BILTMORE MUNICIPAL FUNDS, 485BPOS, 1996-06-24

BILTMORE MUNICIPAL FUNDS
485BPOS, 1996-06-24

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1933 Act File No. 33-37527
1940 Act File No. 811-6201

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

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

Post-Effective Amendment No. 11 ........ X
-

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 11 ........................ X
-

THE BILTMORE MUNICIPAL FUNDS

(Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

immediately upon filing pursuant to paragraph (b)
X on July 22, 1996 pursuant to paragraph (b)
-
60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on pursuant to paragraph (a)(ii) of Rule 485.
-----------------

If appropriate, check the following box:

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

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

X filed the Notice required by that Rule on January 16, 1996; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.

Copies to:

Donald W. Smith, Esquire Alan C. Porter, Esquire
Kirkpatrick & Lockhart LLP Piper & Marbury L.L.P.
1800 Massachusetts Avenue, N.W. 1200 Nineteenth Street, N.W.
Washington, D.C. 20036-1800 Washington, D.C. 20036-2430

CROSS-REFERENCE SHEET

This Amendment to the Registration Statement of The Biltmore Municipal
Funds, which consists of three portfolios: (1) Biltmore Georgia Municipal
Bond Fund (Class A Shares and Class Y Shares), (2) Biltmore North Carolina
Municipal Bond Fund (Class A Shares and Class Y Shares), and (3) Biltmore
South Carolina Municipal Bond Fund (Class A Shares and Class Y Shares) is
comprised of the following:

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. Cover Page...............(1-3) Cover Page.
Item 2. Synopsis.................(1-3) Summary of Fund Expenses.
Item 3. Condensed Financial
Information..............(1-3) Financial Highlights.
Item 4. General Description of
Registrant...............(1-3) Performance Information; General
Information; Investment Information;
Investment Objective; Investment Policies;
(1) Georgia Municipal Securities; (2)
North Carolina Municipal Securities; (3)
South Carolina Municipal Securities; (1-3)
Municipal Bond Insurance; Investment
Risks; Non-Diversification; Investment
Limitation(s).

Item 5. Management of the Fund...(1-3) The Biltmore Funds; Management of
The Trusts; Distribution of Shares; (1-2)
Shareholder Servicing Arrangements; (1-3)
Administration of the Funds.

Item 6. Capital Stock and Other
Securities...............(1-3) Dividends; Capital Gains;
Shareholder Information; Voting Rights;
Effect of Banking Laws; Tax Information;
Federal Income Tax; (1) Georgia Taxes; (2)
North Carolina Taxes; (3) South Carolina
Taxes; (1-3) Other State and Local Taxes.

Item 7. Purchase of Securities Being
Offered..................(1-3) Net Asset Value; Investing in the
Fund; Share Purchases; Minimum Investment
Required; What Shares Cost; Sales Charge
Reallowance; Reducing the Sales Charge;
Certificates and Confirmations; Exchange
Privilege.

Item 8. Redemption or Repurchase.(1-3) Redeeming Shares; Systematic
Withdrawal Program; Accounts with Low
Balances.

Item 9. Pending Legal Proceedings None.

PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.

Item 10. Cover Page...............(1-3) Cover Page.
Item 11. Table of Contents........(1-3) Table of Contents.
Item 12. General Information and
History..................(1-3) General Information About the Fund.
Item 13. Investment Objectives and
Policies.................(1-3) Investment Objective and Policies;
Investment Limitations.
Item 14. Management of the Fund...(1-3) The Biltmore Municipal Funds
Management.
Item 15. Control Persons and Principal
Holders of Securities....Not applicable.
Item 16. Investment Advisory and Other
Services.................(1-3) Investment Advisory Services;
Administrative Services; Shareholder
Servicing Agent.
Item 17. Brokerage Allocation.....(1-3) Brokerage Transactions.
Item 18. Capital Stock and Other
Securities...............Not applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered..................(1-3) Purchasing Shares; Determining Net
Asset Value; Redeeming Shares.
Item 20. Tax Status...............(1-3) Tax Status.
Item 21. Underwriters.............Not Applicable.
Item 22. Calculation of Performance
Data.....................(1-3) Total Return; Yield; Tax-Equivalent;
Yield Performance Comparisons.
Item 23. Financial Statements.....(1-3) The Financial Statements for the
fiscal year ended November 30, 1995 are
incorporated herein by reference to each
Fund's Annual Report dated November 30,
1995. (File Nos. 33-37525 and 811-6201)

THE BILTMORE FUNDS
THE BILTMORE MUNICIPAL FUNDS
CLASS A SHARES
ALL PORTFOLIOS
CLASS B SHARES
BILTMORE EQUITY FUND
BILTMORE QUANTITATIVE EQUITY FUND
BILTMORE BALANCED FUND
BILTMORE FIXED INCOME FUND

PROSPECTUS
JULY 22, 1996

WACHOVIA INVESTMENTS
MAKE YOURSELF COMFORTABLE

THE BILTMORE FUNDS AND THE BILTMORE MUNICIPAL FUNDS
The Biltmore Funds and The Biltmore Municipal Funds (individually referred to as
the "Trust" or collectively as the "Trusts") are open-end management investment
companies which offer separate investment portfolios, each having its own
investment objective and policies for different investor needs. The shares
offered by this prospectus represent interests in the following portfolios
(individually referred to as the "Fund" or collectively as the "Funds"):
THE BILTMORE FUNDS THE BILTMORE MUNICIPAL FUNDS
BILTMORE EQUITY FUND BILTMORE GEORGIA MUNICIPAL BOND FUND
BILTMORE QUANTITATIVE EQUITY FUND BILTMORE NORTH CAROLINA MUNICIPAL BOND
FUND
BILTMORE EQUITY INDEX FUND BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
BILTMORE SPECIAL VALUES FUND
BILTMORE EMERGING MARKETS FUND
BILTMORE BALANCED FUND
BILTMORE FIXED INCOME FUND
BILTMORE SHORT-TERM FIXED INCOME FUND
In addition, The Biltmore Funds offers through separate prospectuses the
following money market portfolios, each having distinct investment objectives
and policies: Biltmore Money Market Fund, Biltmore Prime Cash Management Fund,
Biltmore Tax-Free Money Market Fund, and Biltmore U.S. Treasury Money Market
Fund.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, WACHOVIA BANK OF GEORGIA, N.A., WACHOVIA BANK OF
NORTH CAROLINA, N.A., OR WACHOVIA BANK OF SOUTH CAROLINA, N.A. OR ANY OF THEIR
AFFILIATES OR SUBSIDIARIES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
This prospectus provides you with information specfic to the Class A Shares and
Class B Shares of the Funds. It contains the information you should read and
know before you invest in the Class A Shares or Class B Shares of the Funds. The
Funds also offer Class Y Shares to certain institutional investors. Keep this
prospectus for future reference.
The Funds have also filed Statements of Additional Information dated January 31,
1996 with the Securities and Exchange Commission. The information contained in
the Statements of Additional Information is incorporated by reference into this
prospectus. To request a copy of any of the Statements of Additional Information
free of charge, obtain other information, or make inquiries about the Funds,
call 1-800-994-4414 or write The Biltmore Service Center, 101 Greystone
Boulevard, SC-9215, Columbia, South Carolina 29226.
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.
SUMMARY OF INVESTMENT INFORMATION

WHO MAY WANT TO INVEST IN THE BILTMORE FUNDS AND THE BILTMORE MUNICIPAL
FUNDS?
THE BILTMORE FUNDS and THE BILTMORE MUNICIPAL FUNDS offer investment
opportunities to a wide range of investors, from those who may be investing for
the short-term to those with long-term goals. In addition to certain money
market portfolios offered pursuant to a separate prospectus, the Trusts
currently offer the following eight professionally managed diversified
portfolios and three non-diversified portfolios:
o BILTMORE EQUITY FUND ("EQUITY FUND")--seeks to produce growth of
principal and income;
o BILTMORE QUANTITATIVE EQUITY FUND ("QUANTITATIVE EQUITY FUND")--seeks
to provide growth of principal and income;
o BILTMORE EQUITY INDEX FUND ("EQUITY INDEX FUND")-- seeks to provide a
total return that approximates that of the stock market as measured by
the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500
Index" or "Index");
o BILTMORE SPECIAL VALUES FUND ("SPECIAL VALUES FUND")-- seeks to produce
growth of principal;
o BILTMORE EMERGING MARKETS FUND ("EMERGING MARKETS FUND")--seeks to
produce long-term capital appreciation;
o BILTMORE BALANCED FUND ("BALANCED FUND")--seeks to provide long-term
growth of principal and current income;
o BILTMORE FIXED INCOME FUND ("FIXED INCOME FUND")-- seeks a high level
of total return;
o BILTMORE SHORT-TERM FIXED INCOME FUND ("SHORT-TERM FIXED INCOME FUND")-
-seeks to produce a high level of current income;
o BILTMORE GEORGIA MUNICIPAL BOND FUND ("GEORGIA MUNICIPAL BOND FUND")--
seeks to provide current income which is exempt from federal regular
income tax and the personal income taxes imposed by the State of
Georgia;
o BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND ("NORTH CAROLINA MUNICIPAL
BOND FUND")--seeks to provide current income which is exempt from
federal regular income tax and the income tax imposed by the State of
North Carolina; and
o BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND ("SOUTH CAROLINA MUNICIPAL
BOND FUND")--seeks to provide current income which is exempt from
federal regular income tax and the South Carolina state income taxes.
WHO MANAGES THE FUNDS?
Wachovia Asset Management, a business unit of Wachovia Bank of North Carolina,
N.A., serves as investment adviser to THE BILTMORE FUNDS and the NORTH CAROLINA
MUNICIPAL BOND FUND. Wachovia Bank of Georgia, N.A. serves as investment adviser
to GEORGIA MUNICIPAL BOND FUND and Wachovia Bank of South Carolina, N.A. serves
as investment adviser to SOUTH CAROLINA MUNICIPAL BOND FUND. Twin Capital
Management, Inc. serves as sub-adviser to the QUANTITATIVE EQUITY FUND.
HOW TO BUY AND SELL SHARES
You may buy and sell shares of any of the Funds by telephone, by mail, or in
person. Except as indicated below, all shares are sold with sales charges. Fund
shares are redeemed at net asset value. The Trusts also offer you the privilege
of exchanging shares of one Fund for another. For more information, please see
"Investing in the Funds," "Exchange Privilege," and "Redeeming Shares."
RISK FACTORS
Investors should be aware of general risks associated with investment in mutual
funds. Market values of fixed income securities, which constitute a major part
of the investments of several Funds, may vary inversely in response to change in
prevailing interest rates. Foreign securities in which some of the Funds
(particularly the EMERGING MARKETS FUND) may invest may be subject to certain
risks in addition to those inherent in U.S. investments. One or more of the
Funds may make certain investments and employ certain investment techniques that
involve other risks, including entering into repurchase agreements, lending
portfolio securities, entering into futures contracts and related options,
entering into foreign currency transactions and forward foreign currency
exchange contracts, and borrowing money for investment purposes. These risks and
those associated with investing in mortgage-backed securities, foreign
securities, when-issued securities, variable rate securities, and equity
securities are described under "Portfolio Investments and Strategies."

<S> <C> <C> <C> <C> <C> <C> <C>
THE BILTMORE FUNDS AND THE BILTMORE MUNICIPAL FUNDS
CLASS A SHARES
SUMMARY OF FUND EXPENSES

Quantitative Equity Special Emerging
Equity Equity Index Values Markets Balanced
Fund Fund Fund Fund Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

MAXIMUM SALES LOAD IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
MAXIMUM SALES LOAD IMPOSED ON REINVESTED DIVIDENDS
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None None
CONTINGENT DEFERRED SALES CHARGE (AS A PERCENTAGE
OF ORIGINAL PURCHASE PRICE OR REDEMPTION PROCEEDS,
AS APPLICABLE) None None None None None None
REDEMPTION FEES (AS A PERCENTAGE OF AMOUNT REDEEMED,
IF APPLICABLE) None None None None None None
EXCHANGE FEE None None None None None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee (after waiver if applicable) (1) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
12b-1 Fees None None None None None None
Other Expenses (after waivers if applicable)(2) 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Shareholder Servicing Agent Fee 0.25%
Total Fund Operating Expenses (after waivers if applicable) (3) 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

Short-Term Georgia North South
Carolina Carolina
Fixed Fixed-Income Muni Bond Muni Bond Muni
Income Bond
Fund Fund Fund Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

MAXIMUM SALES LOAD IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) 4.50% 2.50% 4.50% 4.50% 4.50%
MAXIMUM SALES LOAD IMPOSED ON REINVESTED DIVIDENDS
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None
CONTINGENT DEFERRED SALES CHARGE (AS A PERCENTAGE
OF ORIGINAL PURCHASE PRICE OR REDEMPTION PROCEEDS,
AS APPLICABLE) None None None None None
REDEMPTION FEES (AS A PERCENTAGE OF AMOUNT REDEEMED,
IF APPLICABLE) None None None None None
EXCHANGE FEE None None None None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee (after waiver if 0.00% 0.00% 0.00% 0.00% 0.00%
applicable)(1)..................
12b-1 Fees........... None None None None None
Other Expenses (after waivers if applicable) (2) 0.25% 0.25% 0.25% 0.25% 0.25%
Shareholder Servicing Agent Fee.. 0.25%
Total Fund Operating Expenses (after waivers if applicable) (3) 0.25% 0.25% 0.25% 0.25% 0.25%

(1) The management fee has been reduced to reflect the
voluntary waiver by the investment adviser. The adviser can
terminate this voluntary waiver at
any time at its sole discretion. The maximum management fee is
0.30% for the Equity Index Fund, 0.55% for the Short-Term Fixed
Income Fund, 0.60%
for the Fixed Income Fund, 0.70% for the Equity Fund,
Quantitative Equity Fund and Balanced Fund, 0.75% for the
Georgia Municipal Bond Fund, North
Carolina Municipal Bond Fund, and South Carolina Municipal Bond
Fund, 0.80% for the Special Values Fund, and 1.00% for the
Emerging Markets Fund.

(2) Other expenses would have been % for the Special Values
Fund absent the voluntary waiver by the administrator.
Other expenses would have been % for the Georgia Municipal
Bond Fund and % for the North Carolina Municipal Bond Fund
absent the voluntary
waivers by the administrator and portfolio accountant. The
administrator and portfolio accountant can terminate these
voluntary waivers at any time at its sole discretion.

(3) Total Fund Operating Expenses for the fiscal year ended
November 30, 1995 were 0.90% for the Equity Fund, 0.87% for the
Quantitative Equity
Fund, 0.48% for the Equity Index Fund, 1.29% for the Special
Values Fund, 1.80% for the Emerging Markets Fund, 0.76% for the
Balanced Fund, 0.74%
for the Fixed Income Fund, 0.63% for the Short-Term Fixed
Income Fund, 0.92% for the Georgia Municipal Bond Fund, 0.85%
for the North Carolina
Municipal Bond Fund, and 0.58% for the South Carolina Municipal
Bond Fund.

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

THE BILTMORE FUNDS - CLASS B SHARES
SUMMARY OF FUND EXPENSES

Quantitative
Equity Equity
Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

MAXIMUM SALES LOAD IMPOSED ON PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) None None
MAXIMUM SALES LOAD IMPOSED ON REINVESTED
DIVIDENDS
(AS A PERCENTAGE OF OFFERING PRICE) None None
CONTINGENT DEFERRED SALES CHARGE (AS A PERCENTAGE
OF ORIGINAL PURCHASE PRICE OR REDEMPTION
PROCEEDS,
AS APPLICABLE) TBD TBD
REDEMPTION FEES (AS A PERCENTAGE OF AMOUNT
REDEEMED,
IF APPLICABLE) None None
EXCHANGE FEE None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee (after waiver if applicable) 0.00% 0.00%
(1)....................................
12b-1 Fees 0.75% 0.75%
.................................................
..........................................
Other Expenses (after waivers if applicable) 0.25% 0.25%
.................................................
.........
Shareholder Servicing Agent 0.25%
Fee..............................................
................
Total Fund Operating Expenses (after waivers 1.00% 1.00%
if applicable) (2)

Fixed Balanced
Income
Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

Management Fee (after waiver if applicable) 0.00% 0.00%
(1).......
12b-1 Fees................................. 0.75% 0.75%
Other Expenses (after waivers if applicable) 0.25% 0.25%
Shareholder Servicing Agent Fee 0.25%
Total Fund Operating Expenses (after waivers 1.00% 1.00%
if applicable) (2)

(2) Total Fund Operating Expenses for the fiscal year ended
November 30, 1995 were 0.90% for the Equity Fund, 0.87% for
the Quantitative Equity
Fund, 0.74% for the Fixed Income Fund, and 0.76% for the
Balanced Fund.

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

BILTMORE EQUITY FUND FINANCIAL HIGHLIGHTS

(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated herein
by reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of charge
from the Trust.

</TABLE>
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.32 $ 10.28 $ 10.00
Income from investment operations
Net investment income 0.23 0.20 0.12
Net realized and unrealized gain (loss) on investments and futures
contracts 2.64 0.12 0.25
--------- --------- --------
Total from investment operations 2.87 0.32 0.37
--------- --------- --------
Less distributions
Distributions from net investment income (0.25) (0.20) (0.09)
Distributions from net realized gain on investments (0.23) (0.08) --
--------- --------- --------
Total distributions (0.48) (0.28) (0.09)
--------- --------- --------
NET ASSET VALUE, END OF PERIOD $ 12.71 $ 10.32 $ 10.28
--------- --------- --------
Total Return (b) 28.74% 3.10% 3.68%
Ratios to Average Net Assets
Expenses 0.90% 0.87% 0.81%*
Net investment income 1.99% 1.98% 2.18%*
Expense waiver/reimbursement (c) 0.07% 0.16% 0.32%*
Supplemental Data
Net assets, end of period (000 omitted) $130,150 $87,022 $61,997
Portfolio turnover 65% 35% 50%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's

Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE QUANTITATIVE EQUITY FUND FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated
herein by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained free
of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994(a)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.60 $ 10.00
Income from investment operations
Net investment income 0.22 0.12
Net realized and unrealized gain (loss) on investments and future contracts 3.51 (0.43)
--------- ----------
Total from investment operations 3.73 (0.31)
Less distributions
Distributions from net investment income (0.22) (0.09)
--------- ----------
NET ASSET VALUE, END OF PERIOD $ 13.11 $ 9.60
--------- ----------
Total Return (b) 39.33% (3.08)%
Ratios to Average Net Assets
Expenses 0.87% 0.90%*
Net investment income 1.93% 1.83%*
Expense waiver/reimbursement (c) 0.10% 0.10%*
Supplemental Data
Net assets, end of period (000 omitted) $121,895 $91,979
Portfolio turnover 63% 64 %
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 28, 1994 (date of initial
public investment) to November 30, 1994.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE EQUITY INDEX FUND

FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated
herein by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained free
of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.27 $ 10.47 $ 10.00
Income from investment operations
Net investment income 0.28 0.25 0.15
Net realized and unrealized gain (loss) on investments and
futures contracts 3.37 (0.19) 0.43
--------- --------- ----------
Total from investment operations 3.65 0.06 0.58
--------- --------- ----------
Less distributions
Distributions from net investment income (0.27) (0.24) (0.11)
Distributions from net realized gain on investments (0.03) (0.02) --
--------- --------- ----------
Total distributions (0.30) (0.26) (0.11)
--------- --------- ----------
NET ASSET VALUE, END OF PERIOD $ 13.62 $ 10.27 $ 10.47
--------- --------- ----------
Total Return (b) 36.15% 0.56% 5.80%
Ratios to Average Net Assets
Expenses 0.48% 0.46% 0.43%*
Net investment income 2.39% 2.44% 2.54%*
Expense waiver/reimbursement (c) 0.05% 0.08% 0.12%*
Supplemental Data
Net assets, end of period (000 omitted) $186,841 $183,852 $149,266
Portfolio turnover 60% 9% 9 %
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE SPECIAL VALUES FUND FINANCIAL HIGHLIGHTS

(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young, LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated herein
by reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of charge
from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.75 $ 10.24 $ 10.00
Income from investment operations
Net investment income 0.09 0.06 (0.002)
Net realized and unrealized gain (loss) on investments 2.42 (0.22) 0.242
--------- --------- --------
Total from investment operations 2.51 (0.16) 0.24
Less distributions
Distributions from net investment income (0.02) (0.05) --
Distributions from net realized gain on investments (0.06) (0.28) --
--------- --------- --------
Total distributions (0.08) (0.33) --
--------- --------- --------
NET ASSET VALUE, END OF PERIOD $ 12.18 $ 9.75 $ 10.24
--------- --------- --------
Total Return (b) 25.91% (1.61%) 2.40%
Ratios to Average Net Assets
Expenses 1.29% 1.13% 1.25%*
Net investment income 0.80% 0.63% (0.03%)*
Expense waiver/reimbursement (c) 0.58% 1.09% 1.79%*
Supplemental Data
Net assets, end of period (000 omitted) $24,093 $17,431 $12,072
Portfolio turnover 57% 62% 68%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993.

(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE EMERGING MARKETS FUND

FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the period ended November 30, 1995, and on the
following table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated
herein by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained free
of charge from the Trust.
<TABLE>
<CAPTION>
Period Ended November 30, 1995(a)
<S> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
Income from investment operations
Net investment income 0.05
Net realized and unrealized gain on investments and foreign currency 0.36
------
Total from investment operations 0.41
------
NET ASSET VALUE, END OF PERIOD $ 10.41
------
Total Return (b) 4.10%
Ratios to Average Net Assets
Expenses 1.80%*
Net investment income 0.85%*
Expense waiver/reimbursement (c) 0.28%*
Supplemental Data
Net assets, end of period (000 omitted) $71,276
Portfolio turnover 17 %
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 26, 1994 (date of
initial public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of
charge.

BILTMORE BALANCED FUND
FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Funds's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Annual Report
to shareholders dated November 30, 1995, which is incorporated herein by
reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.93 $ 10.33 $ 10.00
Income from investment operations
Net investment income 0.40 0.35 0.19
Net realized and unrealized gain (loss) on investments 2.13 (0.38) 0.29
--------- --------- ----------
Total from investment operations 2.53 (0.03) 0.48
Less distributions
Distributions from net investment income (0.38) (0.33) (0.15)
Distributions from net realized gain on investments (0.16) (0.04) 0.00
--------- --------- ----------
Total distributions (0.54) (0.37) (0.15)
--------- --------- ----------
NET ASSET VALUE, END OF PERIOD $ 11.92 $ 9.93 $ 10.33
--------- --------- ----------
Total Return (b) 26.32% (0.39%) 4.89%
Ratios to Average Net Assets
Expenses 0.76% 0.75% 0.75%*
Net investment income 3.58% 3.46% 3.30%*
Expense waiver/reimbursement (c) 0.16% 0.17% 0.19%*
Supplemental Data
Net assets, end of period (000 omitted) $207,421 $194,430 $166,271
Portfolio turnover 102% 74% 60%
</TABLE>
* Computed on an annualized basis.
- - -
(a) Reflects operations for the period from May 10, 1993 (date of initial
- - -
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.

Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of
charge.

