> <C>
Net Asset Value per Share................................... $ 14.29
Per Share Sales Charge--4 3/4% of offering price............ $ .71
Per Share Offering Price to the Public...................... $ 15.00
</TABLE>

REDEMPTION OF SHARES

Under the 1940 Act, the Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the NYSE is
closed, other than customary weekend and holiday closings, or during which
trading on the NYSE is restricted, or during which (as determined by the SEC) an
emergency exists as a result of which disposal or fair valuation of portfolio
securities is not reasonably practicable, or for such other periods as the SEC
may permit.

PORTFOLIO TRANSACTIONS

The Investment Advisor is responsible for decisions to buy or sell
securities and the selection of broker-dealers for the Fund subject to policies
adopted by the Company's Board of Directors. Portfolio securities may be
purchased directly from the issuer or from a dealer serving as market maker or
may be purchased in broker's transactions. If securities are sold prior to
maturity, they may be sold directly to an issuer or dealer or in broker's
transactions. When securities are purchased or sold directly from or to an
issuer, no commissions or discounts are paid. The price paid to or received from
a dealer for a security may include a spread between bid and asked prices. When
securities are purchased or sold in a broker's transaction, a commission will be
paid.

The Company's policy for placing orders for purchases and sales of
securities for the Fund is to give primary consideration to obtaining the most
favorable price and efficient execution of transactions. Sales of Fund shares is
not a factor in allocating portfolio transactions.

The Distributor may effect brokerage transactions for the Fund when it is
able to provide a net price and execution at least as favorable to the Fund as
those determined to be available from unaffiliated brokers or dealers. The
commissions paid to the Distributor on transactions for the Fund may not exceed
those charged by the Distributor to comparable unaffiliated clients in similar
transactions or the limits set forth in rules adopted by the SEC. The Board of
Directors of the Company has adopted procedures intended to ensure compliance
with these limitations. The procedures require that the Distributor report each
transaction to the Fund and that the Board of Directors determine at least
quarterly that all transactions effected by the Distributor have been effected
in accordance with the procedures.

When comparable price and execution can be obtained from more than one
broker or dealer, consideration may be given to placing portfolio transactions
with those brokers or dealers who also furnish research and other services to
the Fund or the Investment Advisor. These services may include information as to
the availability of securities for purchase or sale, statistical or factual
information or opinions pertaining to investments, evaluations of portfolio
securities, and research related computer software or hardware. These services
may benefit the Investment Advisor in the management of accounts of other
clients and may not benefit the Fund directly. While such services are useful
and important in supplementing its own research, the Investment Advisor believes
the value of such services is not determinable and

B-14
<PAGE>
does not significantly reduce its expenses. The fees payable to the Investment
Advisor will not be reduced by the value of such services.

The Investment Advisor and its affiliates deal, trade and invest for their
own accounts in the types of securities in which the Fund may invest and may
have relationships with the issuers of securities purchased by the Fund.

Investment decisions for the Fund are made independently from those for
other accounts advised by the Investment Advisor.

The Investment Advisor's other accounts may also invest in the same
securities as the Fund. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Fund and another account, the
transaction will be averaged as to price, and available instruments allocated as
to amount, in a manner believed to be equitable to the Fund and the other
account. In some instances, this procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained or sold by the
Fund. To the extent permitted by law, the securities to be sold or purchased for
the Fund may be aggregated with those to be sold or purchased for the other
accounts in order to obtain best execution.

TAXATION

The following discussion reflects certain applicable tax laws as of the date
of this Statement of Additional Information. For additional tax information see
"TAXATION" in the Fund's Prospectus.

TAXATION OF THE FUND

The Fund intends to elect and intends to qualify each year to be treated as
a regulated investment company for federal income tax purposes in accordance
with Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
In order to so qualify, the Fund (see "OTHER INFORMATION-- Capital Stock" in the
Prospectus) must, among other things: (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities,
gains from the sale or other disposition of stock or securities and certain
other sources and (b) diversify its holdings so that at the end of each fiscal
quarter (i) at least 50% of the value of its assets is represented by cash or
cash items, U.S. government securities, securities of other regulated investment
companies, and other securities which, with respect to any one issuer, do not
represent more than 5% of the value of its assets nor more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other regulated investment
companies), or two or more issuers which it controls and which are determined to
be engaged in the same or similar trades or businesses or related trades or
businesses.

If the Fund qualifies as a regulated investment company and distributes to
its stockholders at least 90% of its investment company taxable income, then the
Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. See "TAXATION--Taxation of the Fund" in the Prospectus. In addition, the
Fund will be subject to a nondeductible 4% excise tax on the amount by which the
Fund's distributed amount in any calendar year is less than the sum of: (a) 98%
of such Fund's ordinary income for such calendar year; (b) 98% of such Fund's
capital gain net income for the one-year period ending on October 31 of that
year; and (c) 100% of any prior year underdistributions. The Fund may retain its
net capital gain and pay corporate income tax thereon and elect to include all
or a portion of its undistributed net capital gain in the income of its
stockholders of record on the last day of the taxable year. In such event, each
stockholder of record on the last day of the Fund's taxable year would be
required to include in income for tax purposes his or her proportionate share of
the Fund's undistributed net capital gain. Each stockholder would be entitled to
credit his or her proportionate share of the tax paid by the Fund against his or
her federal income tax liabilities and to claim refunds to the extent that the
credit exceeds such liabilities. In addition, the stockholder would be entitled
to increase the basis of his or her shares for federal income tax

B-15
<PAGE>

purposes by the difference between the amount of the includible gain and the tax
deemed paid in respect of such shares.