BILTMORE FIXED INCOME FUND FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented is included in the Annual Report
to shareholders dated November 30, 1995 which is incorporated herein by
reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.97 $ 10.00 $ 10.00
Income from investment operations
Net investment income 0.58 0.56 0.31
Net realized and unrealized gain (loss) on investments 0.92 (0.98) (0.01)
--------- --------- ----------
Total from investment operations 1.50 (0.42) 0.30
--------- --------- ----------
Less distributions
Distributions from net investment income (0.57) (0.55) (0.30)
Distributions from net realized gain on investment
transactions -- (0.06) --
--------- --------- ----------
Total distributions (0.57) (0.61) (0.30)
--------- --------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.90 $ 8.97 $ 10.00
--------- --------- ----------
Total Return (b) 17.20% (4.30%) 3.02%

Ratios to Average Net Assets
Expenses 0.74% 0.71% 0.68%*
Net investment income 6.07% 5.90% 5.44%*
Expense waiver/reimbursement (c) 0.10% 0.13% 0.19%*
Supplemental Data
Net assets, end of period (000 omitted) $169,846 $148,751 $140,325
Portfolio turnover 155% 148% 149%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE SHORT-TERM FIXED INCOME FUND FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Fund's Annual
Report to shareholders dated November 30, 1995, which is incorporated
herein by reference. This table should be read in conjunction with the
Fund's financial statements and notes thereto, which may be obtained free
of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended November 30, 1995 1994 1993(a)
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.58 $ 9.91 $ 10.00
Income from investment operations
Net investment income 0.59 0.45 0.27
Net realized and unrealized gain (loss) on investments 0.24 (0.33) (0.10)
--------- --------- ----------
Total from investment operations 0.83 0.12 0.17
Less distributions
Distributions from net investment income (0.52) (0.45) (0.26)
--------- --------- ----------
NET ASSET VALUE, END OF PERIOD $ 9.89 $ 9.58 $ 9.91
--------- --------- ----------
Total Return (b) 8.82% 1.27% 1.69%
Ratios to Average Net Assets
Expenses 0.63% 0.60% 0.58%*
Net investment income 5.83% 4.62% 4.78%*
Expense waiver/reimbursement (c) 0.18% 0.18% 0.22%*
Supplemental Data
Net assets, end of period (000 omitted) $124,720 $148,326 $154,459
Portfolio turnover 147% 151% 73%
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from May 10, 1993 (date of initial
public investment) to November 30, 1993.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report for the fiscal year ended November 30, 1995, which can be
obtained free of charge.

BILTMORE GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1995, on the Fund's
financial statements for the year ended November 30, 1995, and the following
table for the period presented is included in the Annual Report to
shareholders dated November 30, 1995, which is incorporated herein by
reference. This table should be read in conjunction with the Fund's financial
statements and notes thereto, which may be obtained free of charge from the
Trust.
<TABLE>
<CAPTION>
Period Ended November 30, 1995(a)
<S> <C>
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
Income from investment operations
Net investment income 0.41
Net realized and unrealized gain (loss) on investments 0.96
------
Total from investment operations 1.37
------
Less distributions
Distributions from net investment income (0.41)
------
NET ASSET VALUE, END OF PERIOD $ 10.96
------
Total Return (b) 13.93%
Ratios to Average Net Assets
Expenses 0.92%*
Net investment income 4.30%*
Expense waiver/reimbursement (c) 1.88%*
Supplemental Data
Net assets, end of period (000 omitted) $10,220
Portfolio turnover 14 %
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 26, 1994 (date of
initial public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of
charge.

BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND

FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1995, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the period presented is included in the Annual Report
to shareholders dated November 30, 1995, which is incorporated herein by
reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
Period Ended November 30, 1995(a)
<S> <C>

NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
Income from investment operations
Net investment income 0.43
Net realized and unrealized gain (loss) on investments 0.99
------
Total from investment operations 1.42
------
Less distributions
Distributions from net investment income (0.43)
------
NET ASSET VALUE, END OF PERIOD $ 10.99
------
Total Return (b) 14.40%
Ratios to Average Net Assets
Expenses 0.85%*
Net investment income 4.40%*
Expense waiver/reimbursement (c) 1.19%*
Supplemental Data
Net assets, end of period (000 omitted) $18,679
Portfolio turnover 19 %
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from December 26, 1994 (date of
initial public investment) to November 30, 1995.
(b) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of
charge.

SOUTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 15, 1996, on the Fund's
financial statements for the year ended November 30, 1995, and on the
following table for the periods presented, is included in the Annual Report
to shareholders dated November 30, 1995, which is incorporated herein by
reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, which may be obtained free of
charge from the Trust.
<TABLE>
<CAPTION>
Year Ended 11/30/95 11/30/94 11/30/93** 9/30/93 9/30/92 9/30/91*
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.05 $ 11.12 $ 11.27 $ 10.53 $ 10.17 $ 10.00
Income from investment operations
Net investment income 0.56 0.56 0.10 0.59 0.60 0.43
Net realized and unrealized gain (loss)
on investments 1.10 (1.04) (0.15) 0.74 0.36 0.17
----------- ----------- ------------- ----------- ----------- ----------
Total from investment operations 1.66 (0.48) (0.05) 1.33 0.96 0.60
----------- ----------- ------------- ----------- ----------- ----------
Less distributions
Distributions from net investment
income (0.56) (0.56) (0.10) (0.59) (0.60) (0.43)
Distributions from net realized gain
on investments (0.10) (0.03) 0.00 0.00 0.00 0.00
----------- ----------- ------------- ----------- ----------- ----------
Total distributions (0.66) (0.59) (0.10) (0.59) (0.60) (0.43)
----------- ----------- ------------- ----------- ----------- ----------
NET ASSET VALUE, END OF PERIOD $ 11.05 $ 10.05 $ 11.12 $ 11.27 $ 10.53 $ 10.17
----------- ----------- ------------- ----------- ----------- ----------
Total Return (a) 16.97% (4.52%) (0.48%) 13.03% 9.73% 6.32%
Ratios to Average Net Assets
Expenses 0.58% 0.60% 0.55%(c) 0.55% 0.61% 0.82%(c)
Net investment income 5.23% 5.22% 5.11%(c) 5.46% 5.83% 5.73%(c)
Expense waiver/reimbursement (b) 0.55% 0.59% 0.60%(c) 0.62% 0.73% 0.86%(c)
Supplemental Data
Net assets, end of period (000 omitted) $93,725 $75,995 $83,371 $82,674 $63,139 $21,438
Portfolio turnover 15% 23% 2% 4% 0% 0%
</TABLE>
* Reflects operations for the period from January 11, 1991 (date of
initial public investment) to September 30, 1991.
** Reflects operations for the two months ended November 30, 1993.
(a) Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and
net investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Fund's
Annual Report dated November 30, 1995, which can be obtained free of
charge.

GENERAL INFORMATION

THE BILTMORE FUNDS was established as a Massachusetts business Trust
under a Declaration of Trust dated November 19, 1991. (For purposes of
this prospectus, "THE BILTMORE FUNDS" refers only to those portfolios of
the Trust that are included in this combined prospectus.) THE BILTMORE
MUNICIPAL FUNDS was established as a Massachusetts business trust under a
Declaration of Trust dated August 15, 1990. Each Declaration of Trust
permits the respective Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of
securities. As of the date of this prospectus, the Trusts offer three
classes of shares: Class A Shares, Class Y Shares, and for the Equity
Fund, the Quantitative Equity Fund, the Balanced Fund and the Fixed
Income Fund, Class B Shares. Class Y Shares are offered to certain
accounts held by Wachovia Bank of Georgia, N.A., Wachovia Bank of North
Carolina, N.A., and Wachovia Bank of South Carolina, N.A. (collectively,
"Wachovia Banks") and their affiliates in a fiduciary, advisory, agency,
custodial, or similar capacity. Class A Shares and Class B Shares are
sold to those customers as well as other individuals and customers of the
Wachovia Banks. This prospectus relates only to Class A Shares and Class
B Shares ("Shares") of the Funds.
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without shareholder
approval. While a Fund cannot assure that it will achieve its investment
objective, it attempts to do so by following the investment policies
described below.
Unless indicated otherwise, the investment policies of a Fund may be
changed by the Trustees without shareholder approval. However,
shareholders will be notified before any material change in these
policies becomes effective.
For additional information about investment limitations, strategies, and
certain investment policies, please refer to the "Portfolio Investments
and Strategies" section of this prospectus.
THE BILTMORE FUNDS

BILTMORE EQUITY FUND
The investment objective of the EQUITY FUND is to produce growth of
principal and income. The Fund pursues its investment objective by
investing primarily in a professionally-managed and diversified portfolio
of common stock of companies with an established market. Under normal
market conditions, the Fund intends to invest at least 65% of its total
assets in equity securities. These securities will be primarily quality
mid- to large-capitalization common stocks. The Fund's investment adviser
seeks undervalued stocks with improving prospects by integrating two
disciplines to capture both growth and value opportunities. The Fund's
investment adviser will integrate value and growth management techniques
in attempting to select undervalued stocks that have prospects for
improving fundamentals while evening out the price volatility often
associated with high growth investments.
Acceptable investments include:
o common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in over-the-
counter markets and are considered by the Fund's investment adviser
to have an established market;
o convertible securities;
o investments in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York Stock Exchange or in over-the-
counter markets. The Fund may not invest more than 20% of its assets
in ADRs. In addition, the Fund may invest up to 10% of its assets in
other securities of foreign issuers ("Non-ADRs"). (See "Securities
of Foreign Issuers."); and
o domestic issues of corporate debt obligations rated A or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch").
BILTMORE QUANTITATIVE EQUITY FUND
The investment objective of the QUANTITATIVE EQUITY FUND is to provide
growth of principal and income. The Fund pursues its investment objective
by investing in a professionally-managed and diversified portfolio
consisting primarily of large capitalization common stocks. The average
market capitalization of the stocks in the Fund's universe will be in
excess of $1 billion. These securities will primarily be composed of
issues of domestic companies. Stocks are selected by the Fund's sub-
adviser using a quantitative computer valuation model described below
under "Investment Processes." The Fund intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the ^ S&P 500
Index. However, the Fund will not limit its investments solely to stocks
represented in the Index. There can be no assurance that the Fund's
investment performance will match or exceed that of the Index. Under
normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities.
Although the Fund normally seeks to remain substantially fully invested
in the common stocks in the universe identified by the Fund's investment
adviser, the Fund may also invest in the acceptable investments listed
under "BILTMORE EQUITY FUND" above.
BILTMORE EQUITY INDEX FUND
The investment objective of the EQUITY INDEX FUND is to provide a total
return that approximates that of the stock market as measured by the S&P
500 Index. The Fund pursues its investment objective by investing in a
broadly diversified portfolio of common stocks that make up the Index.
The Fund will normally seek to be invested in all the stocks that
comprise the Index and achieve a correlation between the performance of
its portfolio and that of the Index of at least 0.95 of 1%; a figure of
1.00 would represent perfect correlation. The Fund is managed by
utilizing a computer program that identifies which stocks should be
purchased or sold in order to approximate, as much as possible, the
investment return of the securities that comprise the S&P 500 Index.
Under normal circumstances, at least 95% of the value of the Fund's total
assets will be invested in stocks represented in the Index and S&P 500
Index futures contracts However, the Fund is not required to sell
securities if the 95% investment level changes due to increases or
decreases in the market value of portfolio securities.
In addition, the Fund may hold cash reserves which may be invested in,
but not limited to, the following:
o commercial paper rated, at the time of purchase, at least Prime-1,
A-1 or F-1 by Moody's, S&P or Fitch, or, if unrated, of comparable
quality as determined by the Fund's investment adviser;
o time and savings deposits (including certificates of deposit) in
domestic, commercial and savings banks; and
o index participation contracts.
BILTMORE SPECIAL VALUES FUND
The investment objective of the SPECIAL VALUES FUND is to produce growth
of principal. The Fund pursues its investment objective by investing
primarily in a portfolio of equity securities comprising the small
capitalization sector of the United States equity market which the
investment adviser believes to be significantly undervalued with
potential for above-average capital appreciation commensurate with
increased risk. Typical investments are in stocks that have low price-to-
earnings ratios, are generally out of favor in the marketplace, are
selling significantly below their stated or replacement book value or are
undergoing a reorganization or other corporate action that may create
above-average price appreciation. Under normal market conditions, the
Fund intends to invest at least 65% of its total assets in equity
securities of companies that have a market value capitalization of up to
$1 billion. The Fund will limit its investments to up to 20% of total
assets in securities of foreign issuers which are freely traded on United
States securities exchanges or in the over-the-counter market in the form
of American ADRs and up to 10% of total assets in other securities of
foreign issuers.
Acceptable investments include, but are not limited to:
o common stocks of U.S. companies which are either listed on the New
York or American Stock Exchange or traded in over-the-counter
markets and are considered by the Fund's investment adviser to have
potential for above-average appreciation;
o domestic issues of corporate debt obligations (including convertible
bonds);
o securities of foreign issuers; and
o master limited partnerships.
In addition, the Fund may invest in high yield corporate bonds (commonly
known as junk bonds) and speculative grade preferred stocks.
BILTMORE EMERGING MARKETS FUND
The investment objective of the EMERGING MARKETS FUND is to produce long-
term capital appreciation. The Fund pursues its investment objective by
investing primarily in a professionally managed and diversified portfolio
of securities of issuers and companies located in countries that are
generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly
known as the World Bank) and the International Finance Corporation, as
well as countries that are classified by the United Nations or otherwise
regarded by their authorities as developing. Many investments in emerging
markets can be considered speculative, and therefore may offer higher
potential for gains and losses than investments in the developed markets
of the world. Because investing in emerging markets can involve
significant risks, the Fund is designed for aggressive investors. Under
normal market conditions, the Fund intends to invest at least 65% of its
total assets in securities of issuers and companies located in countries
having emerging markets. Although the Fund will focus its investment on
the common stocks of foreign companies located in emerging market
countries, the Fund may also invest in other securities, including debt
securities.
Acceptable investments may also include, but will not be limited to:
o preferred stocks of foreign companies;
o convertible securities and warrants of foreign companies;
o investments in ADRs of foreign countries traded on the New York
Stock Exchange or in over-the-counter markets, and investments in
European Depositary Receipts ("EDRs," sometimes also referred to as
Continental Depositary Receipts), which are receipts issued in
Europe, typically by foreign banks and trust companies, that
evidence ownership of either foreign or domestic underlying
securities;
o fixed-income obligations of foreign governments, supranational
entities and corporate debt obligations denominated in currencies
other than U.S. dollars, rated B or better at the time of purchase
by Moody's or S&P; and
o U.S. equity and debt securities rated, at the time of purchase, B or
better by Moody's or S&P.
In addition, the Fund may enter into foreign currency transactions and
may maintain reserves in foreign or U.S. money market instruments.
BILTMORE BALANCED FUND
The investment objective of the BALANCED FUND is to provide long-term
growth of principal and current income. The Fund pursues its investment
objective by investing primarily in a professionally-managed, diversified
portfolio of equity securities and debt securities. The Fund's investment
approach, as related to equity securities, is to produce long-term growth
of principal and income by investing in a diversified portfolio of common
stocks. The Fund will seek undervalued stocks with improving prospects in
an attempt to capture both growth and value opportunities. With regard to
debt securities, the Fund's investment approach will be to maximize total
return (which consists of capital appreciation and income) available from
a diversified portfolio of fixed income securities while providing
relative stability of principal and income as compared to other fixed
income securities. Under normal market circumstances, the Fund will
invest at least 65% of its assets in equity securities and debt
securities. As a matter of operating policy, the asset mix of the Fund
will normally range between 40-60% in common stocks and convertible
securities, 30-50% in preferred stocks and bonds, and 0-20% in money
market instruments. The Fund will maintain at least 25% of its assets in
fixed income senior securities (including the value of convertible senior
securities attributable to their fixed income characteristics).
Acceptable investments include but are not limited to:
o common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in the over-
the-counter markets and are considered by the Fund's investment
adviser to have an established market;
o convertible securities;
o investments in ADRs of foreign companies traded on the New York
Stock Exchange or in the over-the-counter market. The Fund may not
invest more than 20% of its assets in ADRs. In addition, the Fund
may invest up to 10% of its assets in Non-ADRs. (See "Securities of
Foreign Issuers.");
o domestic issues of corporate debt obligations (including convertible
bonds) rated, at the time of purchase, A or better by S&P, Moody's
or Fitch or, if not rated, are determined by the Fund's investment
adviser to be of comparable quality;
o mortgage-backed and asset-backed securities;
o commercial paper rated not less than A-1 by S&P, Prime-1 by Moody's
or F-1 by Fitch, and unrated commercial paper that is deemed by the
Fund's investment adviser to be of comparable quality; and
o time and savings deposits (including certificates of deposit) in
commercial or savings banks.
BILTMORE FIXED INCOME FUND
The investment objective of the FIXED INCOME FUND is to seek a high level
of total return. As a secondary investment objective, the Fund will
attempt to minimize volatility of principal relative to the fixed income
markets. Total return consists of income and capital gains. The Fund
pursues its investment objectives by investing primarily in a diversified
portfolio of fixed income securities that, at the time of purchase, are
rated in the top three investment categories by a nationally recognized
statistical rating organization (NRSRO) or, if unrated, are of comparable
quality to securities with such ratings. The Fund will maintain an
average dollar-weighted maturity of between 6 to 10 years. The Fund will
invest, under normal circumstances, at least 65% of the value of its
total assets in fixed income securities.
Acceptable investments include:
o domestic issues of corporate debt obligations, including demand
master notes rated at the time of purchase Aaa, Aa, or A by Moody's,
AAA, AA, or A by S&P or by Fitch or, if unrated, of comparable
quality as determined by the Fund's investment adviser;
o convertible securities;
o mortgage-backed and asset-backed securities;
o commercial paper that at the time of purchase is rated not less than
Prime-1, A-1, or F-1, by Moody's, S&P, or Fitch, respectively, or,
if unrated, of comparable quality as determined by the Fund's
investment adviser; and
o time and savings deposits (including certificates of deposit) in
commercial or savings banks.
BILTMORE SHORT-TERM FIXED INCOME FUND
The investment objective of the SHORT-TERM FIXED INCOME FUND is to
produce a high level of current income with a minimum of principal
volatility. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of short-term, high-grade, fixed
income securities. Under normal market circumstances, the Fund will
invest at least 65% of its assets in such securities. The Fund will
maintain an average dollar-weighted maturity of between one to three
years. The targeted duration of the Fund will normally be 1.5 years or
less. Otherwise, the Fund may invest in the acceptable investments listed
under "Biltmore Fixed Income Fund" above.
ADDITIONAL ACCEPTABLE INVESTMENTS
In addition to the acceptable investments discussed above, each of the
Funds may borrow money, enter into repurchase agreements, lend portfolio
securities, invest in money market instruments, restricted and illiquid
securities, securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, securities of other investment companies,
warrants, demand master notes and engage in when-issued and delayed
delivery transactions. The Funds may also engage in put and call options,
futures, and options on futures for hedging purposes.
THE BILTMORE MUNICIPAL FUNDS

BILTMORE GEORGIA MUNICIPAL BOND FUND
The investment objective of the GEORGIA MUNICIPAL BOND FUND is to provide
current income which is exempt from federal regular income tax and the
personal income taxes imposed by the State of Georgia. As a matter of
investment policy which may not be changed without shareholder approval,
the Fund will invest its assets so that, under normal circumstances, at
least 80% of its total assets are invested in obligations, the interest
income from which is exempt from federal regular income tax and the
personal income taxes imposed by the State of Georgia ("Georgia Municipal
Securities").
BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the NORTH CAROLINA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax
and the income tax imposed by the State of North Carolina. As a matter of
investment policy which may not be changed without shareholder approval,
the Fund will invest its assets so that, under normal circumstances, at
least 80% of its total assets are invested in obligations, the interest
income from which is exempt from federal regular income tax and the
income tax ^ imposed by the State of North Carolina ("North Carolina
Municipal Securities").
BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the SOUTH CAROLINA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax
and South Carolina state income taxes. As a matter of investment policy
which may not be changed without shareholder approval, the Fund will
invest its assets so that, under normal circumstances, at least 80% of
its interest income is exempt from federal regular income tax and South
Carolina state income taxes or that at least 80% of its total assets are
invested in obligations, the interest income from which is exempt from
federal regular income tax and South Carolina state income taxes ("South
Carolina Municipal Securities").
The Funds' investment advisers may consider the potential for capital
appreciation in the selection of portfolio investments for each of THE
BILTMORE MUNICIPAL FUNDS.
ACCEPTABLE INVESTMENTS
The Funds invest primarily in Georgia Municipal Securities, North
Carolina Municipal Securities, and South Carolina Municipal Securities,
respectively (collectively, "State Municipal Securities"). These
securities are:
o obligations, including industrial development bonds, issued on
behalf of the states of Georgia, North Carolina, and South Carolina,
respectively, and their respective political subdivisions or
agencies;
o obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia,
or any political subdivision or agency of any of these; and
o participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the Trust
and/or the investment advisers to the Funds, exempt from both
federal regular income tax and the personal income tax imposed by
the states of Georgia, North Carolina, and South Carolina,
respectively. It is likely that shareholders who are subject to
alternative minimum tax will be required to include interest from a
portion of the municipal securities owned by the Fund in calculating
the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
STATE MUNICIPAL SECURITIES
State Municipal Securities are generally issued to finance public works,
such as airports, bridges, highways, housing, hospitals, schools,
streets, and water and sewer works. They are also issued to repay
outstanding obligations, to raise funds for general operating expenses,
and to make loans to other public institutions and facilities. State
Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities for privately or publicly owned
corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby
increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. However, interest on and principal of
revenue bonds are payable only from the revenue generated by the facility
financed by the bond or other specified sources of revenue.
Revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public
authority. Industrial development bonds are typically classified as
revenue bonds; the industry which is the beneficiary of such bonds is
generally the only source of payment for the bonds.

CHARACTERISTICS. The State Municipal Securities that the Funds buy are
rated A or above by Moody's or S&P. (A description of the rating
categories is contained in the Appendix to each Fund's Statement of
Additional Information). In addition, State Municipal Securities are
subject to one or more of the following quality standards:
o insured by a municipal bond insurance company which is rated AAA by
S&P or Aaa by Moody's;
o secured by an irrevocable escrow of direct obligations of the U.S.
government; or
o unrated if determined to be of comparable quality to one of the
foregoing rating categories by the Fund's adviser.
PORTFOLIO INVESTMENTS AND STRATEGIES

INVESTMENT CONSIDERATIONS
EQUITY INVESTMENTS. As with other mutual funds that invest in equity
securities, the EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND,
SPECIAL VALUES FUND and BALANCED FUND are subject to market risks. That
is, the possibility exists that common stocks will decline over short or
even extended periods of time. The United States equity market tends to
be cyclical, experiencing both periods when stock prices generally
increase and periods when stock prices generally decrease.
Because the SPECIAL VALUES FUND invests primarily in small capitalization
stocks, there are some additional risk factors associated with
investments in the SPECIAL VALUES FUND. In particular, stocks in the
small capitalization sector of the United States equity market have
historically been more volatile in price than larger capitalization
stocks, such as those included in the S&P 500 Index. This is because,
among other things, small companies have less certain growth prospects
than larger companies; have a lower degree of liquidity in the equity
market; and tend to have a greater sensitivity to changing economic
conditions. Further, in addition to exhibiting greater volatility, the
stocks of small companies may, to some degree, fluctuate independently of
the stocks of large companies. That is, the stocks of small companies may
decline in price as the prices of large company stocks rise or vice
versa. Therefore, investors should expect that the Fund will be more
volatile than, and may fluctuate independently of, broad stock market
indices such as the S&P 500 Index.
SECURITIES OF FOREIGN ISSUERS. THE EQUITY FUND, QUANTITATIVE EQUITY FUND,
SPECIAL VALUES FUND, EMERGING MARKETS FUND, and BALANCED FUND may invest
in the securities of foreign issuers. ^ There may be certain risks
associated with investing in foreign securities. These include risks of
adverse political and economic developments (including possible
governmental seizure or nationalization of assets), the possible
imposition of exchange controls or other governmental restrictions, less
uniformity in accounting and reporting requirements, and the possibility
that there will be less information on such securities and their issuers
available to the public. In addition, there are restrictions on foreign
investments in other jurisdictions and there tends to be difficulty in
obtaining judgments from abroad and affecting repatriation of capital
invested abroad. Delays could occur in settlement of foreign
transactions, which could adversely affect shareholder equity. Foreign
securities may be subject to foreign taxes, which reduce yield, and may
be less marketable than comparable United States securities. As a matter
of practice, a Fund will not invest in the securities of a foreign issuer
if any risk identified above appears to a Fund's investment adviser to be
substantial.
SECURITIES IN EMERGING MARKETS. Investing in the EMERGING MARKETS FUND
entails a substantial degree of risk. Because of the special risks
associated with investing in emerging markets, an investment in the
EMERGING MARKETS FUND should be considered speculative. Investors are
strongly advised to carefully consider the special risks involved in
emerging markets, which are in addition to the usual risks of investing
in domestic markets and in developed markets around the world. By itself,
an investment in the EMERGING MARKETS FUND does not constitute a balanced
investment plan. Investors should be willing to assume a higher degree of
risk and accept a higher level of volatility than is generally associated
with investment in more developed markets.
These risks include a possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations
(including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country and repatriation of investments),
default in foreign government securities, political or social instability
or diplomatic developments which could adversely affect investment in
securities of issuers in foreign nations. (Please refer to the EMERGING
MARKETS FUND'S Statement of Additional Information for an expanded
discussion of sovereign debt obligations.) In addition, there is often
less publicly available information about foreign issuers than those in
the United States. Emerging market companies are not generally subject to
uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those
applicable to U.S. companies. Further, the EMERGING MARKETS FUND may
encounter difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts.
Because the EMERGING MARKETS FUND'S securities will generally be
denominated in foreign currencies, the value of such securities to the
Fund will be affected by changes in currency exchange rates and in
exchange control regulations, and costs will be incurred in connection
with conversion between currencies. A change in the value of a foreign
currency against the U.S. dollar will result in corresponding change in
the U.S. dollar value of the Fund's securities denominated in the
currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected, either favorably
or unfavorably, by the fluctuations in the relative rates of exchange
between the currencies of different nations, and the Fund therefore may
engage in certain hedging strategies. Such strategies involve certain
investment risks and transaction costs to which the Fund might not
otherwise be subject. These risks include dependence on the Adviser's
ability to predict movements in exchange rates, and imperfect movements
between exchange rates and currency hedges.
Brokerage commissions, fees for custodial services, and other costs
relating to investments in emerging market countries are generally
greater than in the United States. Such markets have different clearance
and settlement procedures, and in certain markets, there have been
occasions when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to effect certain
transactions. The inability of the Emerging Markets Fund to make intended
security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to sell a portfolio
security due to settlement problems could result in either losses to the
Fund, if the value of the portfolio security subsequently declines, or,
if the Fund has entered into a contract to sell the security, could
result in possible claims against the Fund.
In certain emerging market countries, there is less government
supervision and regulation of business and industry practices, stock
exchanges, brokers, and listed companies than in the United States. The
economies of emerging market countries may be predominantly based on a
few industries and may be highly vulnerable to change in local or global
trade conditions. The securities markets of many of the countries in
which the Fund may invest also may be smaller, less liquid, and subject
to greater price volatility than those in the United States. Some
emerging market countries also may have fixed or managed currencies which
are not free-floating against the U.S. dollar. Further, certain emerging
market country currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the
U.S. dollar. Any devaluations in the currencies in which the Fund's
portfolio securities are denominated may have an adverse impact on the
Fund. Finally, many emerging market countries have experienced
substantial, and in some periods, extremely high, rates of inflation for
many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies for
individual emerging market countries. Moreover, the economies of
individual emerging market countries may differ favorably or unfavorably
from the U.S. economy in such respects as the rate of growth of domestic
product, inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
INVESTMENTS IN DEBT ^OBLIGATIONS. The market value of debt obligations,
and therefore a Fund's net asset value, will fluctuate due to changes in
economic conditions and other market factors, such as interest rates,
which are beyond the control of the Fund's investment adviser. In the
debt market, prices generally move inversely to interest rates. A decline
in market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest
rates results in a decline in market prices. In either case, the amount
of change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt
obligations. Although debt obligations with longer maturities offer
potentially greater returns, they will generally experience the greatest
market price changes. Consequently, to the extent a Fund is significantly
invested in debt obligations with longer maturities, there is a greater
possibility of fluctuation in the Fund's net asset value. The Fund's
investment adviser will attempt to minimize the fluctuation of each
Fund's net asset value by predicting the direction of interest rates;
however, the adviser could be incorrect in its expectations about the
direction and the extent of these market factors.
INVESTMENTS IN LOWER-RATED DEBT OBLIGATIONS. From time to time, a portion
of the EMERGING MARKETS FUND'S and the SPECIAL VALUES FUND'S portfolios
may consist of lower-rated debt obligations (i.e., rated below BBB by S&P
or Baa by Moody's) which are commonly referred to as "junk bonds." The
Funds will not invest more than 35% of its total assets in such
securities. Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk associated with
these investments. These lower-rated bonds may be more susceptible to
real or perceived adverse economic conditions than investment grade
bonds. These lower-rated bonds are regarded as predominantly speculative
with regard to each issuer's continuing ability to make principal and
interest payments. In addition, the secondary trading market for lower-
rated bonds may be less liquid than the market for investment grade
bonds. Purchasers should carefully assess the risks associated with an
investment in the EMERGING MARKETS FUND and the SPECIAL VALUES FUND.
Many corporate debt obligations, including many lower-rated bonds, permit
the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call
bonds during periods of declining interest rates. In these cases, if the
Emerging Markets Fund owns a bond which is called, the Fund will receive
its return of principal earlier than expected and would likely be
required to reinvest the proceeds at lower interest rates, thus reducing
income to the Fund.
MUNICIPAL SECURITY INVESTMENTS. Yields on State Municipal Securities
depend on a variety of factors, including: the general conditions of the
municipal bond market; the size of the particular offering; the maturity
of the obligations; and the rating of the issue. Further, any adverse
economic conditions or developments affecting the respective state or its
municipalities could impact a Fund's portfolio. A municipal bond fund's
concentration in securities issued by a specific state and its political
subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. A state's
dependence on agriculture, manufacturing, tourism, and service industries
leaves it vulnerable to both the business cycle and long term national
economic trends.
(Please refer to the Funds' Statements of Additional Information for an
expanded discussion of Georgia, North Carolina, or South Carolina
investment risks, as appropriate.) The ability of a Fund to achieve its
investment objective also depends on the continuing ability of the
issuers of State Municipal Securities and participation interests, or the
guarantors of either, to meet their obligations for the payment of
interest and principal when due. Investing in State Municipal Securities
which meet the Fund's quality standards may not be possible if the state
or its municipalities do not maintain their current credit ratings. In
addition, the issuance, tax exemption and liquidity of State Municipal
Securities may be adversely affected by judicial, legislative or
executive action, including, but not limited to, rulings of state and
federal courts, amendments to the state and federal constitutions,
changes in statutory law, and changes in administrative regulations, as
well as voter initiatives.
INVESTMENT PROCESSES
QUANTITATIVE EQUITY FUND. To select stocks for the QUANTITATIVE EQUITY
FUND, the Fund's sub-adviser initially identifies a broad universe of
approximately 900 common stocks. The sub-adviser utilizes four criteria
when determining what common stocks will be included in the Fund's
universe: each stock must be highly capitalized, each stock must be
traded on the New York or American Stock Exchange or in the over-the-
counter markets, each stock must be among the most liquid and highly
traded stocks on its respective exchange, and each stock must be actively
followed by a minimum of three industry analysts.
The Fund's sub-adviser then screens the stocks in the universe, using a
quantitative computer valuation model, to evaluate the relative
attractiveness of each stock. The sub-adviser's model focuses on two
measurement factors: the relative value of the stocks (including their
present and historical price-to-earnings and market price-to-book value
ratios, and the present value of each stock's projected dividend income)
and the stock's growth prospects and earnings momentum (including
changes, over time, in analysts' earning forecasts, and positive or
negative surprises in reported earnings). The Fund's sub-adviser will
vary the importance placed on each factor, depending on market trends.
Using the valuation model described above, the Fund's investment adviser
then ranks each stock in the universe by decile. The stocks are
classified by industry group, based on industry categories and weightings
found in the S&P 500 Index. In managing the Fund, the sub-adviser
continuously monitors the rankings of the stocks in the universe and
employs an active selling discipline, replacing less attractive stocks
(as determined by the valuation model) with more attractive stocks to
maintain a high average rank for the portfolio. In maintaining the
diversification of the portfolio, the sub-adviser gives consideration to
the industry weightings found in the Index.
Although the QUANTITATIVE EQUITY FUND intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the Index, the
Fund will not limit its investments solely to stocks represented in the
Index. By investing in those common stocks that are included in the
universe described above (a large number of which are not included in the
Index), the Fund will seek to provide a higher rate of total return than
the Index. There can be no assurance that the Fund's investment
performance will match or exceed that of the Index.
EQUITY INDEX FUND. The EQUITY INDEX FUND is managed passively, in the
sense that the traditional management functions of economic, financial,
and market analysis are limited to the extent that the Fund seeks to
duplicate the composition of the S&P 500 Index. Furthermore, a company's
adverse financial circumstance will not require its elimination from the
Fund's portfolio, unless the company's stock is removed from the Index by
S&P. The Fund is managed by utilizing a computer program that identifies
which stocks should be purchased or sold in order to approximate, as much
as possible, the investment return of the securities that comprise the
Index. The Fund will select a stock for purchase into its investment
portfolio based on the stock's inclusion and weighting in the Index,
starting with the heaviest-weighted stock. Thus, the proportion of Fund
assets invested in any one stock comprising the Index may not be
identical to the percentage the particular stock represents in the Index.
On occasion, so as to respond to changes in the Index's composition, as
well as corporate mergers, tender offers, and other circumstances,
additional adjustments will be made in the EQUITY INDEX FUND'S portfolio.
However, it is anticipated that these adjustments will occur
infrequently, and the costs will be minimized. As a result, portfolio
turnover is expected to be well below that encountered in other
investment company portfolios. Therefore, the accompanying costs,
including accounting costs, brokerage fees, custodial expenses, and
transfer taxes, are expected to be relatively low. While the cash flows
into and out of the Fund will impact the Fund's portfolio turnover rate
and the Fund's ability to duplicate the composition of the Index and
approximate its performance, investment adjustments will be made, as
practicably as possible, to account for these circumstances.
Since the EQUITY INDEX FUND will seek to duplicate the Index's stock
composition precisely, it is anticipated that the Fund's performance will
approximate the performance of the Index. Factors such as the size of the
Fund's portfolio, the size and timing of cash flows into and out of the
Fund, changes in the securities markets and the Index itself, and the
normal costs of a mutual fund, discussed above, will account for the
difference between the performances of the Fund and the Index.
In order to accommodate cash flows and maintain adequate liquidity to
meet redemption requests, the Fund may enter into stock index futures
contracts, options, options on futures contracts, and index participation
interests. This will allow the Fund to simultaneously maximize the level
of the Fund assets that are tracking the performance of the S&P 500
Index. The Fund can sell futures contracts and options in order to close
out a previously established position. The Fund will not enter into any
stock index futures contract for the purpose of speculation.
S&P 500 INDEX. The S&P 500 Index consists of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. S&P
designates the stocks to be included in the Index on a statistical
basis. A particular stock's weighting in the Index is based on its
relative total market value; that is, its market price per share times
the number of shares outstanding. From time to time, S&P may add or
delete stocks from the Index. The QUANTITATIVE EQUITY and EQUITY INDEX
FUNDS utilize the Index as the standard performance benchmark because
it represents approximately 70% of the total market value of all
common stocks. In addition, it is familiar to investors, and is
recognized as a barometer of common stock investment returns.
The Index is an unmanaged, statistical measure of stock market
performance. As such, it does not reflect the actual cost of investing
in common stocks. By contrast, the QUANTITATIVE EQUITY and EQUITY
INDEX FUNDS incur the normal costs of a mutual fund, including
brokerage and execution costs, advisory fees, and administrative and
custodial costs and expenses. S&P selects the common stocks to be
included in the Index solely on a statistical basis. Inclusion of a
particular security in the Index in no way implies an opinion by S&P
as to the stock's appropriateness as an investment. The Funds are not
sponsored, endorsed, sold or promoted by, or affiliated with, S&P.
EMERGING MARKETS FUND. The adviser will consider the following securities
as permissable investments for the EMERGING MARKETS FUND: (i) securities
of companies the principal securities trading market for which is an
emerging market country; (ii) securities, traded in any market, of
companies or issuers that derive 50% or more of their total revenue from
either goods or services produced in such emerging market countries or
sales made in such emerging market countries; or (iii) securities of
companies organized under the laws of, and with a principal office in, an
emerging market country. In selecting equity securities for the EMERGING
MARKETS FUND, the adviser focuses on a broad diversification of emerging
market countries. Initially, the adviser identifies those emerging market
countries that, in the adviser's judgment, have made, or are currently
making, progress toward improving their economies and market environments
through financial and/or political reform, and which are likely to
produce premium returns. Second, the adviser then uses a disciplined
allocation process to classify the emerging market countries that it has
identified into one of two categories (or "Tiers"). The first, Tier 1, is
comprised of the most established and liquid of emerging market
countries. The second, Tier 2, represents those emerging market countries
which are less established, smaller, and less liquid than those in Tier
1. Examples of countries classified in Tier 1 are Argentina, Brazil,
Mexico and Thailand; examples of countries which are classified in Tier 2
include Colombia, the Philippines, Greece, Peru and Portugal.
In constructing the EMERGING MARKETS FUND'S investment portfolio, the
adviser normally gives the Tier 1 emerging market countries a greater
weighting than is afforded to the Tier 2 emerging market countries.
Within each Tier, each emerging market country is equally weighted and
then its weight is adjusted to reflect the adviser's investment judgments
regarding the particular country. The adviser will consider economic
factors, political conditions and currency and market valuation levels,
in deciding upon which emerging market countries to include in the
portfolio and how those countries should be classified and weighted.
The number of emerging market countries represented in the EMERGING
MARKETS FUND'S portfolio will vary over time. It is the adviser's
intention that the Fund remain broadly diversified across many emerging
market countries, companies, and geographic regions. Under normal market
conditions, the adviser expects to invest in the securities of issuers
located in a minimum of six different emerging market countries, with up
to 25% of the Fund's total assets invested in any one country.
In selecting securities in each emerging market country for purchase by
the EMERGING MARKETS FUND, the adviser will focus on the most prominent
and largest capitalized companies. The adviser will seek to construct the
Fund's investment portfolio in a manner that maintains adequate liquidity
for trading purposes, and will attempt to utilize the low historical
correlation of returns among emerging market countries to moderate the
portfolio's volatility, wherever feasible.
FIXED INCOME FUNDS. The FIXED INCOME FUND'S and the SHORT-TERM FIXED
INCOME FUND'S investment adviser does not select securities purely to
maximize the current yield of the Funds. The Funds' investment adviser
attempts to manage the Funds' total performance, which includes both
changes in principal value of the Funds' portfolios and interest income
earned, to anticipate the opportunities and risks of changes in market
interest rates. When the Funds' investment adviser expects that market
interest rates may decline, which would cause prices of outstanding debt
obligations to rise, it generally extends the average maturity of the
Funds' portfolios. When, in the investment adviser's judgment, market
interest rates may rise, which would cause market prices of outstanding
debt obligations to decline, it generally shortens the average maturity
of the Funds' portfolios. Further, the Funds' investment adviser attempts
to improve the Funds' total return by weighing the relative value of
fixed income securities issues having similar maturities in selecting
portfolio securities. By actively managing the Funds' portfolios in this
manner, the Funds' investment adviser seeks to provide capital
appreciation during periods of falling interest rates and protection
against capital depreciation during periods of rising rates.
PORTFOLIO INVESTMENTS
CORPORATE DEBT OBLIGATIONS. The Funds (except the EQUITY INDEX FUND and
THE BILTMORE MUNICIPAL FUNDS) may invest in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating
or fixed rates of interest. These obligations have the requisite ratings
as described above.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Funds may invest in fixed rate
corporate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics
are long-term debt obligations but are treated in the market as having
short maturities because call features of the securities may make them
callable within a short period of time. A fixed rate security with short-
term characteristics would include a fixed income security priced close
to call or redemption price or a fixed income security approaching
maturity, where the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times
of rising or falling interest rates than securities with floating rates
of interest. This is because floating rate securities, as described
below, behave like short-term instruments in that the rate of interest
they pay is subject to periodic adjustments based on a designated
interest rate index. Fixed rate securities pay a fixed rate of interest
and are more sensitive to fluctuating interest rates. In periods of
rising interest rates the value of a fixed rate security is likely to
fall. Fixed rate securities with short-term characteristics are not
subject to the same price volatility as fixed rate securities without
such characteristics. Therefore, they behave more like floating rate
securities with respect to price volatility.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Funds (except THE BILTMORE
MUNICIPAL FUNDS) may invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above
prevailing market rates. The interest rate paid on these securities is
then reset periodically (commonly every 90 days) to an increment over
some predetermined interest rate index. Commonly utilized indices include
the three-month Treasury bill rate, the 180-day Treasury bill rate, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a bank, the commercial paper rates, or the longer-term rates on
U.S. Treasury securities. An example of floating and fixed rate corporate
debt obligations in which a Fund can invest include Yankee bonds, which
are U.S. dollar-denominated bonds issued in the United States by foreign
banks or corporations.
Some of the floating rate corporate debt obligations in which the FIXED
INCOME FUND may invest include floating rate corporate debt securities
issued by savings associations collateralized by adjustable rate mortgage
loans, also known as collateralized thrift notes. Many of these
collateralized thrift notes have received AAA ratings from NRSROs.
Collateralized thrift notes differ from traditional "pass-through"
certificates in which payments made are linked to monthly payments made
by individual borrowers net of any fees paid to the issuer or guarantor
of such securities.
CONVERTIBLE SECURITIES. The Funds (except THE BILTMORE MUNICIPAL FUNDS)
may invest in convertible securities. Convertible securities are fixed
income securities which may be exchanged or converted into a
predetermined number of the issuer's underlying common stock at the
option of the holder during a specified time period. Convertible
securities may take the form of convertible bonds, convertible preferred
stock or debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for different
investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which entitle the holder to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bonds' maturity. Convertible securities are senior to equity
securities, and therefore have a claim to assets of the corporation prior
to the holders of common stock in the case of liquidation. However,
convertible securities are generally subordinated to similar non-
convertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but
lower than non-convertible securities of similar quality. A Fund will
exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stocks when, in the Fund's investment
adviser's opinion, the investment characteristics of the underlying
common shares will assist a Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Fund's investment
adviser evaluates the investment characteristics of the convertible
security as a fixed income instrument, and the investment potential of
the underlying equity security for capital appreciation. In evaluating
these matters with respect to a particular convertible security, the
Fund's investment adviser considers numerous factors, including the
economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
PUT AND CALL OPTIONS. The Funds (except THE BILTMORE MUNICIPAL FUNDS) may
purchase put options on their portfolio securities. These options will be
used only as a hedge to attempt to protect securities which a Fund holds
against decreases in value. A Fund may purchase these put options as long
as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio. A Fund may also write call options on
securities either held in its portfolio or which it has the right to
obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration. The call
options which a Fund writes and sells must be listed on a recognized
options exchange. The writing of calls by a Fund is intended to generate
income for a Fund and thereby protect against price movements in
particular securities in a Fund's portfolio.
Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. This
requires a secondary market on an exchange which may or may not exist for
any particular call or put option at any specific time. The absence of a
liquid secondary market also may limit the Fund's ability to dispose of
the securities underlying an option. The inability to close options also
could have an adverse impact on the Fund's ability to effectively hedge
its portfolio. These instruments may not be available with regard to the
securities of certain emerging markets in which the EMERGING MARKETS FUND
may invest.
The effective use of futures and options as hedging techniques depends on
the correlation between their prices and the behavior of a Fund's
portfolio securities as well as the investment adviser's ability to
accurately predict the direction of stock prices, interest rates and
other relevant economic factors. In addition, daily limits on the
fluctuation of futures and options prices could cause a Fund to be unable
to timely liquidate its futures or options position and cause it to
suffer greater losses than would otherwise be the case. In this regard, a
Fund may be unable to anticipate the extent of its losses from futures
transactions. These instruments may not be available with regard to the
securities of certain emerging markets in which the EMERGING MARKETS FUND
may invest.
STOCK INDEX FUTURES AND OPTIONS. The EQUITY FUND, QUANTITATIVE EQUITY
FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, and
BALANCED FUND may utilize stock index futures contracts, options, and
options on futures contracts, subject to the limitation that the value of
these futures contracts and options will not exceed 20% of a Fund's total
assets. Also, a Fund will not purchase options to the extent that more
than 5% of the value of a Fund's total assets would be invested in
premiums on open put option positions (and, in the case of the SPECIAL
VALUES FUND and EMERGING MARKETS FUND, margin deposits on open
positions). These futures contracts and options will be used to handle
cash flows into and out of a Fund and to potentially reduce transactional
costs, since transactional costs associated with futures and options
contracts can be lower than costs stemming from direct investment in
stocks. The Funds will not enter into these transactions for speculative
purposes.
There are several risks accompanying the utilization of futures contracts
to effectively anticipate market movements. First, positions in futures
contracts may be closed only on an exchange or board of trade that
furnishes a secondary market for such contracts. While the Funds plan to
utilize futures contracts only if there exists an active market for such
contracts, there is no guarantee that a liquid market will exist for the
contracts at a specified time. Furthermore, because, by definition,
futures contracts look to projected price levels in the future, and not
to current levels of valuation, market circumstances may result in there
being a discrepancy between the price of the stock index future and the
movement in the corresponding stock index. The absence of a perfect price
correlation between the futures contract and its underlying stock index
could stem from investors choosing to close futures contracts by
offsetting transactions rather than satisfying additional margin
requirements. This could result in a distortion of the relationship
between the index and the futures market. In addition, because the
futures market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by speculators in
the futures market could result in price fluctuations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The EMERGING MARKETS FUND
may enter into forward foreign currency exchange contracts. A forward
foreign currency exchange contract ("forward contract") is an obligation
to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties. Generally, no
commission charges or deposits are involved. At the time the Fund enters
into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated on the Fund's
records and are maintained until the forward contract has been settled.
The Fund will not enter into a forward contract with a term of more than
one year. The Fund will generally enter into a forward contract to
provide the proper currency to settle a securities transaction at the
time the transaction occurs ("trade date"). The period between the trade
date and settlement date will vary between 24 hours and 30 days,
depending upon local custom.
The EMERGING MARKETS FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to sell
an amount of that currency approximating the value of all or a portion of
the Fund's assets denominated in that currency ("hedging"). The success
of this type of short-term hedging strategy is highly uncertain due to
the difficulties of predicting short-term currency market movements and
of precisely matching forward contract amounts and the constantly
changing value of the securities involved. Although the investment
adviser will consider the likelihood of changes in currency values when
making investment decisions, the investment adviser believes that it is
important to be able to enter into forward contracts when it believes the
interest of the Fund will be served. The Fund will only enter into
forward contracts for hedging purposes and will not enter into forward
contracts in a particular currency in an amount in excess of the Fund's
assets denominated in that currency. No more than 30% of the Fund's
assets will be committed to forward contracts at any time. (This
restriction does not include forward contracts entered into to settle
securities transactions.)
INDEX PARTICIPATION CONTRACTS. The EQUITY INDEX FUND may participate in
the purchasing and selling of index participation contracts based on the
S&P 500 Index. The Fund will utilize index participation contracts to aid
in the management of cash flows into and out of the Fund and not for
speculative purposes. These contracts provide the equivalent of a
position in the stocks of the Index, where each stock is represented in
the same proportion as it is represented in the Index. Unlike futures
contracts, positions in these instruments may last indefinitely, with no
expiration date and will pay dividends implied by the underlying stocks
in the Index. Generally, the value of an Index participation contract
will rise and fall as the value of the Index rises and falls. Index
participation contracts have lower transaction costs than those
associated with the purchase and sale of individual stocks. The Fund will
invest in index participation contracts only if there exists an active
market for such contracts.
The value of these contracts, together with the value of the EQUITY INDEX
FUND'S investment in stock index futures contracts, options and options
on futures contracts will not exceed 20% of the Fund's total assets. The
Fund's use of these investments will be to accommodate cash flows and
maintain adequate liquidity to meet redemption requests, while
simultaneously maximizing the level of Fund assets which are tracking the
performance of the S&P 500 Index.
MORTGAGE-BACKED SECURITIES. The BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may invest in mortgage-backed securities.
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from,
mortgage loans on real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as the
Government National Mortgage Association ("Ginnie Mae"), the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home Loan
Mortgage Corporation ("Freddie Mac"); (ii) those issued by private
issuers that represent an interest in or are collateralized by mortgage-
backed securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; and (iii) those issued by private
issuers that represent an interest in or are collateralized by whole
loans or mortgage-backed securities without a government guarantee but
usually having some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMS") are pass-through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMS in which a
Fund invests are issued by Ginnie Mae, Fannie Mae or Freddie Mac, and are
actively traded. The underlying mortgages which collateralize ARMS issued
by Ginnie Mae are fully guaranteed by the Federal Housing Administration
or Veterans Administration, while those collateralizing ARMS issued by
Fannie Mae or Freddie Mac are typically conventional residential
mortgages conforming to strict underwriting size and maturity
constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized by
Ginnie Mae, Fannie Mae or Freddie Mac Certificates, but may be
collateralized by whole loans or private pass-through securities.
A Fund will only invest in CMOs which are rated AAA by an NRSRO or are of
comparable quality as determined by a Fund's investment adviser, and
which may be: (a) collateralized by pools of mortgages in which each
mortgage is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government; (b) collateralized by
pools of mortgages in which payment of principal and interest is
guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or (c) collateralized by pools of mortgages
without a government guarantee as to payment of principal and interest,
but which have some form of credit enhancement.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. Real estate mortgage investment
conduits ("REMICs") are offerings of multiple class real estate mortgage-
backed securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs may take
several forms, such as trusts, partnerships, corporations, associations,
or segregated pools of mortgages. Once REMIC status is elected and
obtained, the entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the person or persons
who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
ASSET-BACKED SECURITIES. The BALANCED FUND, FIXED INCOME FUND, and SHORT-
TERM FIXED INCOME FUND may invest in asset-backed securities. Asset-
backed securities have structural characteristics similar to mortgage-
backed securities but have underlying assets that are not mortgage loans
or interests in mortgage loans. A Fund may invest in asset-backed
securities rated A or higher at the time of purchase by an NRSRO
including, but not limited to, interests in pools of receivables, such as
motor vehicle installment purchase obligations and credit card
receivables. These securities may be in the form of pass-through
instruments or asset-backed bonds. The securities are issued by non-
governmental entities and carry no direct or indirect government
guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time a Fund reinvests
the payments and any unscheduled prepayments of principal received, a
Fund may receive a rate of interest which is actually lower than the rate
of interest paid on these securities ("prepayment risks"). Mortgage-
backed and asset-backed securities are subject to higher prepayment risks
than most other types of debt instruments with prepayment risks because
the underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Prepayments on mortgage-
backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally
are less likely to experience substantial prepayments than are mortgage-
backed securities, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws,
many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by motor vehicle installment purchase
obligations permit the servicer of such receivables to retain possession
of the underlying obligations. If the servicer sells these obligations to
another party, there is a risk that the purchaser would acquire an
interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle
in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of
the obligations backing such receivables. Therefore, there is the
possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which the
Funds (except The Biltmore Municipal Funds) invest are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
These securities include, but are not limited to:
o direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds;
o and notes, bonds and discount notes of U.S. government agencies or
instrumentalities, such as: the Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives;
o Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Corporation; Government National Mortgage
Association; and
o Student Loan Marketing Association.
Some of these obligations, such as Government National Mortgage
Association mortgage-backed securities, are backed by the full faith and
credit of the U.S. Treasury. No assurances can be given that the U.S.
government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. These agencies and
instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
Some of the short-term U.S. government securities the Funds may purchase
carry variable interest rates. These securities have a rate of interest
subject to adjustment at least annually. This adjusted rate is ordinarily
tied to some objective standard, such as the 91-day U.S. Treasury bill
rate.
DEMAND MASTER NOTES. The Funds (except THE BILTMORE MUNICIPAL FUNDS) may
invest in variable amount demand master notes. Demand master notes are
short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as a Fund) payable upon demand
by either party. The notice period for demand typically ranges from one
to seven days, and the party may demand full or partial payment. Many
demand master notes give a Fund the option of increasing or decreasing
the principal amount of the master note on a daily or weekly basis within
certain limits. Demand master notes usually provide for floating or
variable rates of interest.
TEMPORARY INVESTMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
EQUITY FUND, QUANTITATIVE EQUITY FUND, SPECIAL VALUES FUND, and EMERGING
MARKETS FUND may invest in:
o certificates of deposit, demand and time deposits, savings shares,
bankers' acceptances, and other instruments of domestic and foreign
banks and savings and loans, which institutions have capital,
surplus, and undivided profits over $100 million, or if the
principal amount of the instrument is insured in full by the Bank
Insurance Fund ("BIF"), or by the Savings Association Insurance Fund
("SAIF"), both of which are administered by the FDIC; and
o commercial paper (including Canadian Commercial Paper and Europaper)
rated A-1 or better by S&P, Prime-1 by Moody's, or F-1 by Fitch, or,
if unrated, of comparable quality as determined by the Funds'
investment adviser.
THE BILTMORE MUNICIPAL FUNDS may invest in short-term tax-exempt or
taxable temporary investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; other debt securities; commercial paper; certificates
of deposit of banks; shares of other investment companies; and repurchase
agreements (arrangements in which the organization selling the Fund a
bond or temporary investment agrees at the time of sale to repurchase it
at a mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments.
However, each Fund's investment adviser will limit temporary investments
to those it considers to be of comparable quality to the Fund's
acceptable investments.
Although the Funds are permitted to make taxable, temporary investments,
there is no current intention of generating income subject to federal
regular income tax. However, it is anticipated that certain temporary
investments will generate income which is subject to Georgia or North
Carolina state income taxes.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objective and policies but
which are subject to restriction on resale under federal securities law.
However, a Fund will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, over-the-counter options, and
repurchase agreements providing for settlement in more than seven days
after notice, to 15% of its net assets.
The restriction is not applicable to commercial paper issued under
Section 4(2) of the Securities Act of 1933. Section 4(2) commercial paper
is restricted as to disposition under federal securities law, and is
generally sold to institutional investors, such as the Funds, who agree
that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like a Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. Each Fund believes that
Section 4(2) commercial paper and possibly certain other restricted
securities which meet the criteria for liquidity established by the
Trustees are quite liquid. Each Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established
by the Trustees, including Section 4(2) commercial paper, as determined
by a Fund's investment adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities. In addition,
because Section 4(2) commercial paper is liquid, a Fund intends not to
subject such paper to the limitation applicable to restricted securities.
REPURCHASE AGREEMENTS. The U.S. government securities in which each Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers and other
recognized financial institutions sell U.S. government securities or
other securities to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, a Fund
could receive less than the repurchase price on any sale of such
securities.
DEMAND FEATURES. The Funds ^ may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the
securities at their principal amount (usually with accrued interest)
within a fixed period (usually seven days) following a demand by a Fund.
The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may
not be transferred separately from the underlying security. A Fund uses
these arrangements to provide a Fund with liquidity and not to protect
against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature,
or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are
exercisable even after a payment default on the underlying security may
be treated as a form of credit enhancement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which a Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete
these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices. Accordingly, a Fund may pay
more or less than the market value of the securities on the settlement
date.
A Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, a Fund may
enter into transactions to sell its purchase commitments to third parties
at current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. A Fund may realize short-term
profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
each Fund may lend portfolio securities on a short-term or long-term
basis, or both, to broker/dealers, banks or other institutional borrowers
of securities. The Funds will only enter into loan arrangements with
broker/dealers, banks or other institutions which a Fund's investment
adviser has determined are creditworthy under guidelines established by
the Trustees and in which a Fund will receive collateral equal to at
least 100% of the value of the securities loaned. There is the risk that
when lending portfolio securities, the securities may not be available to
a Fund on a timely basis and a Fund may, therefore, lose the opportunity
to sell the securities at a desirable price. In addition, in the event
that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court
action.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest
in the securities of other investment companies, but may not own more
than 3% of the total outstanding voting stock of any investment company,
invest more than 5% of its total assets in any one investment company, or
invest more than 10% of its total assets in investment companies in
general. A Fund will invest in other open-end investment companies
primarily for the purpose of investing short-term cash which has not yet
been invested in other portfolio instruments. The investment adviser will
waive its investment advisory fee on assets invested in securities of
open-end investment companies. Each Fund would, however, continue to pay
its own investment advisory fees and other expenses with respect to its
investments in shares of closed-end investment companies. It should be
noted that investment companies incur certain expenses, such as custodian
and transfer agent fees, and therefore, any investment by a Fund in
shares of another investment company would be subject to such duplicate
expenses.
RATINGS. If a security loses its rating or has its rating reduced after a
Fund purchased it, the Fund is not required to sell or otherwise dispose
of the security, but may consider doing so. If ratings made by Moody's,
S&P, or Fitch change because of changes in those organizations or in
their ratings systems, a Fund will attempt to identify other rating
organizations and systems with comparable standards, in accordance with
the investment policies of the Fund. A description of rating categories
is contained in the Appendices to the Statements of Additional
Information.
MUNICIPAL LEASES. THE BILTMORE MUNICIPAL FUNDS may invest in municipal
leases. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid.
PARTICIPATION INTERESTS. The Funds may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations, and insurance companies. These participation interests
would give the Funds undivided interests in State Municipal Securities.
The financial institutions from which a Fund purchases participation
interests frequently provide or secure irrevocable letters of credit or
guarantees to assure that the participation interests are of high
quality. The Trustees will establish guidelines pursuant to which a
Fund's investment adviser determines that participation interests meet
the prescribed quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the State Municipal
Securities which the Funds purchase may have variable interest rates.
Variable interest rates are ordinarily based on a published interest
rate, interest rate index or a similar standard, such as the 91-day U.S.
Treasury bill rate. Many variable rate municipal securities are subject
to payment of principal on demand by a Fund, usually in not more than
seven days. All variable rate municipal securities will meet the quality
standards for a Fund. The Fund's investment adviser monitors the
pricing, quality, and liquidity of the variable rate municipal
securities, including participation interests held by a Fund, on the
basis of published financial information and reports of the rating
agencies and other analytical services pursuant to guidelines established
by the Trustees.
MUNICIPAL BOND INSURANCE
The GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and
SOUTH CAROLINA MUNICIPAL BOND FUND may purchase municipal securities
covered by insurance which guarantees the timely payment of principal at
maturity and interest on such securities. These insured municipal
securities are either (1) covered by an insurance policy applicable to a
particular security, whether obtained by the issuer of the security or by
a third party ("Issuer-Obtained Insurance") or (2) insured under master
insurance policies issued by municipal bond insurers, which may be
purchased by a Fund (the "Policy" or"Policies").
THE BILTMORE MUNICIPAL FUNDS will require or obtain municipal bond
insurance when purchasing municipal securities which would not otherwise
meet a Fund's quality standards. A Fund may also require or obtain
municipal bond insurance when purchasing or holding specific municipal
securities when, in the opinion of the Fund's investment adviser, such
insurance would benefit the Fund (for example, through improvement of
portfolio quality or increased liquidity of certain securities). The
Funds' investment advisers anticipate that between 30% and 60% of each
Fund's net assets will be invested in municipal securities which are
insured.
Issuer-Obtained Insurance policies are noncancellable and continue in
force as long as the municipal securities are outstanding and their
respective insurers remain in business. If a municipal security is
covered by Issuer-Obtained Insurance, then such security need not be
insured by the Policies purchased by a Fund.
The Funds may purchase two types of Policies issued by municipal bond
insurers. One type of Policy covers certain municipal securities only
during the period in which they are in a Fund's portfolio. In the event
that a municipal security covered by such a Policy is sold from a Fund,
the insurer of the relevant Policy will be liable only for those payments
of interest and principal which are due and owing at the time of sale.
The other type of Policy covers municipal securities not only while they
remain in the Fund's portfolio but also until their final maturity even
if they are sold out of the Fund's portfolio, so that the coverage may
benefit all subsequent holders of those municipal securities. The Fund
will obtain insurance which covers municipal securities until final
maturity even after they are sold out of the Fund's portfolio only if, in
the judgment of the investment adviser, the Fund would receive net
proceeds from the sale of those securities, after deducting the cost of
such permanent insurance and related fees, significantly in excess of the
proceeds it would receive if such municipal securities were sold without
insurance. Payments received from municipal bond issuers may not be tax-
exempt income to shareholders of the Fund.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. Premiums for the Policies are paid
by the Fund monthly, and are adjusted for purchases and sales of
municipal securities during the month. A Fund may purchase Policies from
MBIA Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial
Guaranty Insurance Company ("FGIC"), or any other municipal bond insurer
which is rated AAA by S&P or Aaa by Moody's. Each Policy guarantees the
payment of principal and interest on those municipal securities it
insures. The Policies will have the same general characteristics and
features. A municipal security will be eligible for coverage if it meets
certain requirements set forth in the Policy. In the event interest or
principal on an insured municipal security is not paid when due, the
insurer covering the security will be obligated under its Policy to make
such payment not later than 30 days after it has been notified by the
Fund that such non-payment has occurred. MBIA, AMBAC, and FGIC will not
have the right to withdraw coverage on securities insured by their
Policies so long as such securities remain in the Fund's portfolio, nor
may MBIA, AMBAC, or FGIC cancel their Policies for any reason except
failure to pay premiums when due.
MBIA, AMBAC, and FGIC will reserve the right at any time upon 90 days'
written notice to a Fund to refuse to insure any additional municipal
securities purchased by the Fund after the effective date of such notice.
The Funds reserve the right to terminate any of the Policies if they
determine that the benefits to a Fund of having its portfolio insured
under such Policy are not justified by the expense involved.
Additionally, the Funds reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, or FGIC if such carriers are
rated AAA by S&P or Aaa by Moody's.
NON-DIVERSIFICATION
THE BILTMORE MUNICIPAL FUNDS is comprised of three non-diversified Funds.
As such, there is no limit on the percentage of assets which can be
invested by a Fund in any single issuer. An investment in a Fund,
therefore, will entail greater risk than would exist in a diversified
investment company because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total market value
of a Fund's portfolio. Any economic, political, or regulatory
developments affecting the value of the securities in a Fund's portfolio
will have a greater impact on the total value of the portfolio than would
be the case if the portfolio were diversified among more issuers. A Fund
may purchase an issue of municipal securities in its entirety.
The Funds intend to comply with Subchapter M of the Internal Revenue
Code. This undertaking requires that at the end of each quarter of the
taxable year, the aggregate value of all investments in any one issuer
(except U.S. government obligations, cash, and cash items) which exceed
5% of a Fund's total assets shall not exceed 50% of the value of its
total assets.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the magnitude
of the change in the price of a bond relative to a given change in the
market rate of interest. A bond's price volatility depends on three
primary variables: the bond's coupon rate; maturity date; and the level
of market yields of similar fixed income securities. Generally, bonds
with lower coupons or longer maturities will be more volatile than bonds
with higher coupons or shorter maturities. Duration combines these
variables into a single measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When a Fund
invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Funds.
INVESTMENT LIMITATIONS

BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND will not borrow money directly or through
reverse repurchase agreements (arrangements in which a Fund sells a
portfolio instrument for a percentage of its cash value with an agreement
to buy it back on a set date) or pledge securities except, under certain
circumstances, a Fund may borrow up to one-third of the value of its
total assets and pledge, mortgage, or hypothecate up to 15% of the value
of those assets to secure such borrowings. The GEORGIA MUNICIPAL BOND
FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL
BOND FUND will not borrow money or pledge securities except, under
certain circumstances, a Fund may borrow up to one-third of the value of
its total assets and pledge up to 10% of the value of those assets to
secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of its total assets, the EQUITY FUND,
QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND,
BALANCED FUND, FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND will
not invest more than 5% of the value of its total assets in securities of
any one issuer (other than cash, cash items, or securities issued or
guaranteed by the government of the United States or its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities), or acquire more than 10% of the outstanding voting
securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
In addition to the above limitations, The SOUTH CAROLINA MUNICIPAL BOND
FUND will not:
o invest more than 5% of its total assets in industrial development
bonds when the payment of principal and interest is the
responsibility of companies (or guarantors, where applicable) with
less than three years of continuous operations, including the
operation of any predecessor; or
o own securities of open-end or closed-end investment companies,
except under certain circumstances and subject to certain
limitations described in this prospectus, and, not exceeding 10% of
its net assets.