Any capital losses resulting from the disposition of securities can only be
used to offset capital gains and cannot be used to reduce the Fund's ordinary
income. Such capital losses may be carried forward by the Fund for eight years.

The Fund's taxable income will in part be determined on the basis of reports
made to the Fund by the issuers of the securities in which the Fund invests. The
tax treatment of certain securities in which the Fund may invest is not free
from doubt and it is possible that an Internal Revenue Service examination of
the issuers of such securities or of the Fund could result in adjustments to the
income of the Fund.

TAXATION OF STOCKHOLDERS

Dividends (other than capital gain dividends) distributed by the Fund may be
eligible for the dividends received deduction in the hands of corporate
stockholders, to the extent that the Fund's taxable income consists of dividends
received from domestic corporations and certain other requirements as generally
described in Section 854 of the Code are met.

Dividends and other distributions by the Fund are generally taxable to the
stockholders at the time the dividend or distribution is made. However, any
dividends declared by the Fund in October, November or December and made payable
to stockholders of record in such months but actually paid in the following
January will be taxable to stockholders as of December 31.

If a stockholder purchases shares of the Fund immediately prior to a
dividend, the dividend received by the stockholder will be taxable even though
it represents economically in whole or in part a return of the purchase price.
Investors should consider the tax implications of buying shares shortly prior to
a dividend distribution.

The Fund will, within 60 days after the close of its taxable year, send
written notices to stockholders regarding the tax status of all distributions
made during the year. The foregoing discussion is a summary of some of the
current federal income tax laws regarding the Fund and investors in the shares
of the Fund, and does not deal with all of the federal income tax consequences
applicable to the Fund or to all categories of investors, some of which may be
subject to special rules. Prospective investors should consult their own tax
advisers regarding the federal, state, local, foreign and other tax consequences
to them of investments in the Fund.

For additional information on taxation, see "TAXATION" in the Fund's
Prospectus.

CAPITAL STOCK

For additional information as to the organization and capital stock of the
Company, see "Other Information" in the Prospectus.

As used in the Prospectus and this Statement of Additional Information, the
term "majority," when referring to the approvals to be obtained from
stockholders in connection with matters affecting the Company as a whole means
the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the outstanding shares are present in
person or by proxy or (ii) more than 50% of the Company's outstanding shares.
The term "majority," when referring to the approvals to be obtained from
stockholders in connection with matters affecting only the Fund (for example,
approval of an investment advisory contract), means the vote of the lesser of
(i) 67% of the shares of the Fund represented at a meeting if the holders of
more than 50% of the outstanding shares of the Fund are present in person or by
proxy or (ii) more than 50% of the outstanding shares of the Fund. Stockholders
are entitled to one vote for each full share held and a fractional vote for
fractional shares held.

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<PAGE>
Each share of the Fund is entitled to such dividends and distributions out
of the assets belonging to the Fund as are declared in the discretion of the
Company's Board of Directors. In determining the Fund's net asset value, the
Fund is charged with the direct expenses of the Fund and with a share of the
general expenses and liabilities of the Company, which are normally allocated in
proportion to the relative asset values of the respective Series at the time of
allocation.

In the event of the liquidation or dissolution of the Company, shares of the
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the various Series, of any general assets not
attributable to a particular series that are available for distribution.

Subject to the provisions of the Company's charter, determinations by the
Board of Directors as to the direct and allocable liabilities, and the allocable
portion of any general assets of the Company, with respect to a Series are
conclusive.

Stockholders of the Company are not entitled to any preemptive or conversion
rights.

PERFORMANCE INFORMATION

The performance of the Fund may be compared to the record of the Standard &
Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the Nasdaq Composite
Index, the Russell 2000 Index, the Wilshire 5000 Equity Index, the DEM Index,
the DEM Universe of companies and returns quoted by Ibbotson Associates. The S&P
500 Stock Index is a well known measure of the price performance of 500 leading
larger domestic stocks which represents approximately 80% of the market
capitalization of the United States equity market. In comparison, the Nasdaq
National Market System is comprised of all stocks on Nasdaq's National Market
System. The Nasdaq Composite Index has typically included smaller, less mature
companies representing 10% to 15% of the capitalization of the entire domestic
equity market. Both indices are unmanaged and capitalization weighted. In
general, the securities comprising the Nasdaq Composite Index are more growth
oriented and have a somewhat higher "beta" and P/E ratio than those in the S&P
500 Stock Index. The Russell 2000 Index is a capitalization weighted index which
measures total return (and includes in such calculation dividend income and
price appreciation). The Russell 2000 is generally regarded as a measure of
small capitalization performance. It is a subset of the Russell 3000 Index. The
Russell 3000 is comprised of the 3000 largest U.S. companies. The Russell 2000
is comprised of the smallest 2000 companies in the Russell 3000 Index. The
Wilshire 5000 Index is a broad measure of market performance and represents the
total dollar value of all common stocks in the United States for which daily
pricing information is available. This index is also capitalization weighted and
captures total return. The DEM Universe is a growing list of companies
identified by the Investment Advisor that are controlled by African Americans,
Asian Americans, Hispanic/Latino Americans or women. The DEM Index was created
by the Investment Advisor and is comprised of 30 companies from the DEM Universe
that reflect the market capitalization and industry classification
characteristics of the DEM Universe. The DEM Index is weighted by market
capitalization and is intended as a performance measure of the DEM Universe. The
small company stock returns quoted by Ibbotson Associates are based upon the
smallest quintile of the New York Stock Exchange, as well as similar
capitalization stocks on the American Stock Exchange and Nasdaq. This data base
is unmanaged and capitalization weighted.