TRUST INFORMATION

MANAGEMENT OF THE TRUSTS
BOARD OF TRUSTEES. The Trustees are responsible for managing the business
affairs of the Trusts and for exercising the Trusts' powers except those
reserved for the shareholders.
INVESTMENT ADVISERS. Pursuant to investment advisory contracts with the
Trusts on behalf of the Funds, and subject to direction by the Trustees,
investment decisions for THE BILTMORE FUNDS are made by Wachovia Asset
Management, a business unit of Wachovia Bank of North Carolina, N.A., and
investment decisions for GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA
MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL BOND FUND are made by
Wachovia Bank of Georgia, N.A., Wachovia Bank of North Carolina, N.A.,
and Wachovia Bank of South Carolina, N.A., respectively, (each the
"Adviser" and, together, the "Advisers") subject to direction by the
Trustees. The Advisers continually conduct investment research and
supervision of investments for the Funds and are responsible for the
purchase and sale of portfolio instruments, for which they receive annual
fees from the assets of the Funds.
SUB-ADVISER. The QUANTITATIVE EQUITY FUND is sub-advised by Twin Capital
Management, Inc., 3244 Washington Road, McMurray, Pennsylvania, 15317-
3153. Pursuant to the terms of an investment sub-advisory agreement
between the Funds' Adviser and Twin Capital Management, Inc. ("Twin
Capital" or the "Sub-Adviser"), Twin Capital furnishes certain investment
advisory services to Wachovia Asset Management, including investment
research, quantitative analysis, statistical and other factual
information, and recommendations, based on Twin Capital's analysis, and
assists the Adviser in identifying securities for potential purchase
and/or sale on behalf of the Fund's portfolio. For the services provided
and the expenses incurred by the Sub-Adviser, Twin Capital is entitled to
receive an annual fee of $55,000, payable by Wachovia Asset Management,
in quarterly installments. Twin Capital may elect to waive some or all of
its fee. In no event shall the Fund be responsible for any fees due to
the Sub-Adviser for its services to Wachovia Asset Management. Twin
Capital provides investment counsel to both individuals and institutions,
including banks, thrift institutions, and pension and profit-sharing
plans. As of December 31, 1995, Twin Capital furnished services,
substantially similar to the services it provides to the Adviser, to
other accounts with assets in excess of $1.5 billion. The Sub-Adviser is
controlled by Geoffrey Gerber, its President.
ADVISORY FEES. The Advisers are entitled to receive annual investment
advisory fees equal to a percentage of each Fund's average daily net
assets as follows: 0.30 of 1% of EQUITY INDEX FUND; 0.55 of 1% of SHORT-
TERM FIXED INCOME FUND; 0.60 of 1% of FIXED INCOME FUND; 0.70 of 1% of
EQUITY FUND, QUANTITATIVE EQUITY FUND, and BALANCED FUND; 0.75 of 1% of
GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and
SOUTH CAROLINA MUNICIPAL BOND FUND; 0.80 of 1% of SPECIAL VALUES FUND;
and 1.00% of EMERGING MARKETS FUND. These fees are accrued daily and paid
monthly. The fees paid by THE BILTMORE MUNICIPAL FUNDS, SPECIAL VALUES
FUND and EMERGING MARKETS FUND, while higher than the advisory fees paid
by other mutual funds in general, are comparable to fees paid by other
mutual funds with similar policies and objectives. The Advisers have
undertaken to reimburse the Funds for operating expenses in excess of
limitations established by certain states, and may voluntarily choose to
waive a portion of their fees or reimburse a Fund for certain other
expenses but reserve the right to terminate such waiver or reimbursement
at any time at their sole discretion.
Investment decisions for the Funds will be made independently from those
of any fiduciary or other accounts that may be managed by the Advisers or
their affiliates. If, however, such accounts, the Funds, or the Advisers
for their own accounts, are simultaneously engaged in transactions
involving the same securities, the transactions may be combined and
allocated to each account. This system may adversely affect the price the
Funds pay or receive, or the size of the position they obtain.
ADVISERS' BACKGROUND. Wachovia Asset Management has served as investment
adviser to THE BILTMORE FUNDS since March 9, 1992. Wachovia Asset
Management is a business unit of Wachovia Bank of North Carolina, N.A.
which, along with Wachovia Bank of South Carolina, N.A. and Wachovia Bank
of Georgia, N.A., is a wholly-owned subsidiary of Wachovia Corporation.
Wachovia Bank of South Carolina, N.A. has served as investment adviser
for the SOUTH CAROLINA MUNICIPAL BOND FUND since August 5, 1990. Wachovia
Bank of North Carolina, N.A. and Wachovia Bank of Georgia, N.A. have
served as investment advisers to the NORTH CAROLINA MUNICIPAL BOND FUND
and GEORGIA MUNICIPAL BOND FUND, respectively, since their inception in
December 1994.
Through offices in eight states, Wachovia Corporation and its
subsidiaries provide a broad range of financial services to individuals
and businesses. The Wachovia Banks offer financial services that include,
but are not limited to, commercial and consumer loans, corporate,
institutional, and personal trust services, demand and time deposit
accounts, letters of credit and international financial services.
The Advisers employ an experienced staff of professional investment
analysts, portfolio managers and traders. The Advisers use fundamental
analysis and other investment management disciplines to identify
investment opportunities. The Wachovia Banks have been managing trust
assets for over 100 years, with over $20 billion in managed assets as of
December 31, 1995. As part of their regular banking operations, the
Wachovia Banks may make loans to public companies and municipalities.
Thus, it may be possible, from time to time, for a Fund to hold or
acquire the securities of issuers which are also lending clients of the
Wachovia Banks. The lending relationship will not be a factor in the
selection of securities.
Frank N. Donnelly is Senior Vice President and Senior Investment Officer
in institutional portfolio management for Wachovia Asset Management in
Atlanta. Mr. Donnelly is a portfolio manager of the EQUITY FUND. Mr.
Donnelly joined Wachovia Capital Management as a counselor in 1987. He
became an institutional portfolio manager in Atlanta in 1990. He received
his bachelor of science degree in economics from Siena College in 1971
and an MBA from Babcock School of Management, Wake Forest University in
1983.
Daniel S. Earthman is a Chartered Financial Analyst and is a Vice
President and Institutional Portfolio Manager of the BALANCED FUND. Mr.
Earthman joined Wachovia Bank of North Carolina, N.A. in 1988 as an
Assistant Vice President in Institutional Portfolio Management. Prior to
joining the Wachovia Bank of North Carolina, N.A., he was a vice
president and investment manager with Richland Asset Management in
Nashville, and an assistant vice president and portfolio manager with
North Carolina National Bank in Charlotte. Mr. Earthman received a
bachelor's degree in business from Southern Methodist University and an
MBA from the University of North Carolina at Chapel Hill.
Samuel M. Gibbs, II is the portfolio manager of the FIXED INCOME FUND and
SHORT-TERM FIXED INCOME FUND and is Senior Vice President and Manager of
Fixed-Income Investments for Wachovia Asset Management. Mr. Gibbs joined
Wachovia Bank of North Carolina, N.A. in 1969 as a portfolio manager. He
became a bond trader and fixed-income portfolio manager in 1975 and was
elected Vice President in 1976. He assumed his current position in 1977
and was elected Senior Vice President in 1987. Mr. Gibbs is a graduate of
Davidson College and has an MBA from the University of South Carolina.
M. Alfred R. Guenthner, Ph.D., A.B.D., is Senior Vice President and
Manager of Research for Wachovia Group and is a portfolio manager of the
BALANCED FUND. Mr. Guenthner joined Wachovia Bank of North Carolina, N.A.
in 1972 as an economist and was elected vice president and senior
economist in 1978. From 1978 to 1982, he was the fixed income strategist
for Wachovia Asset Management. Mr. Guenthner is a graduate of Concord
College and is completing a dissertation for a doctorate degree in
economics from the University of Georgia. He is a member of the North
Carolina Society of Financial Analysts and the United Shareholders
Association. Mr. Guenthner is a former president of the North Carolina
Association of Business Economists.
Mr. John F. Hageman is a Chartered Financial Analyst and is a Senior Vice
President and Institutional Portfolio Manager of the BALANCED FUND. Mr.
Hageman is responsible for managing the employee benefit, foundation and
endowment portfolios. Prior to joining Wachovia Bank of North Carolina,
N.A. in 1986, Mr. Hageman was Vice President and head of Institutional
Investment Management at Michigan National Investment Corporation from
1977 to 1986, and an account executive with Merrill Lynch from 1975 to
1977. Mr. Hageman is a graduate of Wabash College with a bachelor's
degree in political science.
Paige C. Henderson is an Assistant Vice President of Wachovia Asset
Management in Winston-Salem, North Carolina. Ms. Henderson is an equity
analyst in the Investment Asset Group and a portfolio manager of the
EMERGING MARKETS FUND. Ms. Henderson joined Wachovia Bank of North
Carolina, N.A. in 1991 as an equity analyst. Ms. Henderson received a
Bachelor of Science in Business Administration in 1986 and an MBA from
the University of North Carolina at Chapel Hill in 1991. Ms. Henderson is
a chartered financial analyst and a certified public accountant.
F. Stanley King is a Chartered Financial Analyst and a Senior Vice
President of Wachovia Bank of North Carolina, N.A. Mr. King is a
portfolio manager of the EQUITY FUND. He serves as manager of
institutional portfolio management in the Investment Management Group.
Mr. King joined Wachovia Bank of North Carolina, N.A. in 1985 as a
securities analyst. He was elected Vice President in 1990 and assumed his
current position in 1991. He has both bachelor and master of science
degrees from North Carolina State University.
Michael O. Mercer is Senior Vice President, Wachovia Bank of North
Carolina, N.A., and, as a Portfolio Investment Manager of the EQUITY
FUND, manages the Wachovia Equity Investment Fund and other large
institutional accounts. Mr. Mercer has managed the Equity Fund since
October 1, 1993, and has been with Wachovia Bank of North Carolina, N.A.
since 1983.
Harold (Rick) Nelson III is a Senior Vice President and fixed-income
portfolio manager of Wachovia Asset Management in Atlanta. Mr. Nelson
joined Wachovia in June, 1985 as a fixed income portfolio manager. He
became a portfolio manager of the BALANCED FUND in May, 1996. Mr. Nelson
is a native of Mountainside, New Jersey. He received a bachelor of
science degree in Management from St. Francis College and an MBA in
Finance at Mercer University in 1990.
Michael Peters is the portfolio manager of THE BILTMORE MUNICIPAL FUNDS.
Mr. Peters has been portfolio manager of SOUTH CAROLINA MUNICIPAL BOND
FUND since 1993. Mr. Peters has been portfolio manager of GEORGIA
MUNICIPAL BOND FUND and NORTH CAROLINA MUNICIPAL BOND FUND since those
Funds' inceptions in December 1994. Mr. Peters is a Vice President of
Wachovia Bank of South Carolina N.A., Wachovia Bank of North Carolina,
N.A. and Wachovia Bank of Georgia, N.A. Mr. Peters was employed with
Nations Bank from 1990 to 1993. Mr. Peters received his M.B.A. from
Indiana University and is a member of the Institute of Chartered
Financial Analysts.
^
B. Scott Sadler is a portfolio manager of the EMERGING MARKETS FUND. He
is a Vice President of Wachovia Asset Management. He joined Wachovia Bank
of North Carolina, N.A. in 1987, and is responsible for managing personal
trust investment portfolios. Mr. Sadler is a graduate of the University
of Virginia's McIntire School of Commerce with a bachelor's degree in
economics. Mr. Sadler is a Chartered Financial Analyst.
Scott C. Satterwhite is the portfolio manager of the ^ SPECIAL VALUES
FUND. Mr. Satterwhite is a Chartered Financial Analyst and Senior Vice
President and Manager of Personal Trust Portfolio Management in Georgia
for the Personal Financial Services Group. Mr. Satterwhite joined
Wachovia Bank of North Carolina, N.A. in 1981 and has held positions as a
closely-held business analyst and capital management counselor. Mr.
Satterwhite has a bachelor's degree from the University of the South and
an MBA from Tulane University.
Cherry Stribling is the portfolio manager of the QUANTITATIVE EQUITY
FUND. Mr. Stribling is a Vice President of Wachovia Bank of North
Carolina, N.A., and, as a Portfolio Investment Manager, managed the
Wachovia Stock Fund, a bank collective investment fund with an investment
objective similar to the Fund's. Mr. Stribling also manages individual
and institutional accounts with the same portfolio management style as
the Fund. Mr. Stribling has managed the Fund since its inception.
Timothy L. Swanson is an Assistant Vice President of Wachovia Asset
Management. He joined Wachovia Bank of North Carolina, N.A. in 1991. Mr.
Swanson is responsible for managing personal trust portfolios. Mr.
Swanson is a portfolio manager of the EMERGING MARKETS FUND. Mr. Swanson
is a graduate of Wake Forest University with a bachelor's degree in
mathematical economics, and of the University of Rochester with a
master's degree in economics. Mr. Swanson is a Chartered Financial
Analyst.
Michael J. Tierney, who joined Wachovia Bank of North Carolina, N.A. in
1981, is Senior Vice President/Group Executive and Chief Investment
Officer with Wachovia Asset Management.^ Mr. Tierney is a portfolio
manager of the EMERGING MARKETS FUND. Mr. Tierney is a graduate of the
University of Connecticut, and has more than 25 years of experience
managing equity and fixed income investments.
DISTRIBUTION OF SHARES
Federated Securities Corp., Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 is the distributor for Shares of the Funds. It is
a Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Class B Shares of the Equity Fund, the Quanitative
Equity Fund, the Balanced Fund, and the Fixed Income Fund have adopted a
plan for distribution of Class B Shares permitted by Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan"), whereby each of these Funds
have authorized a daily expense ("Rule 12b-1 fee") at an annual rate of
up to 0.75 of 1% of the average daily net asset value of that Fund's
Class B Shares to finance the sale of Class B Shares.
The distributor may pay all or a portion of the Rule 12b-1 fee to
compensate selected brokers and financial institutions for selling Class
B Shares or for administrative services rendered in connection with the
Class B Shares.
The Funds make no payments in connection with the sale of Class B Shares
other than the Rule 12b-1 fees paid to the distributor. The distributor,
however, may pay a sales commission to brokers in connection with the
sale of Class B Shares. Except as set forth in the next paragraph, the
Funds do not pay for unreimbursed expenses of the distributor. Since the
Funds' Plan is a "compensation" type plan, however, future Rule 12b-1
fees may permit recovery of such amounts or may result in a profit to the
distributor.
The distributor may sell, assign or pledge its right to receive Rule 12b-
1 fees and contingent deferred sales charges to finance payments made to
brokers in connection with the sale of Class B Shares. Actual
distribution expenses for Class B Shares at any given time may exceed the
Rule 12b-1 fees and payments received pursuant to contingent deferred
sales charges. These unrecovered amounts, plus interest thereon, will be
carried forward and paid from future Rule 12b-1 fees and payments
received through contingent deferred sales charges. If a Plan were
terminated or not continued, the Funds would not be contractually
obligated to pay for any expenses not previously reimbursed by the Funds
or recovered through contingent deferred sales charges.
Federated Securities Corp., from time to time, may pay brokers additional
sums of cash or promotional incentives based upon the amount of Class B
Shares sold. Such payments, if made, will be in addition to amounts paid
under the Plans and will not be an expense of the Funds.
ADMINISTRATIVE ARRANGEMENTS
The distributor may pay financial institutions and other financial
service providers such as banks, fiduciaries, custodians for public
funds, investment advisers, and broker/dealers a fee based upon the
average net asset value of shares of their customers for providing
administrative services to the Funds. This fee, if paid, will be
reimbursed by the Advisers or their affiliates and not the Funds.
SHAREHOLDER SERVICING ARRANGEMENTS
Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, is shareholder servicing agent (the "Shareholder
Servicing Agent") for Class A Shares of each Fund and for the Equity
Fund, the Quanitative Equity Fund, the Balanced Fund, and the Fixed
Income Fund Class B Shares. The Funds may pay the Shareholder Servicing
Agent a fee based on the average daily net asset value of Shares for
which it provides shareholder services. These shareholder services
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance and communicating or
facilitating purchases and redemptions of Shares. This fee will be
computed at an annual rate equal to 0.25 of 1% of each Class' average
daily net assets for which the Shareholder Servicing Agent provides
services; however, the Shareholder Servicing Agent may choose voluntarily
to waive all or a portion of its fee at any time or pay all or some of
its fees to financial institutions or other financial service providers.
ADMINISTRATION OF THE FUNDS
Federated Services Company also provides the Funds with the
administrative personnel and services necessary to operate the Funds.
Such services include legal, accounting and other administrative
services. Federated Services Company provides these at an annual rate,
computed and payable daily, as specified below:
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS
ADMINISTRATIVE FEE AND THE BILTMORE MUNICIPAL FUNDS.
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall aggregate at
least $75,000 for each portfolio of THE BILTMORE FUNDS and at least
$50,000 for each portfolio of THE BILTMORE MUNICIPAL FUNDS. Federated
Services Company may choose voluntarily to waive or reimburse a portion
of its fee at any time.
EXPENSES OF THE FUNDS AND CLASS A SHARES AND CLASS B SHARES
Holders of Class A Shares and Class B Shares pay their allocable portion
of Trust and respective Fund expenses. The Trust expenses for which
holders of Shares pay their allocable portion include, but are not
limited to: the cost of organizing the Trust and continuing its
existence; the cost of registering the Trust; Trustees' fees; auditors'
fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary
items as may arise.
Fund expenses for which holders of Shares pay their allocable portion
based on average daily net assets include, but are not limited to:
registering a Fund and Shares of that Fund; investment advisory services;
taxes and commissions; custodian fees; insurance premiums; auditors'
fees; and such non-recurring and extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the
Class B Shares. In addition, the Funds' expenses under a shareholder
services plan are incurred by the Class A Shares and Class B Shares. The
Trustees reserve the right to allocate certain expenses to holders of
Shares as they deem appropriate ("Class Expenses"). In any case, Class
Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of shares of a Class; printing
and postage expenses related to preparing and distributing materials such
as shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and to
state securities commissions; expenses related to administrative
personnel and services as required to support holders of Class A and
Class B Shares; legal fees relating solely to Class A and Class B Shares;
and Trustees fees incurred as a result of issues relating solely to Class
A and Class B Shares.
BROKERAGE TRANSACTIONS
The Funds may engage in brokerage transactions. When selecting brokers
and dealers to handle the purchase and sale of portfolio instruments, the
Advisers look for prompt execution of the order at a favorable price. In
working with dealers, the Advisers will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a
better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the Advisers may
give consideration to those firms which have sold or are selling shares
of the Funds. The Advisers make decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
NET ASSET VALUE

Each Fund's net asset value per share fluctuates. It is determined by
dividing the sum of the market value of all securities and other assets,
less liabilities, by the number of shares outstanding. The net asset
value of Class A Shares and Class B Shares of a Fund may differ slightly
from that of Class Y Shares of the same Fund due to the variability in
daily net income resulting from different distribution charges and
shareholder services fees. The net asset value for each Fund will
fluctuate for all three classes.
The net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange, Monday through
Friday, except on: (i) days on which there are not sufficient changes in
the value of a Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus
Day, Veterans' Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS

SHARE PURCHASES
Fund Shares are sold on days on which Wachovia Banks, the New York Stock
Exchange and the Federal Reserve Wire System are open for business.
Shares may be purchased through the Trust Divisions of the Wachovia
Banks, Wachovia Investments, Inc. or authorized broker/dealers that have
a sales agreement with the distributor. All purchase orders must be
transmitted to a Fund by 5:00 p.m. (Eastern time) and will be purchased
at the public offering price next determined after a Fund receives the
purchase request. Texas residents must purchase Shares through Federated
Securities Corp. at 1-800-618-8573. In connection with the sale of
Shares, the distributor may from time to time offer certain items of
nominal value to any shareholder or investor. Each Fund and the
distributor reserve the right to reject any purchase request.
THROUGH THE TRUST DIVISIONS OF THE WACHOVIA BANKS. Trust customers of the
Wachovia Banks may purchase Shares of a Fund by telephoning, sending
written instructions, or placing the order in person with their account
officer in accordance with the procedures established by the Wachovia
Banks and as set forth in the relevant account agreement.
Payment may be made by check, by wire of federal funds, or by debiting a
customer's account with a Wachovia Bank. Purchase orders must normally be
received by Wachovia Bank by 3:00 p.m. (Eastern time), in order for
Shares to be purchased at that day's price. It is the responsibility of
the Wachovia Banks to transmit orders promptly to the Fund.
THROUGH WACHOVIA INVESTMENTS, INC. Customers of Wachovia Investments,
Inc. or Wachovia Brokerage Service may place an order to purchase Shares
by telephoning The Biltmore Service Center at 1-800-994-4414, sending
written instructions, or placing an order in person. Payment may be made
by check or by debiting a customer's account at Wachovia Investments,
Inc. Wachovia Investments, Inc., a wholly-owned subsidiary of Wachovia
Corporation, is a registered broker/dealer and member of the National
Association of Securities Dealers, Inc. Wachovia Brokerage Service is a
business unit of Wachovia Investments, Inc. Shares may also be purchased
through authorized broker/dealers that have a sales agreement with the
distributor. All purchase orders must normally be received by Wachovia
Investments, Inc. before 3:30 p.m. (Eastern time) in order for Shares to
be purchased at that day's offering price.
BY MAIL. To purchase Shares of a Fund through Wachovia Investments,
Inc. by mail, send a check made payable to (Name of Fund) to The
Biltmore Service Center, 101 Greystone Boulevard, SC-9215, Columbia,
South Carolina 29226. Orders by mail are considered received after
payment by check is converted by Wachovia Investments, Inc. into
federal funds. This is normally the next business day after Wachovia
Investments, Inc. receives the check.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares of THE BILTMORE FUNDS is $250,
and $500 for THE BILTMORE MUNICIPAL FUNDS. Subsequent investments in THE
BILTMORE FUNDS must be in amounts of at least $50, and for the THE
BILTMORE MUNICIPAL FUNDS, subsequent investments must be in amounts of at
least $100. Minimum initial investments may be waived from time to time
for purchases by Trust Divisions of the Wachovia Banks for their
fiduciary or custodial accounts. An institutional investor's minimum
investment will be calculated by combining all accounts it maintains with
the Funds.
WHAT SHARES COST
This prospectus offers investors two classes of Shares that carry sales
charges and contingent deferred sales charges in different forms and
amounts and which bear different levels of expenses.
CLASS A SHARES. Most investors who purchase Class A Shares pay a maximum
sales charge of 4.50% at the time of purchase. As a result, Class A
Shares are not subject to any charges when they are redeemed. Certain
purchases of Class A Shares qualify for reduced sales charges. See
"REDUCING THE SALES CHARGE." Class A Shares have no conversion feature.
Class A Shares of all Funds except the SHORT-TERM FIXED INCOME FUND are
sold at their net asset value next determined after an order is received,
plus a sales charge as follows:
SALES LOAD AS SALES LOAD AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
Less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.75%
3.90%
$250,000 but less than$500,000 2.50%
2.56%
$500,000 but less than $750,00 2.00%
2.04%
$750,000 but less than $1 million 1.00%
1.01%
$1 million or more 0.25% 0.25%
Shares of the SHORT-TERM FIXED INCOME FUND are sold at their net asset
value next determined after an order is received, plus a sales charge as
follows:
SALES LOAD AS SALES LOAD AS
AMOUNT OF A PERCENTAGE OF A PERCENTAGE OF
TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT INVESTED
Less than $100,000 2.50% 2.56%
$100,000 but less than $250,000 1.75%
1.78%
$250,000 but less than$500,000 1.25%
1.27%
$500,000 but less than $750,00 0.75%
0.76%
$750,000 but less than $1 million 0.50%
0.50%
$1 million or more 0,25% 0.25%.

PURCHASES AT NET ASSET VALUE. Class A Shares of a Fund may be purchased
at net asset value, without an initial sales charge, by investment
advisers registered under the Investment Advisers Act of 1940, purchasing
on behalf of their clients, by the Wachovia Banks or affiliates for funds
which are held in a fiduciary, advisory, agency, custodial, or similar
capacity, and by trustees, officers, directors and retired directors,
advisory board members, employees and retired employees of a Fund, the
Wachovia Banks, the spouses and children under the age of 21 of such
persons, and any trusts, pension profit-sharing plans and individual
retirement accounts operated for such persons. Purchases made by ^ or
through 401(k) Defined Contribution Plans (each a "Delaware/Wachovia
401(k) Plan" or "Plan") which have in excess of an aggregate investment
of $1 million in certain Delaware Group Funds ("Eligible Delaware Funds")
and ^ any portfolios of THE BILTMORE FUNDS that are available through
that Plan ("Eligible Biltmore Funds" together, the "Eligible Funds") ^
will be made at net asset value, without the imposition of the sales
charge otherwise provided in the table above. ^In addition, trustees,
officers, directors and employees of the distributor and its affiliates,
and any bank or investment dealer who has a sales agreement with the
distributor may also purchase shares at their net asset value.
REDUCING THE INITIAL SALES CHARGE. The initial sales charge can be
reduced on the purchase of shares of a Fund through:
o quantity discounts and accumulated purchases;
o signing a 13-month letter of intent; using the reinvestment
privilege; or
o concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table
above, larger purchases reduce the sales charge paid. Funds will combine
purchases made on the same day by the investor, the investor's spouse,
and the investor's children under age 21 when it calculates the sales
charge.
A Fund may also consider the previous purchases still invested in any of
THE BILTMORE FUNDS or THE BILTMORE MUNICIPAL FUNDS if an additional
purchase is made. For example, if a shareholder already owns shares of
the EQUITY FUND having a current value at the public offering price of
$90,000 and then purchases $10,000 more at the current public offering
price, the sales charge of the additional purchase according to the
schedule now in effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, the Wachovia Banks, Wachovia
Investments, Inc. or the distributor must be notified by the shareholder
at the time the purchase is made that Fund shares are already owned or
that purchases are being combined. The Fund will reduce the sales charge
after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase shares of the
Funds equal in value to at least $100,000 over the next 13 months, the
sales charge may be reduced by signing a letter of intent to that effect.
This letter of intent includes a provision for a sales charge adjustment
depending on the amount actually purchased within the 13-month period and
a provision for the Custodian to hold up to 4.50% of the total amount
intended to be purchased in escrow (in shares of a Fund) until such
purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days toward the dollar fulfillment of
the letter of intent. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If shares in a Fund have been redeemed, the
shareholder has a one-time right, within 90 days, to reinvest the
redemption proceeds at the next-determined net asset value without any
sales charge. The Wachovia Banks, Wachovia Investments, Inc. or the
distributor must be notified by the shareholder in writing or by his
financial institution of the reinvestment in order to eliminate a sales
charge. If the shareholder redeems his shares in a Fund, there may be tax
consequences.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of Fund shares. For example, if a shareholder concurrently
invested $70,000 in one Fund, and $30,000 in another Fund, the sales
charge would be reduced.
To receive this sales charge reduction, the Wachovia Banks, Wachovia
Investments, Inc. or the distributor must be notified at the time the
concurrent purchases are made. The sales charge will be reduced after the
purchase is confirmed.
PLAN RIGHT OF ACCUMULATION. Purchases of the Eligible Biltmore Funds by
a Delaware/Wachovia 401(k) Plan will be aggregated with the current value
of all shares of the Eligible Funds already held by, and being
concurrently purchased by, the Plan in order to compute reduced sales
charges. However, participants in a Delaware/Wachovia 401(k) Plan or any
other employee benefit plan may not combine their holdings in, or
purchases through, the Plan with Fund purchases made outside the Plan for
the purpose of obtaining reduced sales charges.
CLASS B SHARES. Class B Shares are sold without an initial sales charge,
but are subject to a contingent deferred sales charge of up to 5.00% if
redeemed within seven full years following purchase. Class B Shares also
bear a Rule 12b-1 fee. Class B Shares will automatically convert into
Class A Shares, based on relative net asset value, on or around the
fifteenth of the month, eight full years after the purchase date. Class B
Shares provide an investor the benefit of putting all of the investor's
dollars to work from the time the investment is made, but, until
conversion, will have a higher expense ratio and pay lower dividends than
Class A Shares due to the Rule 12b-1 fee.
Class B Shares are sold at net asset value per Share without the
imposition of a sales charge at the time of purchase. Shares redeemed
within seven years of their purchase will be subject to a contingent
deferred sales charge according to the following schedule:
Year of Redemption
Contingent Deferred
After Purchase Sales
Charge
First.................................5%
Second................................4%
Third.................................3%
Fourth................................3%
Fifth.................................2%
Sixth....................................................................
............1%
Seventh and thereafter.................................................0%
No contingent deferred sales charge will be imposed on: (1) the portion
of redemption proceeds attributable to increases in the value of the
account due to increases in the net asset value per Share, (2) Shares
acquired through reinvestment of dividends and capital gains, (3) Shares
held for more than seven years after the end of the calendar month of
acquisition, (4) accounts following the death or disability of a
shareholder, or (5) minimum required distributions to a shareholder over
the age of 70 1/2 from an IRA or other retirement plan.
CONVERSION FEATURE
Class B Shares include all Shares purchased pursuant to the deferred
sales charge alternative which have been outstanding for less than the
period ending eight years after the end of the month in which the
shareholder's order to purchase Class B Shares was accepted. At the end
of this eight year period, Class B Shares may automatically convert to
Class A Shares, in which case the Shares will no longer be subject to the
Rule 12b-1 distribution fee which is assessed on Class B Shares. Such
conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other
charge. The purpose of the conversion feature is to relieve the holders
of the Class B Shares that have been outstanding for a period of time
sufficient for the distributor to have been compensated for distribution
expenses related to the Class B Shares from most of the burden of such
distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid on Class B
Shares in a shareholder's Fund acount will be considered to be held in a
separate sub-account. Each time any Class B Shares in the shareholder's
Fund account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of the Class B Shares in the sub-
account will also convert to Class A Shares.
SALES CHARGE REALLOWANCE. For Class A and Class B Shares sold with an
initial or contingent deferred sales charge, the Wachovia Banks or an
affiliated broker/dealer will receive up to 100% of the applicable sales
charge for purchases of Fund shares made directly through the Wachovia
Banks or such broker/dealer. Any portion of the sales charge which is not
paid to a dealer will be retained by the distributor. The sales charge
for shares sold other than through Wachovia Investments, Inc., the
Wachovia Banks or a registered broker/dealer will be retained by the
Distributor. However, the distributor. However, the distributor, at its
sole discretion, may uniformly offer to pay cash, or promotional
incentives in the form of trips to sales seminars at luxury resorts,
tickets or other items, to all dealers selling shares of a Fund. Such
payments will be predicated upon the amount of shares of a Fund that are
sold by the dealers.
SYSTEMATIC INVESTMENT PROGRAM
Shareholders in any of the Funds may participate in a Systematic
Investment Program. Once a Fund account has been opened, shareholders in
THE BILTMORE FUNDS and THE BILTMORE MUNCIPAL FUNDS may add to their
investment on a regular basis in a minimum amount of $50 and $100,
respectively. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Fund
shares at the net asset value next determined after an order is received
by a Fund, plus , in the case of Class A Shares, the applicable sales
charge. A shareholder may apply for participation in this program through
Wachovia Banks, Wachovia Investments, Inc. or through the distributor.
CERTIFICATES AND CONFIRMATIONS
As the transfer agent, Federated Shareholder Services Company maintains a
share account for each shareholder of record. Share certificates are not
issued unless requested in writing to a Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder of record. Annual statements are sent to report dividends
paid during the year for THE BILTMORE FUNDS, and monthly confirmations
are sent to report dividends paid during that month for THE BILTMORE
MUNICIPAL FUNDS.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts; however,
certain institutions may wish to use the Transfer Agent's subaccounting
system to minimize their internal recordkeeping requirements. The
Transfer Agent may charge a fee based on the level of subaccounting
services rendered. Institutions holding Shares of a Fund in a fiduciary,
agency, custodial, or similar capacity may charge or pass through
subaccounting fees as part of or in addition to normal trust or agency
account fees. They may also charge fees for other services provided which
may be related to the ownership of Fund Shares. This prospectus should,
therefore, be read together with any agreement between the customer and
the institution with regard to the services provided, the fees charged
for those services, and any restrictions and limitations imposed.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly to all shareholders invested in
THE BILTMORE FUNDS (except the EMERGING MARKETS FUND and SPECIAL VALUES
FUND) on the record date. Dividends are declared ^ and paid monthly to
all shareholders invested in the FIXED INCOME FUND and the SHORT-TERM
FIXED INCOME FUND on the record date. Dividends are declared daily and
paid monthly to all shareholders invested in THE BILTMORE MUNICIPAL FUNDS
on the record date. Dividends are declared and paid annually to all
shareholders of the EMERGING MARKETS FUND and SPECIAL VALUES FUND on the
record date. Unless shareholders request cash payments by writing to a
Fund, dividends are automatically reinvested in additional Shares of a
Fund on the payment dates at the ex-dividend date net asset value without
a sales charge.
Dividends are declared just prior to determining net asset value. If an
order for Shares is placed on the preceding business day, Shares
purchased by wire begin earning dividends on the business day wire
payment is received by the Custodian. If the order for Shares and payment
by wire are received on the same day, Shares begin earning dividends on
the next business day. Shares purchased by check begin earning dividends
on the business day after the check is converted into federal funds.
Capital gains, when realized by a Fund, will be distributed at least once
every 12 months.
EXCHANGE PRIVILEGE

Shareholders of the Funds have easy access to the other Funds comprising
the Trusts, and to the FEDERATED INTERNATIONAL EQUITY FUND, a portfolio
of International Series, Inc. (a mutual fund advised by Federated Global
Research Corp.) (hereinafter collectively referred to as, the
"Participating Funds") through a telephone exchange program. Class A
Shares and Class B Shares, respectively, of a Participating Fund may be
exchanged for Class A Shares and Class B Shares, respectively, of another
Participating Fund at net asset value without a sales charge (if a sales
charge was previously paid). An exchange of Class B Shares for Class B
Shares of another Biltmore Fund or for Investment Shares of the Biltmore
U.S. Treasury Money Market Fund will not be subject to a contingent
deferred sales charge. However, if the shareholder redeems the exchanged-
for shares within seven years of the original purchase of Class B Shares,
a contingent deferred sales charge will be imposed. For purposes of
computing the contingent deferred sales charge, the length of time the
shareholder has owned Class B Shares will be measured from the date of
original purchase and will not be affected by the exchange. The exchange
privilege is available to shareholders residing in any state in which the
Shares being acquired may be legally sold. Prior to any exchange, a
shareholder should review a copy of the current prospectus of the
Participating Fund into which an exchange is to be effected. Shareholders
contemplating exchanges into THE BILTMORE MUNICIPAL FUNDS should consult
their tax advisers, since the tax advantages of each Fund may vary.
Shareholders using this privilege must exchange Shares having a net asset
value at least equal to the minimum investment of the Participating Fund
into which they are exchanging. An exchange order must comply with the
requirements for a redemption and purchase order and must specify the
dollar value or number of Shares to be exchanged. Shareholders who desire
to automatically exchange Shares of a predetermined amount on a monthly,
quarterly, or annual basis may take advantage of a systematic exchange
privilege. A shareholder may obtain further information or give
instructions for exchange between Participating Funds by calling the
Fund, Wachovia Investments, Inc., or in the case of customers of the
Wachovia Banks, the shareholder's account officer. Shares may be
exchanged by telephone only between Fund accounts having identical
shareholder registrations.
Shares of the Participating Funds with a sales charge may be exchanged at
net asset value for shares of other Participating Funds with an equal
sales charge or no sales charge. Exchanges are made at net asset value,
plus the difference between the sales charge already paid on the
exchanged-from Fund's shares and any sales charge of the Participating
Fund into which the shares are to be exchanged, if higher. Shares of
Participating Funds with no sales charge acquired by direct purchase or
reinvestment of dividends on such shares may be exchanged for shares of
Participating Funds at net asset value.
Upon receipt of proper instructions and all necessary supporting
documents, Shares submitted for exchange will be redeemed at the next-
determined net asset value. Written exchange instructions may require a
signature guarantee. Exercise of this privilege is treated as a sale for
federal income tax purposes and, depending on the circumstances, a short
or long-term capital gain or loss may be realized. The exchange privilege
may be modified or terminated at any time. Shareholders will be notified
of the modification or termination of the exchange privilege.
EXCHANGE BY TELEPHONE. Telephone exchange instructions must be received
before 4:00 p.m. (Eastern time) for Shares to be exchanged the same day.
Exchange instructions given by telephone may be electronically recorded.
If reasonable procedures are not followed by the Fund, it may be liable
for losses due to unauthorized or fraudulent telephone instructions. The
telephone exchange privilege may be modified or terminated at any time.
Shareholders will be notified of such modification or termination.
Shareholders may have difficulty in making exchanges by telephone through
banks, brokers, and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his bank,
broker, or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail.
In addition to the exchange privilege described above, participants in a
Delaware/Wachovia 401(k) Plan are, with respect to the Plan, permitted
to: (1) exchange all or part of their Class A Shares of other Eligible
Delaware Funds, as well as Eligible Biltmore Funds, at net asset value;
and (2) exchange all or part of their Eligible Biltmore Fund shares into
Class A Shares of the Eligible Delaware Funds, at net asset value,
without payment of a front-end sales charge. However, a participant in
any Plan that has an aggregate investment of $1 million or less in the
Eligible Funds who exchanges into an Eligible Fund from the Money Fund
must pay the applicable front-end sales charge at the time of the
exchange (unless the Money Fund shares were acquired in an exchange from
an Eligible Fund subject to a front-end sales charge or by reinvestment
of dividends).
REDEEMING SHARES

Each Fund redeems Shares at its net asset value next determined after the
Fund receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written
requests for redemptions must be received in proper form and can be made
through the Wachovia Banks or directly to a Fund.
BY TELEPHONE. A shareholder may redeem Shares of a Fund by calling the
Wachovia Banks (call toll-free 1-800-994-4414) to request the redemption.
Redemption requests made through the Wachovia Banks must be received
before 3:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. The Wachovia Banks are responsible for
promptly submitting redemption requests and providing proper written
redemption instructions to the Funds. Registered broker/dealers may
charge customary fees and commissions for this service. Telephone
redemption instructions may be recorded. If reasonable procedures are not
followed by a Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.
A shareholder who is a customer of Wachovia Investments, Inc. may redeem
Shares of a Fund by calling The Biltmore Service Center at 1-800-994-
4414. Redemption requests must be received by 4:00 p.m. (Eastern time) in
order for Shares to be redeemed at that day's net asset value. In no
event will proceeds be credited more than seven days after a proper
request for redemption has been received. In the event of drastic
economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption should be considered.
BY MAIL. A shareholder may redeem Fund Shares by sending a written
request to the Wachovia Banks or Wachovia Investments, Inc., as
appropriate. The written request should include the shareholder's name,
the Fund name, the account number or brokerage account numbers, and the
share or dollar amount requested. If share certificates have been issued,
they must be properly endorsed and should be sent by registered or
certified mail with the written request to a Fund. Shareholders should
call the Wachovia Banks or Wachovia Investments, Inc. for assistance in
redeeming by mail.
A shareholder who is a customer of Wachovia Investments, Inc. may redeem
Shares by sending a written request to Wachovia Investments, Inc. The
written request should include the shareholder's name and address, the
Fund name, the brokerage account number, and the share or dollar amount
requested. Shareholders should call Wachovia Investments, Inc. for
assistance in redeeming by mail. Normally, a check for the proceeds is
mailed within three business days, but in no event more than seven days,
after receipt of a proper written redemption request.
SIGNATURES. Shareholders requesting a redemption to be sent to an address
other than that on record with a Fund or a redemption payable other than
to the shareholder of record must have signatures on written redemption
requests guaranteed by:
o a trust company or commercial bank whose deposits are insured by the
BIF;
o a member of the New York, American, Boston, Midwest, or Pacific
Stock Exchange;
o a savings bank or savings association whose deposits are insured by
the SAIF; or
o any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the transfer agent have adopted standards for accepting
signature guarantees from the above institutions. A Fund may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Funds and the transfer
agent reserve the right to amend these standards at any time without
notice.
SYSTEMATIC WITHDRAWAL PROGRAM
Class A Shareholders having an account value of at least $10,000 and who
desire to receive payments of a predetermined amount may take advantage
of the Systematic Withdrawal Program. Under this program, shares are
redeemed to provide for monthly or quarterly withdrawal payments in a
minimum of $100 as directed by the shareholder. Depending upon the amount
of the withdrawal payments, the amount of dividends paid and capital
gains distributions, and the fluctuation of net asset value of shares
redeemed under this program, redemptions may reduce, and eventually
deplete, the shareholder's investment in a Fund. For this reason,
payments under this program should not be considered as yield or income
on the shareholder's investment in a Fund. A shareholder may apply for
participation in this program through his financial institution. Due to
the fact that shares are sold with an initial sales charge, it is not
advisable for shareholders to be purchasing shares while participating in
this program.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, each Fund
may redeem Shares in any account and pay the proceeds to the shareholder
if, due to shareholder redemptions, the account balance falls below the
required minimum value of $250 for THE BILTMORE FUNDS and $500 for THE
BILTMORE MUNICIPAL FUNDS. This requirement does not apply, however, if
the balance falls below the required minimum because of changes in a
Fund's net asset value. Before Shares are redeemed to close an account,
the shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION

VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of all
classes of each Fund in a Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shares of that
Fund or class are entitled to vote.
As Massachusetts business trusts, neither Trust is required to hold
annual shareholder meetings. Shareholder approval will be sought only for
certain changes in a Trust or a Fund's operation and for the election of
Trustees under certain circumstances.
As of June 4, 1996, the Wachovia Banks and their various affiliates and
subsidiaries, acting in various capacities for numerous accounts, were
the owners of record of in excess of 25% of the outstanding shares of the
Quantitative Equity Fund, Equity Index Fund, Special Values Fund, and
Short-Term Fixed Income Fund, and therefore may, for certain purposes, be
deemed to control these Funds and be able to affect the outcome of
certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of a Trust's shareholders shall be called by
the Trustees upon the written request of shareholders owning at least 10%
of a Trust's outstanding shares.
EFFECT OF BANKING LAWS

The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company
Act of 1956 or any bank or non-bank affiliate thereof from sponsoring,
organizing, controlling or distributing the shares of a registered open-
end investment company continuously engaged in the issuance of its
shares, and prohibit banks generally from issuing, underwriting or
distributing most securities. However, such banking laws and regulations
do not prohibit such a holding company or its bank and non-bank
affiliates generally from acting as investment adviser, transfer agent or
custodian to such an investment company or from purchasing shares of such
a company as agent for and upon the order of their customers.
Some entities providing services to the Funds are subject to such banking
laws and regulations. The Wachovia Banks believe, based on the advice of
their counsel, that they may perform the services for a Fund contemplated
by their investment advisory contracts and custodian agreements with the
Trusts without violating those laws or regulations. Changes in either
federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of
present or future statutes and regulations, could prevent the Wachovia
Banks from continuing to perform all or a part of the above services for
their customers and/or a Fund. If this happens, the Trustees would
consider alternative means of continuing available investment services.
In such event, changes in the operation of a Fund may occur, including
the possible termination of any automatic or other Fund share investment
and redemption services then being provided by the Wachovia Banks. It is
not expected that existing Fund shareholders would suffer any adverse
financial consequences (if another service provider with equivalent
abilities to the Wachovia Banks is found) as a result of any of these
occurrences.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings association) from being an underwriter or
distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the
administrative capacities described above, or should Congress relax
current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to
state law.
TAX INFORMATION

The Funds expect to pay no federal income tax because each intends to
meet requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
Each Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses realized
by a Trust's other portfolios will not be combined for tax purposes with
those realized by a Fund.
Unless otherwise exempt, shareholders of THE BILTMORE FUNDS are subject
to federal income tax on any dividends and other distributions, including
capital gains distributions, received. This applies whether dividends and
distributions are received in cash or as additional shares. The Funds
will provide shareholders with tax information for reporting purposes.
Distributions representing long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains no matter how long the
shareholders have held the shares.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
THE BILTMORE MUNICIPAL FUNDS TAX INFORMATION

FEDERAL INCOME TAXES
Shareholders of THE BILTMORE MUNICIPAL FUNDS are not required to pay
federal regular income tax on any dividends received from the Fund that
represent net interest on tax-exempt municipal bonds. However, under the
Tax Reform Act of 1986, dividends representing net interest income earned
on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax
for corporations.
The alternative minimum tax, equal to up to 28% of alternative minimum
taxable income for individuals and 20% for corporations, applies when it
exceeds the regular tax for the taxable year. Alternative minimum taxable
income is equal to the regular taxable income of the taxpayer increased
by certain "tax preference" items not included in regular taxable income
and increased or reduced by certain alternative minimum tax adjustments.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item for both
individuals and corporations. Unlike traditional governmental purpose
municipal bonds, which finance roads, schools, libraries, prisons, and
other public facilities, private activity bonds provide benefits to
private parties. A Fund may purchase all types of municipal bonds,
including private activity bonds. Thus, should it purchase any such
bonds, a portion of the Fund's dividends may be treated as a tax
preference item.
In addition, in the case of a corporate shareholder, dividends of a Fund
which represent interest on municipal bonds may become subject to the 20%
corporate alternative minimum tax because the dividends are included in a
corporations's "adjusted current earnings." The corporate alternative
minimum tax treats 75% of the excess of the taxpayer's "adjusted current
earnings" over the taxpayer's preadjustment alternative minimum taxable
income as an alternative minimum tax adjustment. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and
profits". Since "earnings and profits" generally includes the full amount
of any Fund dividend, and preadjustment alternative minimum taxable
income does not include the portion of a Fund's dividend attributable to
municipal bonds which are not private activity bonds, 75% of the
difference will be included in the calculation of the corporation's
alternative minimum tax.
Shareholders should consult with their tax advisers to determine whether
they are subject to the alternative minimum tax or the corporate
alternative minimum tax and, if so, the tax treatment of dividends paid
by a Fund.
Dividends of a Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income. Distributions representing net long-term capital gains
realized by a Fund, if any, will be taxable as long-term capital gains
regardless of the length of time shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
GEORGIA AND NORTH CAROLINA TAXES
Under existing Georgia and North Carolina laws, shareholders of the
GEORGIA MUNICIPAL BOND FUND and NORTH CAROLINA MUNICIPAL BOND FUND will
not be subject to Georgia or North Carolina income taxes, respectively,
on Fund dividends to the extent that such dividends represent exempt-
interest dividends as defined in the Internal Revenue Code of 1986, as
amended, which are directly attributable to (i) interest ^on obligations
issued by or on behalf of the States of Georgia or North Carolina,
respectively, or their respective political subdivisions; or (ii)
interest on obligations of the United States or any other issuer whose
obligations are exempt from state income taxes under federal law.
To the extent that ^ Fund ^dividends are attributable to other sources,
such ^dividends will be subject to the relevant state's income taxes.
^For purposes of the Georgia intangibles tax, shareholders of the GEORGIA
MUNICIPAL BOND FUND may exclude from the share value of the Fund that
portion of the total share value which is attributable to the value of
United States obligations held in the Fund. To the extent that the Fund
is comprised of other types of obligations, shares of the Fund will be
taxable at the rate of 10 cents per $1,000 in value of the shares held on
January 1 of each year.
SOUTH CAROLINA TAXES
Under current South Carolina law, shareholders of the SOUTH CAROLINA
MUNICIPAL BOND FUND who are subject to South Carolina individual or
corporate income taxes will not be subject to such taxes on Fund
dividends to the extent that such dividends qualify as either (1) exempt-
interest dividends under the Internal Revenue Code, which are derived
from interest on obligations of the state of South Carolina or any of its
political subdivisions; (2) dividends derived from interest on certain
obligations of the United States; and (3) dividends derived from interest
on obligations of any agency or instrumentality of the United States that
is prohibited by federal law from being taxed by a state or any political
subdivision of a state. To the extent that Fund dividends are
attributable to other sources, such dividends will ^ be subject to ^
South Carolina taxes.
OTHER STATE AND LOCAL TAXES
Income from THE BILTMORE MUNICIPAL FUNDS is not necessarily free from
state income taxes in states other than Georgia, North Carolina, or South
Carolina, respectively, or from personal property taxes. State laws
differ on this issue, and shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local tax
laws.
OTHER CLASSES OF SHARES

THE BILTMORE FUNDS and THE BILTMORE MUNICIPAL FUNDS offer three classes
of shares: Class Y Shares, Class A Shares and Class B Shares of the
Equity Fund, the Quantitative Equity Fund, the Balanced Fund, and the
Fixed Income Fund for individuals and other customers of the Wachovia
Banks.
Class Y Shares are sold to accounts for which the Wachovia Banks or
^their affiliates act in a fiduciary, advisory, agency, custodial or
similar capacity at net asset value without a sales charge. Class Y
Shares are not distributed pursuant to a Rule 12b-1 Plan and are not
subject to a shareholder services fee.
The stated advisory fee is the same for all classes of the Funds.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of
shares than with respect to another class of shares of the same Fund.
The amount of dividends payable to Class A Shares and Class B Shares will
be less than those payable to Class Y Shares by the difference between
Class Expenses and distribution and shareholder services expenses borne
by the shares of each respective class.
PERFORMANCE INFORMATION

From time to time, the Funds advertise their total return, yield, and if
applicable, tax-equivalent yield.
Total return represents the change, over a specified period of time, in
the value of an investment in a Fund after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by the Fund over a thirty-day period by the maximum offering price
per share of the Fund on the last day of the period. This number is then
annualized using semi-annual compounding.
The tax-equivalent yield of THE BILTMORE MUNICIPAL FUNDS is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that
the Fund would have had to earn to equal its actual yield, assuming a
specific tax rate.
The yield and the tax-equivalent yield do not necessarily reflect income
actually earned by a Fund and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Class A Shares,
Class B Shares, and Class Y Shares of a Fund. Because Class A Shares
and Class B Shares are subject to a shareholder services fee and Class B
Shares are subject to a Rule 12b-1 fee, the yield will be lower than that
of Class Y Shares. The sales load applicable to Class A Shares also
contributes to a lower total return for Class A Shares. The performance
information reflects the effect of the maximum sales load which, if
excluded, would increase the total return, yield, and, as applicable,
tax-equivalent yield. In addition, Class B Shares are subject to similar
non-recurring charges, such as the contingent deferred sales charge,
which, if excluded, would increase the total return for Class B Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications and/or
compare a Fund's performance to certain indices.
ADDRESSES

Biltmore Equity Fund Federated Investors Tower
Biltmore Quantitative Equity Fund Pittsburgh,
Pennsylvania 15222-3779
Biltmore Equity Index Fund Biltmore
Biltmore Special Values Fund
Biltmore Emerging Markets Fund
Biltmore Balanced Fund
Biltmore Fixed Income Fund
Biltmore Short-Term Fixed Income Fund
Biltmore Georgia Municipal Bond Fund
Biltmore North Carolina Municipal Bond Fund
Biltmore South Carolina Municipal Bond Fund

Investment Adviser Wachovia Asset Management
(The Biltmore Funds) 100 North Main Street
(North Carolina Municipal Bond Fund) Winston-
Salem, North Carolina 27101

Investment Adviser Wachovia Bank of Georgia, N.A.
(Georgia Municipal Bond Fund) 191 Peachtree Street, N.E.
Atlanta, Georgia 30303

Investment Adviser Wachovia Bank of South Carolina, N.A.
(South Carolina Municipal Bond Fund) 1426 Main
Street
Columbia, South Carolina 29226
Counsel to The Biltmore Funds and Kirkpatrick
& Lockhart LLP
The Biltmore Municipal Funds 1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800

Counsel to the Independent Trustees Piper &
Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036-2430

The Biltmore Service Center 101 Greystone Boulevard
SC-9215
Columbia, South Carolina 29226

THE BILTMORE FUNDS
THE BILTMORE MUNICIPAL FUNDS

J822-27 July 22, 1996 G01513-01 (6/96)

THE BILTMORE FUNDS
THE BILTMORE MUNICIPAL FUNDS
CLASS Y SHARES

PROSPECTUS
JULY 22, 1996

WACHOVIA INVESTMENTS
MAKE YOURSELF COMFORTABLE

THE BILTMORE FUNDS AND THE BILTMORE MUNICIPAL FUNDS
The Biltmore Funds and The Biltmore Municipal Funds (individually referred to as
the "Trust" or collectively as the "Trusts") are open-end management investment
companies which offer separate investment portfolios, each having its own
investment objective and policies for different investor needs. The shares
offered by this prospectus represent interests in the following portfolios
(individually referred to as the "Fund" or collectively as the "Funds"):
THE BILTMORE FUNDS THE BILTMORE MUNICIPAL FUNDS
BILTMORE EQUITY FUND BILTMORE GEORGIA MUNICIPAL BOND FUND
BILTMORE QUANTITATIVE EQUITY FUND BILTMORE NORTH CAROLINA MUNICIPAL BOND
FUND
BILTMORE EQUITY INDEX FUND BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
BILTMORE SPECIAL VALUES FUND
BILTMORE EMERGING MARKETS FUND
BILTMORE BALANCED FUND
BILTMORE FIXED INCOME FUND
BILTMORE SHORT-TERM FIXED INCOME FUND
In addition, The Biltmore Funds offers through separate prospectuses the
following money market portfolios, each having distinct investment objectives
and policies: Biltmore Money Market Fund, Biltmore Prime Cash Management Fund,
Biltmore Tax-Free Money Market Fund, and Biltmore U.S. Treasury Money Market
Fund.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, WACHOVIA BANK OF GEORGIA, N.A., WACHOVIA BANK OF
NORTH CAROLINA, N.A., OR WACHOVIA BANK OF SOUTH CAROLINA, N.A. OR ANY OF THEIR
AFFILIATES OR SUBSIDIARIES, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT
AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
This prospectus provides you with information specific to the Class Y Shares of
the Funds. It contains the information you should read and know before you
invest in the Class Y Shares of the Funds. The Funds also offer Class A and, in
some cases, Class B Shares. Keep this prospectus for future reference.
The Funds have also filed Statements of Additional Information dated January 31,
1996 with the Securities and Exchange Commission. The information contained in
the Statements of Additional Information is incorporated by reference into this
prospectus. To request a copy of any of the Statements of Additional Information
free of charge, obtain other information, or make inquiries about the Funds,
call 1-800-994-4414 or write The Biltmore Service Center, 101 Greystone
Boulevard, SC-9215, Columbia, South Carolina 29226.
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.
TABLE OFCONTENTS

Table of Contents will be generated
when document is complete.