The total returns for all indices used show the changes in prices for the
stocks in each index. However, only the performance data for the S&P 500 Stock
Index and the Ibbotson Associates performance data assume reinvestment of all
capital gains distributions and dividends paid by the stocks in each data base.
Tax consequences are not included in such illustrations, nor are brokerage or
other fees or expenses reflected in the Nasdaq Composite or S&P 500 Stock
figures. In addition, the Fund's total return or performance may be compared to
the performance of other funds or other groups of funds that are followed by
Morningstar, Inc. a widely used independent research firm which ranks funds by
overall performance, investment objectives and asset size. Morningstar
proprietary ratings reflect risk-adjusted

B-17
<PAGE>
performance. The ratings are subject to change every month. Morningstar's
ratings are calculated from a fund's three-year and five-year average annual
returns with appropriate sales charge adjustments and a risk factor that
reflects fund performance relative to three-month Treasury bill monthly returns.
Ten percent of the funds in an asset class receive a five star rating. The
Fund's total return or performance may also be compared to the performance of
other funds or groups of funds by other financial or business publications, such
as Business Week, Investors Daily, Mutual Fund Forecaster, Money Magazine, Wall
Street Journal, New York Times, Baron's, and Lipper Analytical Services. The
Fund's performance may also be compared, from time to time, to (a) indices of
stocks comparable to those in which the Fund invests and (b) the Consumer Price
Index (measure for inflation) may be used to assess the real rate of return from
an investment in the Fund.

ADDITIONAL PERFORMANCE INFORMATION FOR THE FUND

The Fund may reflect its total return in advertisements and stockholder
reports. Total investment return is one recognized method of measuring
investment company investment performance. Quotations of average annual total
return will be shown in terms of the average annual compounded rate or return on
a hypothetical investment in the Fund over a period of 1 year, 5 years and over
the life of the Fund. This method of calculating total return is based on the
assumption that, all dividends and distributions by the Fund are reinvested in
shares of the Fund at net asset value and all recurring fees are included for
applicable periods. Total return may also be expressed in terms of the
cumulative value of an investment in the Fund at the end of a defined period of
time. Any fees charged by banks or their institutional investors directly to
their customer accounts in connection with investments in Investor Shares will
not be included in the Fund's calculations of total returns.

All data is based on the Fund's past investment results and does not predict
future performance. Investment performance, which may vary, is based on many
factors, including market conditions, the composition of the investments in the
Fund, and the Fund's operating expenses. Investment performance also often
reflects the risk associated with the Fund's investment objectives and policies.
These factors should be considered when comparing the Fund to other mutual funds
and other investment vehicles.

The performance of the Institutional Shares will normally be higher than the
Investor Shares because of the sales charge (when applicable) and additional
expenses charged to the Investor Shares.

COUNSEL TO THE COMPANY

The validity of the Fund's shares will be passed upon for the Company by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland. Venable, Baetjer and
Howard, LLP also acts as counsel to the Investment Advisor and the Distributor.

INDEPENDENT AUDITORS

Ernst & Young LLP, One North Charles Street, Baltimore, Maryland 21201,
serves as the Company's independent auditors. Ernst & Young LLP will provide
audit services, tax advice and assistance in connection with filings with the
SEC.

B-18
<PAGE>
FINANCIAL STATEMENTS
DEM EQUITY FUND

COMPOSITE STATEMENT OF ASSETS AND LIABILITIES--FEBRUARY 28, 1998

<TABLE>
<S> <C>
ASSETS:
Cash.................................................................. $ 29
---
Total Assets.................................................. $ 29
---

LIABILITIES:
$ 0
---
Total Liabilities............................................. $ 0
---

NET ASSETS--equivalent to $14.28 per share on 2 shares of Common Stock
outstanding.......................................................... $ 29
---
---

SUMMARY OF STOCKHOLDERS' EQUITY
Common Stock, par value $.001 per share; authorized 10,000,000,000
shares; issued and outstanding 2 shares........................... $ 0
Capital paid-in..................................................... 29
---
Net assets applicable to outstanding common stock..................... $ 29
---
---
</TABLE>

F-1