SUMMARY OF INVESTMENT INFORMATION

income tax and the personal income taxes imposed by the State of
Georgia;
o BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND ("NORTH CAROLINA MUNICIPAL
BOND FUND")--seeks to provide current income which is exempt from
federal regular income tax and the income tax imposed by the State of
North Carolina; and
o BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND ("SOUTH CAROLINA MUNICIPAL
BOND FUND")--seeks to provide current income which is exempt from
federal regular income tax and the South Carolina state income taxes.
WHO MANAGES THE FUNDS?
Wachovia Asset Management, a business unit of Wachovia Bank of North Carolina,
N.A., serves as investment adviser to THE BILTMORE FUNDS and the NORTH CAROLINA
MUNICIPAL BOND FUND. Wachovia Bank of Georgia, N.A. serves as investment adviser
to GEORGIA MUNICIPAL BOND FUND and Wachovia Bank of South Carolina, N.A. serves
as investment adviser to SOUTH CAROLINA MUNICIPAL BOND FUND. Twin Capital
Management, Inc. serves as sub-adviser to the QUANTITATIVE EQUITY FUND.
HOW TO BUY AND SELL SHARES
You may buy and sell shares of any of the Funds by telephone, by mail, or in
person. Except as indicated below, all shares are sold with sales charges. Fund
shares are redeemed at net asset value. The Trusts also offer you the privilege
of exchanging shares of one Fund for another. For more information, please see
"Investing in the Funds," "Exchange Privilege," and "Redeeming Shares."
RISK FACTORS
Investors should be aware of general risks associated with investment in mutual
funds. Market values of fixed income securities, which constitute a major part
of the investments of several Funds, may vary inversely in response to change in
prevailing interest rates. Foreign securities in which some of the Funds
(particularly the EMERGING MARKETS FUND) may invest may be subject to certain
risks in addition to those inherent in U.S. investments. One or more of the
Funds may make certain investments and employ certain investment techniques that
involve other risks, including entering into repurchase agreements, lending

portfolio securities, entering into futures contracts and related options,
entering into foreign currency transactions and forward foreign currency
exchange contracts, and borrowing money for investment purposes. These risks and
those associated with investing in mortgage-backed securities, foreign
securities, when-issued securities, variable rate securities, and equity

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
THE BILTMORE FUNDS AND THE BILTMORE
MUNICIPAL FUNDS
CLASS Y SHARES
SUMMARY OF FUND EXPENSES

Quantitative Equity Special Emerging
Equity Equity Index Values Markets Balanced
Fund Fund Fund Fund Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

MAXIMUM SALES LOAD IMPOSED ON
PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None None
MAXIMUM SALES LOAD IMPOSED ON
REINVESTED DIVIDENDS
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None None
CONTINGENT DEFERRED SALES CHARGE (AS
A PERCENTAGE
OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS,
AS APPLICABLE) None None None None None None
REDEMPTION FEES (AS A PERCENTAGE OF
AMOUNT REDEEMED,
IF APPLICABLE) None None None None None None
EXCHANGE FEE None None None None None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net
assets)

Management Fee (after waiver if 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
applicable)
(1).................................
...
12b-1 Fees None None None None None None
....................................
....................................
........................
Other Expenses (after waivers if 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
applicable)
(2).................................
.........................
Total Fund Operating Expenses 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
(after waivers if applicable)
(3)...............

Short- Georgia North South
Term Carolina Carolina
Fixed Fixed- Muni Muni Bond Muni
Income Income Bond Bond
Fund Fund Fund Fund Fund

SHAREHOLDER TRANSACTION EXPENSES

MAXIMUM SALES LOAD IMPOSED ON
PURCHASES
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None
MAXIMUM SALES LOAD IMPOSED ON
REINVESTED DIVIDENDS
(AS A PERCENTAGE OF OFFERING PRICE) None None None None None
CONTINGENT DEFERRED SALES CHARGE (AS
A PERCENTAGE
OF ORIGINAL PURCHASE PRICE OR
REDEMPTION PROCEEDS,
AS APPLICABLE) None None None None None
REDEMPTION FEES (AS A PERCENTAGE OF
AMOUNT REDEEMED,
IF APPLICABLE) None None None None None
EXCHANGE FEE None None None None None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net
assets)

Management Fee (after waiver if 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
applicable)
(1).................................
...
12b-1 None None None None None
Fees................................
....................................
..................................
Other Expenses (after waivers if 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
applicable) (2)
Total Fund Operating Expenses 0.00% 0.00% 0.00% 0.00% 0.00%
(after waivers if applicable) (3)

(1) The management fee has been reduced to reflect the voluntary waiver
by the investment adviser. The adviser can terminate this voluntary
waiver at
any time at its sole discretion. The maximum management fee is 0.30% for
the Equity Index Fund, 0.55% for the Short-Term Fixed Income Fund, 0.60%
for the Fixed Income Fund, 0.70% for the Equity Fund, Quantitative
Equity Fund and Balanced Fund, 0.75% for the Georgia Municipal Bond
Fund, North
Carolina Municipal Bond Fund, and South Carolina Municipal Bond Fund,
0.80% for the Special Values Fund, and 1.00% for the Emerging Markets
Fund.

(2) Other expenses would have been % for the Special Values Fund
absent the voluntary waiver by the administrator.
Other expenses would have been % for the Georgia Municipal Bond
Fund and % for the North Carolina Municipal Bond Fund absent the
voluntary
waivers by the administrator and portfolio accountant. The administrator
and portfolio accountant can terminate these voluntary waivers at any
time at its
sole discretion.

(3) Total Fund Operating Expenses for the fiscal year ended November 30,
1995 were 0.90% for the Equity Fund, 0.87% for the Quantitative Equity
Fund, 0.48% for the Equity Index Fund, 1.29% for the Special Values
Fund, 1.80% for the Emerging Markets Fund, 0.76% for the Balanced Fund,
0.74%
for the Fixed Income Fund, 0.63% for the Short-Term Fixed Income Fund,
0.92% for the Georgia Municipal Bond Fund, 0.85% for the North Carolina
Municipal Bond Fund, and 0.58% for the South Carolina Municipal Bond
Fund.

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

GENERAL INFORMATION

THE BILTMORE FUNDS was established as a Massachusetts business Trust under
a Declaration of Trust dated November 19, 1991. (For purposes of this
prospectus, "THE BILTMORE FUNDS" refers only to those portfolios of the
Trust that are included in this combined prospectus.) THE BILTMORE
MUNICIPAL FUNDS was established as a Massachusetts business trust under a
Declaration of Trust dated August 15, 1990. Each Declaration of Trust
permits the respective Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of
securities. As of the date of this prospectus, ^ the Trusts offer three
classes of shares: Class A Shares, Class Y Shares, and for the Equity
Fund, the Quantitative Equity Fund, the Balanced Fund and the Fixed Income
Fund, Class B Shares. Class Y Shares are offered to certain accounts held
by Wachovia Bank of Georgia, N.A., Wachovia Bank of North Carolina, N.A.,
and Wachovia Bank of South Carolina, N.A. (collectively, "Wachovia Banks")
and their affiliates in a fiduciary, advisory, agency, custodial or
similar capacity. Class A Shares and Class B Shares are sold to those
customers as well as other individuals and customers of the Wachovia
Banks. This prospectus relates only to Class Y Shares ("Shares") of the
Funds.
The investment objective and policies of each Fund appear below. The
investment objective of a Fund cannot be changed without shareholder
approval. While a Fund cannot assure that it will achieve its investment
objective, it attempts to do so by following the investment policies
described below.
Unless indicated otherwise, the investment policies of a Fund may be
changed by the Trustees without shareholder approval. However,
shareholders will be notified before any material change in these policies
becomes effective.
For additional information about investment limitations, strategies, and
certain investment policies, please refer to the "Portfolio Investments
and Strategies" section of this prospectus.
THE BILTMORE FUNDS

BILTMORE EQUITY FUND
The investment objective of the EQUITY FUND is to produce growth of
principal and income. The Fund pursues its investment objective by
investing primarily in a professionally-managed and diversified portfolio
of common stock of companies with an established market. Under normal
market conditions, the Fund intends to invest at least 65% of its total
assets in equity securities. These securities will be primarily quality
mid- to large-capitalization common stocks. The Fund's investment adviser
seeks undervalued stocks with improving prospects by integrating two
disciplines to capture both growth and value opportunities. The Fund's
investment adviser will integrate value and growth management techniques
in attempting to select undervalued stocks that have prospects for
improving fundamentals while evening out the price volatility often
associated with high growth investments.
Acceptable investments include:
o common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in over-the-
counter markets and are considered by the Fund's investment adviser
to have an established market;
o convertible securities;
o investments in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York Stock Exchange or in over-the-
counter markets. The Fund may not invest more than 20% of its assets
in ADRs. In addition, the Fund may invest up to 10% of its assets in
other securities of foreign issuers ("Non-ADRs"). (See "Securities of
Foreign Issuers."); and
o domestic issues of corporate debt obligations rated A or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch").
BILTMORE QUANTITATIVE EQUITY FUND
The investment objective of the QUANTITATIVE EQUITY FUND is to provide
growth of principal and income. The Fund pursues its investment objective
by investing in a professionally-managed and diversified portfolio
consisting primarily of large capitalization common stocks. The average
market capitalization of the stocks in the Fund's universe will be in
excess of $1 billion. These securities will primarily be composed of
issues of domestic companies. Stocks are selected by the Fund's sub-
adviser using a quantitative computer valuation model described below
under "Investment Processes." The Fund intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the ^ S&P 500
Index. However, the Fund will not limit its investments solely to stocks
represented in the Index. There can be no assurance that the Fund's
investment performance will match or exceed that of the Index. Under
normal market conditions, the Fund intends to invest at least 65% of its
total assets in equity securities.
Although the Fund normally seeks to remain substantially fully invested in
the common stocks in the universe identified by the Fund's investment
adviser, the Fund may also invest in the acceptable investments listed
under "BILTMORE EQUITY FUND" above.
BILTMORE EQUITY INDEX FUND
The investment objective of the EQUITY INDEX FUND is to provide a total
return that approximates that of the stock market as measured by the S&P
500 Index. The Fund pursues its investment objective by investing in a
broadly diversified portfolio of common stocks that make up the Index. The
Fund will normally seek to be invested in all the stocks that comprise the
Index and achieve a correlation between the performance of its portfolio
and that of the Index of at least 0.95 of 1%; a figure of 1.00 would
represent perfect correlation. The Fund is managed by utilizing a computer
program that identifies which stocks should be purchased or sold in order
to approximate, as much as possible, the investment return of the
securities that comprise the S&P 500 Index. Under normal circumstances, at
least 95% of the value of the Fund's total assets will be invested in
stocks represented in the Index and S&P 500 Index futures contracts.
However, the Fund is not required to sell securities if the 95% investment
level changes due to increases or decreases in the market value of
portfolio securities.
In addition, the Fund may hold cash reserves which may be invested in, but
not limited to, the following:
o commercial paper rated, at the time of purchase, at least Prime-1, A-
1 or F-1 by Moody's, S&P or Fitch, respectively, or, if unrated, of
comparable quality as determined by the Fund's investment adviser;
o time and savings deposits (including certificates of deposit) in
domestic, commercial and savings banks; and
o index participation contracts.
BILTMORE SPECIAL VALUES FUND
The investment objective of the SPECIAL VALUES FUND is to produce growth
of principal. The Fund pursues its investment objective by investing
primarily in a portfolio of equity securities comprising the small
capitalization sector of the United States equity market which the
investment adviser believes to be significantly undervalued with potential
for above-average capital appreciation commensurate with increased risk.
Typical investments are in stocks that have low price-to-earnings ratios,
are generally out of favor in the marketplace, are selling significantly
below their stated or replacement book value or are undergoing a
reorganization or other corporate action that may create above-average
price appreciation. Under normal market conditions, the Fund intends to
invest at least 65% of its total assets in equity securities of companies
that have a market value capitalization of up to $1 billion. The Fund
will limit its investments to up to 20% of total assets in securities of
foreign issuers which are freely traded on United States securities
exchanges or in the over-the-counter market in the form of American ADRs
and up to 10% of total assets in other securities of foreign issuers.
Acceptable investments include, but are not limited to:
o common stocks of U.S. companies which are either listed on the New
York or American Stock Exchange or traded in over-the-counter markets
and are considered by the Fund's investment adviser to have potential
for above-average appreciation;
o domestic issues of corporate debt obligations (including convertible
bonds);
o securities of foreign issuers; and
o master limited partnerships.
In addition, the Fund may invest in high yield corporate bonds (commonly
known as junk bonds) and speculative grade preferred stocks.
BILTMORE EMERGING MARKETS FUND
The investment objective of the EMERGING MARKETS FUND is to produce long-
term capital appreciation. The Fund pursues its investment objective by
investing primarily in a professionally managed and diversified portfolio
of securities of issuers and companies located in countries that are
generally considered to be developing or emerging countries by the
International Bank for Reconstruction and Development (more commonly known
as the World Bank) and the International Finance Corporation, as well as
countries that are classified by the United Nations or otherwise regarded
by their authorities as developing. Many investments in emerging markets
can be considered speculative, and therefore may offer higher potential
for gains and losses than investments in the developed markets of the
world. Because investing in emerging markets can involve significant
risks, the Fund is designed for aggressive investors. Under normal market
conditions, the Fund intends to invest at least 65% of its total assets in
securities of issuers and companies located in countries having emerging
markets. Although the Fund will focus its investment on the common stocks
of foreign companies located in emerging market countries, the Fund may
also invest in other securities, including debt securities.
Acceptable investments may also include, but will not be limited to:
o preferred stocks of foreign companies;
o convertible securities and warrants of foreign companies;
o investments in ADRs of foreign countries traded on the New York Stock
Exchange or in over-the-counter markets, and investments in European
Depositary Receipts ("EDRs," sometimes also referred to as
Continental Depositary Receipts), which are receipts issued in
Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities;
o fixed-income obligations of foreign governments, supranational
entities and corporate debt obligations denominated in currencies
other than U.S. dollars, rated B or better at the time of purchase by
Moody's or S&P; and
o U.S. equity and debt securities rated, at the time of purchase, B or
better by Moody's or S&P.
In addition, the Fund may enter into foreign currency transactions and may
maintain reserves in foreign or U.S. money market instruments.
BILTMORE BALANCED FUND
The investment objective of the BALANCED FUND is to provide long-term
growth of principal and current income. The Fund pursues its investment
objective by investing primarily in a professionally-managed, diversified
portfolio of equity securities and debt securities. The Fund's investment
approach, as related to equity securities, is to produce long-term growth
of principal and income by investing in a diversified portfolio of common
stocks. The Fund will seek undervalued stocks with improving prospects in
an attempt to capture both growth and value opportunities. With regard to
debt securities, the Fund's investment approach will be to maximize total
return (which consists of capital appreciation and income) available from
a diversified portfolio of fixed income securities while providing
relative stability of principal and income as compared to other fixed
income securities. Under normal market circumstances, the Fund will invest
at least 65% of its assets in equity securities and debt securities. As a
matter of operating policy, the asset mix of the Fund will normally range
between 40-60% in common stocks and convertible securities, 30-50% in
preferred stocks and bonds, and 0-20% in money market instruments. The
Fund will maintain at least 25% of its assets in fixed income senior
securities (including the value of convertible senior securities
attributable to their fixed income characteristics).
Acceptable investments include but are not limited to:
o common or preferred stocks of U.S. companies which are either listed
on the New York or American Stock Exchange or traded in the over-the-
counter markets and are considered by the Fund's investment adviser
to have an established market;
o convertible securities;
o investments in ADRs of foreign companies traded on the New York Stock
Exchange or in the over-the-counter market. The Fund may not invest
more than 20% of its assets in ADRs. In addition, the Fund may invest
up to 10% of its assets in Non-ADRs. (See "Securities of Foreign
Issuers.");
o domestic issues of corporate debt obligations (including convertible
bonds) rated, at the time of purchase, A or better by S&P, Moody's or
Fitch or, if not rated, are determined by the Fund's investment
adviser to be of comparable quality;
o mortgage- and asset-backed securities;
o commercial paper rated not less than A-1 by S&P, Prime-1 by Moody's
or F-1 by Fitch, and unrated commercial paper that is deemed by the
Fund's investment adviser to be of comparable quality; and
o time and savings deposits (including certificates of deposit) in
commercial or savings banks.
BILTMORE FIXED INCOME FUND
The investment objective of the FIXED INCOME FUND is to seek a high level
of total return. As a secondary investment objective, the Fund will
attempt to minimize volatility of principal relative to the fixed income
markets. Total return consists of income and capital gains. The Fund
pursues its investment objectives by investing primarily in a diversified
portfolio of fixed income securities that, at the time of purchase, are
rated in the top three investment categories by a nationally recognized
statistical rating organization (NRSRO) or, if unrated, are of comparable
quality to securities with such ratings. The Fund will maintain an average
dollar-weighted maturity of between 6 to 10 years. The Fund will invest,
under normal circumstances, at least 65% of the value of its total assets
in fixed income securities.
Acceptable investments include:
o domestic issues of corporate debt obligations, including demand
master notes rated at the time of purchase Aaa, Aa, or A by Moody's,
AAA, AA, or A by S&P or by Fitch or, if unrated, of comparable
quality as determined by the Fund's investment adviser;
o convertible securities;
o mortgage- and asset-backed securities;
o commercial paper that at the time of purchase is rated not less than
Prime-1, A-1, or F-1, by Moody's, S&P, or Fitch, respectively, or, if
unrated, of comparable quality as determined by the Fund's investment
adviser; and
o time and savings deposits (including certificates of deposit) in
commercial or savings banks.
BILTMORE SHORT-TERM FIXED INCOME FUND
The investment objective of the SHORT-TERM FIXED INCOME FUND is to produce
a high level of current income with a minimum of principal volatility. The
Fund pursues its investment objective by investing primarily in a
diversified portfolio of short-term, high-grade, fixed income securities.
Under normal market circumstances, the Fund will invest at least 65% of
its assets in such securities. The Fund will maintain an average dollar-
weighted maturity of between one to three years. The targeted duration of
the Fund will normally be 1.5 years or less. Otherwise, the Fund may
invest in the acceptable investment listed under "BILTMORE FIXED INCOME
FUND" above.
ADDITIONAL ACCEPTABLE INVESTMENTS
In addition to the acceptable investments discussed above, each of the
Funds may borrow money, enter into repurchase agreements, lend portfolio
securities, invest in money market instruments, restricted and illiquid
securities, securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities, securities of other investment companies,
warrants, demand master notes and engage in when-issued and delayed
delivery transactions. The Funds may also engage in put and call options,
futures, and options on futures for hedging purposes.
THE BILTMORE MUNICIPAL FUNDS

BILTMORE GEORGIA MUNICIPAL BOND FUND
The investment objective of the GEORGIA MUNICIPAL BOND FUND is to provide
current income which is exempt from federal regular income tax and the
personal income taxes imposed by the State of Georgia. As a matter of
investment policy which may not be changed without shareholder approval,
the Fund will invest its assets so that, under normal circumstances, at
least 80% of its total assets are invested in obligations, the interest
income from which is exempt from federal regular income tax and the
personal income taxes imposed by the State of Georgia ("Georgia Municipal
Securities").
BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the NORTH CAROLINA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax and
the income tax imposed by the State of North Carolina. As a matter of
investment policy which may not be changed without shareholder approval,
the Fund will invest its assets so that, under normal circumstances, at
least 80% of its total assets are invested in obligations, the interest
income from which is exempt from federal regular income tax and the income
tax ^ imposed by the State of North Carolina ("North Carolina Municipal
Securities").
BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
The investment objective of the SOUTH CAROLINA MUNICIPAL BOND FUND is to
provide current income which is exempt from federal regular income tax and
South Carolina state income taxes. As a matter of investment policy which
may not be changed without shareholder approval, the Fund will invest its
assets so that, under normal circumstances, at least 80% of its interest
income is exempt from federal regular income tax and South Carolina state
income taxes or that at least 80% of its total assets are invested in
obligations, the interest income from which is exempt from federal regular
income tax and South Carolina state income taxes ("South Carolina
Municipal Securities").
ACCEPTABLE INVESTMENTS
The Funds' investment advisers may consider the potential for capital
appreciation in the selection of portfolio investments for each of THE
BILTMORE MUNICIPAL FUNDS.
The Funds invest primarily in Georgia Municipal Securities, North Carolina
Municipal Securities, and South Carolina Municipal Securities,
respectively (collectively, "State Municipal Securities"). These
securities are:
o obligations, including industrial development bonds, issued on behalf
of the states of Georgia, North Carolina, and South Carolina,
respectively, and their respective political subdivisions or
agencies;
o obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia,
or any political subdivision or agency of any of these; and
o participation interests, as described below, in any of the above
obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the Trust
and/or the investment advisers to the Funds, exempt from both federal
regular income tax and the personal income tax imposed by the states
of Georgia, North Carolina, and South Carolina, respectively. It is
likely that shareholders who are subject to alternative minimum tax
will be required to include interest from a portion of the municipal
securities owned by the Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
STATE MUNICIPAL SECURITIES
State Municipal Securities are generally issued to finance public works,
such as airports, bridges, highways, housing, hospitals, schools, streets,
and water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses, and to make
loans to other public institutions and facilities. State Municipal
Securities include industrial development bonds issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct
or equip facilities for privately or publicly owned corporations. The
availability of this financing encourages these corporations to locate
within the sponsoring communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. However, interest on and principal of
revenue bonds are payable only from the revenue generated by the facility
financed by the bond or other specified sources of revenue.
Revenue bonds do not represent a pledge of credit or create any debt of or
charge against the general revenues of a municipality or public authority.
Industrial development bonds are typically classified as revenue bonds;
the industry which is the beneficiary of such bonds is generally the only
source of payment for the bonds.
^
CHARACTERISTICS. The State Municipal Securities that the Funds buy are
rated A or above by Moody's or S&P. (A description of the rating
categories is contained in the Appendix to each Fund's Statement of
Additional Information). In addition, State Municipal Securities are
subject to one or more of the following quality standards:
o insured by a municipal bond insurance company which is rated AAA by
S&P or Aaa by Moody's;
o secured by an irrevocable escrow of direct obligations of the U.S.
government; or
o unrated if determined to be of comparable quality to one of the
foregoing rating categories by the Fund's adviser.
PORTFOLIO INVESTMENTS AND STRATEGIES

INVESTMENT CONSIDERATIONS
EQUITY INVESTMENTS. As with other mutual funds that invest in equity
securities, the EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND,
SPECIAL VALUES FUND and BALANCED FUND are subject to market risks. That
is, the possibility exists that common stocks will decline over short or
even extended periods of time. The United States equity market tends to be
cyclical, experiencing both periods when stock prices generally increase
and periods when stock prices generally decrease.
Because the SPECIAL VALUES FUND invests primarily in small capitalization
stocks, there are some additional risk factors associated with investments
in the SPECIAL VALUES FUND. In particular, stocks in the small
capitalization sector of the United States equity market have historically
been more volatile in price than larger capitalization stocks, such as
those included in the S&P 500 Index. This is because, among other things,
small companies have less certain growth prospects than larger companies;
have a lower degree of liquidity in the equity market; and tend to have a
greater sensitivity to changing economic conditions. Further, in addition
to exhibiting greater volatility, the stocks of small companies may, to
some degree, fluctuate independently of the stocks of large companies.
That is, the stocks of small companies may decline in price as the prices
of large company stocks rise or vice versa. Therefore, investors should
expect that the Fund will be more volatile than, and may fluctuate
independently of, broad stock market indices such as the S&P 500 Index.
SECURITIES OF FOREIGN ISSUERS. THE EQUITY FUND, QUANTITATIVE EQUITY FUND,
SPECIAL VALUES FUND, EMERGING MARKETS FUND, and BALANCED FUND may invest
in the securities of foreign issuers. ^There may be certain risks
associated with investing in foreign securities. These include risks of
adverse political and economic developments (including possible
governmental seizure or nationalization of assets), the possible
imposition of exchange controls or other governmental restrictions, less
uniformity in accounting and reporting requirements, and the possibility
that there will be less information on such securities and their issuers
available to the public. In addition, there are restrictions on foreign
investments in other jurisdictions and there tends to be difficulty in
obtaining judgments from abroad and affecting repatriation of capital
invested abroad. Delays could occur in settlement of foreign transactions,
which could adversely affect shareholder equity. Foreign securities may be
subject to foreign taxes, which reduce yield, and may be less marketable
than comparable United States securities. As a matter of practice, a Fund
will not invest in the securities of a foreign issuer if any risk
identified above appears to a Fund's investment adviser to be substantial.
SECURITIES IN EMERGING MARKETS Investing in the EMERGING MARKETS FUND
entails a substantial degree of risk. Because of the special risks
associated with investing in emerging markets, an investment in the
EMERGING MARKETS FUND should be considered speculative. Investors are
strongly advised to carefully consider the special risks involved in
emerging markets, which are in addition to the usual risks of investing in
domestic markets and in developed markets around the world. By itself, an
investment in the EMERGING MARKETS FUND does not constitute a balanced
investment plan. Investors should be willing to assume a higher degree of
risk and accept a higher level of volatility than is generally associated
with investment in more developed markets.
These risks include a possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations
(including, for example, withholding taxes on interest and dividends) or
other taxes imposed with respect to investments in foreign nations,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country and repatriation of investments),
default in foreign government securities, political or social instability
or diplomatic developments which could adversely affect investment in
securities of issuers in foreign nations. (Please refer to the EMERGING
MARKETS FUND'S Statement of Additional Information for an expanded
discussion of sovereign debt obligations.) In addition, there is often
less publicly available information about foreign issuers than those in
the United States. Emerging market companies are not generally subject to
uniform accounting, auditing and financial reporting standards, and
auditing practices and requirements may not be comparable to those
applicable to U.S. companies. Further, the EMERGING MARKETS FUND may
encounter difficulties or be unable to pursue legal remedies and obtain
judgments in foreign courts.
Because the EMERGING MARKETS FUND'S securities will generally be
denominated in foreign currencies, the value of such securities to the
Fund will be affected by changes in currency exchange rates and in
exchange control regulations, and costs will be incurred in connection
with conversion between currencies. A change in the value of a foreign
currency against the U.S. dollar will result in corresponding change in
the U.S. dollar value of the Fund's securities denominated in the
currency. Such changes will also affect the Fund's income and
distributions to shareholders. The Fund may be affected, either favorably
or unfavorably, by the fluctuations in the relative rates of exchange
between the currencies of different nations, and the Fund therefore may
engage in certain hedging strategies. Such strategies involve certain
investment risks and transaction costs to which the Fund might not
otherwise be subject. These risks include dependence on the Adviser's
ability to predict movements in exchange rates, and imperfect movements
between exchange rates and currency hedges.
Brokerage commissions, fees for custodial services, and other costs
relating to investments in emerging market countries are generally greater
than in the United States. Such markets have different clearance and
settlement procedures, and in certain markets, there have been occasions
when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to effect certain
transactions. The inability of the Emerging Markets Fund to make intended
security purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to sell a portfolio
security due to settlement problems could result in either losses to the
Fund, if the value of the portfolio security subsequently declines, or, if
the Fund has entered into a contract to sell the security, could result in
possible claims against the Fund.
In certain emerging market countries, there is less government supervision
and regulation of business and industry practices, stock exchanges,
brokers, and listed companies than in the United States. The economies of
emerging market countries may be predominantly based on a few industries
and may be highly vulnerable to change in local or global trade
conditions. The securities markets of many of the countries in which the
Fund may invest also may be smaller, less liquid, and subject to greater
price volatility than those in the United States. Some emerging market
countries also may have fixed or managed currencies which are not free-
floating against the U.S. dollar. Further, certain emerging market country
currencies may not be internationally traded. Certain of these currencies
have experienced a steady devaluation relative to the U.S. dollar. Any
devaluations in the currencies in which the Fund's portfolio securities
are denominated may have an adverse impact on the Fund. Finally, many
emerging market countries have experienced substantial, and in some
periods, extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies for individual emerging market
countries. Moreover, the economies of individual emerging market countries
may differ favorably or unfavorably from the U.S. economy in such respects
as the rate of growth of domestic product, inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
INVESTMENTS IN DEBT ^OBLIGATIONS. The market value of debt obligations,
and therefore a Fund's net asset value, will fluctuate due to changes in
economic conditions and other market factors, such as interest rates,
which are beyond the control of the Fund's investment adviser. In the debt
market, prices generally move inversely to interest rates. A decline in
market interest rates results in a rise in the market prices of
outstanding debt obligations. Conversely, an increase in market interest
rates results in a decline in market prices. In either case, the amount of
change in market prices of debt obligations in response to changes in
market interest rates generally depends on the maturity of the debt
obligations. Although debt obligations with longer maturities offer
potentially greater returns, they will generally experience the greatest
market price changes. Consequently, to the extent a Fund is significantly
invested in debt obligations with longer maturities, there is a greater
possibility of fluctuation in the Fund's net asset value. The Funds'
investment adviser will attempt to minimize the fluctuation of each Fund's
net asset value by predicting the direction of interest rates; however,
the adviser could be incorrect in its expectations about the direction and
the extent of these market factors.
INVESTMENTS IN LOWER-RATED DEBT OBLIGATIONS. From time to time, a portion
of the EMERGING MARKETS FUND'S and the SPECIAL VALUES FUND'S portfolios
may consist of lower-rated debt obligations (i.e., rated below BBB by S&P
or Baa by Moody's) which are commonly referred to as "junk bonds." The
Funds will not invest more than 35% of its total assets in such
securities. Lower-rated securities will usually offer higher yields than
higher-rated securities. However, there is more risk associated with these
investments. These lower-rated bonds may be more susceptible to real or
perceived adverse economic conditions than investment grade bonds. These
lower-rated bonds are regarded as predominantly speculative with regard to
each issuer's continuing ability to make principal and interest payments.
In addition, the secondary trading market for lower-rated bonds may be
less liquid than the market for investment grade bonds. Purchasers should
carefully assess the risks associated with an investment in the EMERGING
MARKETS FUND and the SPECIAL VALUES FUND
Many corporate debt obligations, including many lower-rated bonds, permit
the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call
bonds during periods of declining interest rates. In these cases, if the
Emerging Markets Fund owns a bond which is called, the Fund will receive
its return of principal earlier than expected and would likely be required
to reinvest the proceeds at lower interest rates, thus reducing income to
the Fund.
MUNICIPAL SECURITY INVESTMENTS. Yields on State Municipal Securities
depend on a variety of factors, including: the general conditions of the
municipal bond market; the size of the particular offering; the maturity
of the obligations; and the rating of the issue. Further, any adverse
economic conditions or developments affecting the respective state or its
municipalities could impact a Fund's portfolio. A municipal bond fund's
concentration in securities issued by a specific state and its political
subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. A state's
dependence on agriculture, manufacturing, tourism, and service industries
leaves it vulnerable to both the business cycle and long term national
economic trends.
(Please refer to the Funds' Statements of Additional Information for an
expanded discussion of Georgia, North Carolina, or South Carolina
investment risks, as appropriate.) The ability of a Fund to achieve its
investment objective also depends on the continuing ability of the issuers
of State Municipal Securities and participation interests, or the
guarantors of either, to meet their obligations for the payment of
interest and principal when due. Investing in State Municipal Securities
which meet the Fund's quality standards may not be possible if the state
or its municipalities do not maintain their current credit ratings. In
addition, the issuance, tax exemption and liquidity of State Municipal
Securities may be adversely affected by judicial, legislative or executive
action, including, but not limited to, rulings of state and federal
courts, amendments to the state and federal constitutions, changes in
statutory law, and changes in administrative regulations, as well as voter
initiatives.
INVESTMENT PROCESSES
QUANTITATIVE EQUITY FUND. To select stocks for the QUANTITATIVE EQUITY
FUND, the Fund's sub-adviser initially identifies a broad universe of
approximately 900 common stocks. The sub-adviser utilizes four criteria
when determining what common stocks will be included in the Fund's
universe: each stock must be highly capitalized, each stock must be traded
on the New York or American Stock Exchange or in the over-the-counter
markets, each stock must be among the most liquid and highly traded stocks
on its respective exchange, and each stock must be actively followed by a
minimum of three industry analysts.
The Fund's sub-adviser then screens the stocks in the universe, using a
quantitative computer valuation model, to evaluate the relative
attractiveness of each stock. The sub-adviser's model focuses on two
measurement factors: the relative value of the stocks (including their
present and historical price-to-earnings and market price-to-book value
ratios, and the present value of each stock's projected dividend income)
and the stock's growth prospects and earnings momentum (including changes,
over time, in analysts' earning forecasts, and positive or negative
surprises in reported earnings). The Fund's sub-adviser will vary the
importance placed on each factor, depending on market trends.
Using the valuation model described above, the Fund's investment adviser
then ranks each stock in the universe by decile. The stocks are classified
by industry group, based on industry categories and weightings found in
the S&P 500 Index. In managing the Fund, the sub-adviser continuously
monitors the rankings of the stocks in the universe and employs an active
selling discipline, replacing less attractive stocks (as determined by the
valuation model) with more attractive stocks to maintain a high average
rank for the portfolio. In maintaining the diversification of the
portfolio, the sub-adviser gives consideration to the industry weightings
found in the Index.
Although the QUANTITATIVE EQUITY FUND intends to hold a broadly
diversified portfolio of common stocks that, in the aggregate, exhibit
investment characteristics similar to the stocks found in the Index, the
Fund will not limit its investments solely to stocks represented in the
Index. By investing in those common stocks that are included in the
universe described above (a large number of which are not included in the
Index), the Fund will seek to provide a higher rate of total return than
the Index. There can be no assurance that the Fund's investment
performance will match or exceed that of the Index.
EQUITY INDEX FUND. The EQUITY INDEX FUND is managed passively, in the
sense that the traditional management functions of economic, financial,
and market analysis are limited to the extent that the Fund seeks to
duplicate the composition of the S&P 500 Index. Furthermore, a company's
adverse financial circumstance will not require its elimination from the
Fund's portfolio, unless the company's stock is removed from the Index by
S&P. The Fund is managed by utilizing a computer program that identifies
which stocks should be purchased or sold in order to approximate, as much
as possible, the investment return of the securities that comprise the
Index. The Fund will select a stock for purchase into its investment
portfolio based on the stock's inclusion and weighting in the Index,
starting with the heaviest-weighted stock. Thus, the proportion of Fund
assets invested in any one stock comprising the Index may not be identical
to the percentage the particular stock represents in the Index.
On occasion, so as to respond to changes in the Index's composition, as
well as corporate mergers, tender offers, and other circumstances,
additional adjustments will be made in the EQUITY INDEX FUND'S portfolio.
However, it is anticipated that these adjustments will occur infrequently,
and the costs will be minimized. As a result, portfolio turnover is
expected to be well below that encountered in other investment company
portfolios. Therefore, the accompanying costs, including accounting costs,
brokerage fees, custodial expenses, and transfer taxes, are expected to be
relatively low. While the cash flows into and out of the Fund will impact
the Fund's portfolio turnover rate and the Fund's ability to duplicate the
composition of the Index and approximate its performance, investment
adjustments will be made, as practicably as possible, to account for these
circumstances.
Since the EQUITY INDEX FUND will seek to duplicate the Index's stock
composition precisely, it is anticipated that the Fund's performance will
approximate the performance of the Index. Factors such as the size of the
Fund's portfolio, the size and timing of cash flows into and out of the
Fund, changes in the securities markets and the Index itself, and the
normal costs of a mutual fund, discussed above, will account for the
difference between the performances of the Fund and the Index.
In order to accommodate cash flows and maintain adequate liquidity to meet
redemption requests, the Fund may enter into stock index futures
contracts, options, options on futures contracts, and index participation
interests. This will allow the Fund to simultaneously maximize the level
of the Fund assets that are tracking the performance of the S&P 500 Index.
The Fund can sell futures contracts and options in order to close out a
previously established position. The Fund will not enter into any stock
index futures contract for the purpose of speculation.
S&P 500 INDEX. The S&P 500 Index consists of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. S&P
designates the stocks to be included in the Index on a statistical
basis. A particular stock's weighting in the Index is based on its
relative total market value; that is, its market price per share times
the number of shares outstanding. From time to time, S&P may add or
delete stocks from the Index. The QUANTITATIVE EQUITY and EQUITY INDEX
FUNDS utilize the Index as the standard performance benchmark because
it represents approximately 70% of the total market value of all
common stocks. In addition, it is familiar to investors, and is
recognized as a barometer of common stock investment returns.
The Index is an unmanaged, statistical measure of stock market
performance. As such, it does not reflect the actual cost of investing
in common stocks. By contrast, the QUANTITATIVE EQUITY and EQUITY
INDEX FUNDS incur the normal costs of a mutual fund, including
brokerage and execution costs, advisory fees, and administrative and
custodial costs and expenses. S&P selects the common stocks to be
included in the Index solely on a statistical basis. Inclusion of a
particular security in the Index in no way implies an opinion by S&P
as to the stock's appropriateness as an investment. The Funds are not
sponsored, endorsed, sold or promoted by, or affiliated with, S&P.
EMERGING MARKETS FUND. The adviser will consider the following securities
as permissable investments for the EMERGING MARKETS FUND: (i) securities
of companies the principal securities trading market for which is an
emerging market country; (ii) securities, traded in any market, of
companies or issuers that derive 50% or more of their total revenue from
either goods or services produced in such emerging market countries or
sales made in such emerging market countries; or (iii) securities of
companies organized under the laws of, and with a principal office in, an
emerging market country. In selecting equity securities for the EMERGING
MARKETS FUND, the adviser focuses on a broad diversification of emerging
market countries. Initially, the adviser identifies those emerging market
countries that, in the adviser's judgment, have made, or are currently
making, progress toward improving their economies and market environments
through financial and/or political reform, and which are likely to produce
premium returns. Second, the adviser then uses a disciplined allocation
process to classify the emerging market countries that it has identified
into one of two categories (or "Tiers"). The first, Tier 1, is comprised
of the most established and liquid of emerging market countries. The
second, Tier 2, represents those emerging market countries which are less
established, smaller, and less liquid than those in Tier 1. Examples of
countries classified in Tier 1 are Argentina, Brazil, Mexico and Thailand;
examples of countries which are classified in Tier 2 include Colombia, ^
the Philippines, Greece, Peru and Portugal.
In constructing the EMERGING MARKETS FUND'S investment portfolio, the
adviser normally gives the Tier 1 emerging market countries a greater
weighting than is afforded to the Tier 2 emerging market countries. Within
each Tier, each emerging market country is equally weighted and then its
weight is adjusted to reflect the adviser's investment judgments regarding
the particular country. The adviser will consider economic factors,
political conditions and currency and market valuation levels, in deciding
upon which emerging market countries to include in the portfolio and how
those countries should be classified and weighted.
The number of emerging market countries represented in the EMERGING
MARKETS FUND'S portfolio will vary over time. It is the adviser's
intention that the Fund remain broadly diversified across many emerging
market countries, companies, and geographic regions. Under normal market
conditions, the adviser expects to invest in the securities of issuers
located in a minimum of six different emerging market countries, with up
to 25% of the Fund's total assets invested in any one country.
In selecting securities in each emerging market country for purchase by
the EMERGING MARKETS FUND, the adviser will focus on the most prominent
and largest capitalized companies. The adviser will seek to construct the
Fund's investment portfolio in a manner that maintains adequate liquidity
for trading purposes, and will attempt to utilize the low historical
correlation of returns among emerging market countries to moderate the
portfolio's volatility, wherever feasible.
FIXED INCOME FUNDS. The FIXED INCOME FUND'S and the SHORT-TERM FIXED
INCOME FUND'S investment adviser does not select securities purely to
maximize the current yield of the Funds. The Funds' investment adviser
attempts to manage the Funds' total performance, which includes both
changes in principal value of the Funds' portfolios and interest income
earned, to anticipate the opportunities and risks of changes in market
interest rates. When the Funds' investment adviser expects that market
interest rates may decline, which would cause prices of outstanding debt
obligations to rise, it generally extends the average maturity of the
Funds' portfolios. When, in the investment adviser's judgment, market
interest rates may rise, which would cause market prices of outstanding
debt obligations to decline, it generally shortens the average maturity of
the Funds' portfolios. Further, the Funds' investment adviser attempts to
improve the Funds' total return by weighing the relative value of fixed
income securities issues having similar maturities in selecting portfolio
securities. By actively managing the Funds' portfolios in this manner, the
Funds' investment adviser seeks to provide capital appreciation during
periods of falling interest rates and protection against capital
depreciation during periods of rising rates.
PORTFOLIO INVESTMENTS
CORPORATE DEBT OBLIGATIONS. The Funds (except the EQUITY INDEX FUND and
THE BILTMORE MUNICIPAL FUNDS) may invest in corporate debt obligations,
including corporate bonds, notes, and debentures, which may have floating
or fixed rates of interest. These obligations have the requisite ratings
as described above.
FIXED RATE CORPORATE DEBT OBLIGATIONS. The Funds may invest in fixed rate
corporate securities, including fixed rate securities with short-term
characteristics. Fixed rate securities with short-term characteristics are
long-term debt obligations but are treated in the market as having short
maturities because call features of the securities may make them callable
within a short period of time. A fixed rate security with short-term
characteristics would include a fixed income security priced close to call
or redemption price or a fixed income security approaching maturity, where
the expectation of call or redemption is high.
Fixed rate securities tend to exhibit more price volatility during times
of rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described below,
behave like short-term instruments in that the rate of interest they pay
is subject to periodic adjustments based on a designated interest rate
index. Fixed rate securities pay a fixed rate of interest and are more
sensitive to fluctuating interest rates. In periods of rising interest
rates the value of a fixed rate security is likely to fall. Fixed rate
securities with short-term characteristics are not subject to the same
price volatility as fixed rate securities without such characteristics.
Therefore, they behave more like floating rate securities with respect to
price volatility.
FLOATING RATE CORPORATE DEBT OBLIGATIONS. The Funds (except THE BILTMORE
MUNICIPAL FUNDS) may invest in floating rate corporate debt obligations,
including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above
prevailing market rates. The interest rate paid on these securities is
then reset periodically (commonly every 90 days) to an increment over some
predetermined interest rate index. Commonly utilized indices include the
three-month Treasury bill rate, the 180-day Treasury bill rate, the one-
month or three-month London Interbank Offered Rate (LIBOR), the prime rate
of a bank, the commercial paper rates, or the longer-term rates on U.S.
Treasury securities. An example of floating and fixed rate corporate debt
obligations in which a Fund can invest include Yankee bonds, which are
U.S. dollar-denominated bonds issued in the United States by foreign banks
or corporations.
Some of the floating rate corporate debt obligations in which the FIXED
INCOME FUND may invest include floating rate corporate debt securities
issued by savings associations collateralized by adjustable rate mortgage
loans, also known as collateralized thrift notes. Many of these
collateralized thrift notes have received AAA ratings from NRSROs.
Collateralized thrift notes differ from traditional "pass-through"
certificates in which payments made are linked to monthly payments made by
individual borrowers net of any fees paid to the issuer or guarantor of
such securities.
CONVERTIBLE SECURITIES. The Funds (except THE BILTMORE MUNICIPAL FUNDS)
may invest in convertible securities. Convertible securities are fixed
income securities which may be exchanged or converted into a predetermined
number of the issuer's underlying common stock at the option of the holder
during a specified time period. Convertible securities may take the form
of convertible bonds, convertible preferred stock or debentures, units
consisting of "usable" bonds and warrants or a combination of the features
of several of these securities. The investment characteristics of each
convertible security vary widely, which allows convertible securities to
be employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income
securities that generally retain the investment characteristics of fixed
income securities until they have been converted but also react to
movements in the underlying equity securities. The holder is entitled to
receive the fixed income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion
privilege. Usable bonds are corporate bonds that can be used in whole or
in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants,
which entitle the holder to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before
the bonds' maturity. Convertible securities are senior to equity
securities, and therefore have a claim to assets of the corporation prior
to the holders of common stock in the case of liquidation. However,
convertible securities are generally subordinated to similar non-
convertible securities of the same company. The interest income and
dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but
lower than non-convertible securities of similar quality. A Fund will
exchange or convert the convertible securities held in its portfolio into
shares of the underlying common stocks when, in the Fund's investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist a Fund in achieving its investment objective.
Otherwise, a Fund will hold or trade the convertible securities. In
selecting convertible securities for a Fund, the Fund's investment adviser
evaluates the investment characteristics of the convertible security as a
fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the Fund's investment
adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
PUT AND CALL OPTIONS. The Funds (except THE BILTMORE MUNICIPAL FUNDS) may
purchase put options on their portfolio securities. These options will be
used only as a hedge to attempt to protect securities which a Fund holds
against decreases in value. A Fund may purchase these put options as long
as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio. A Fund may also write call options on
securities either held in its portfolio or which it has the right to
obtain without payment of further consideration or for which it has
segregated cash in the amount of any additional consideration. The call
options which a Fund writes and sells must be listed on a recognized
options exchange. The writing of calls by a Fund is intended to generate
income for a Fund and thereby protect against price movements in
particular securities in a Fund's portfolio.
Prior to exercise or expiration, an option position can only be terminated
by entering into a closing purchase or sale transaction. This requires a
secondary market on an exchange which may or may not exist for any
particular call or put option at any specific time. The absence of a
liquid secondary market also may limit the Fund's ability to dispose of
the securities underlying an option. The inability to close options also
could have an adverse impact on the Fund's ability to effectively hedge
its portfolio. These instruments may not be available with regard to the
securities of certain emerging markets in which the EMERGING MARKETS FUND
may invest.
The effective use of futures and options as hedging techniques depends on
the correlation between their prices and the behavior of a Fund's
portfolio securities as well as the investment adviser's ability to
accurately predict the direction of stock prices, interest rates and other
relevant economic factors. In addition, daily limits on the fluctuation of
futures and options prices could cause a Fund to be unable to timely
liquidate its futures or options position and cause it to suffer greater
losses than would otherwise be the case. In this regard, a Fund may be
unable to anticipate the extent of its losses from futures transactions.
These instruments may not be available with regard to the securities of
certain emerging markets in which the EMERGING MARKETS FUND may invest.
STOCK INDEX FUTURES AND OPTIONS. The EQUITY FUND, QUANTITATIVE EQUITY
FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, EMERGING MARKETS FUND, and
BALANCED FUND may utilize stock index futures contracts, options, and
options on futures contracts, subject to the limitation that the value of
these futures contracts and options will not exceed 20% of a Fund's total
assets. Also, a Fund will not purchase options to the extent that more
than 5% of the value of a Fund's total assets would be invested in
premiums on open put option positions (and, in the case of the SPECIAL
VALUES FUND and EMERGING MARKETS FUND, margin deposits on open positions).
These futures contracts and options will be used to handle cash flows into
and out of a Fund and to potentially reduce transactional costs, since
transactional costs associated with futures and options contracts can be
lower than costs stemming from direct investment in stocks. The Funds will
not enter into these transactions for speculative purposes.
There are several risks accompanying the utilization of futures contracts
to effectively anticipate market movements. First, positions in futures
contracts may be closed only on an exchange or board of trade that
furnishes a secondary market for such contracts. While the Funds plan to
utilize futures contracts only if there exists an active market for such
contracts, there is no guarantee that a liquid market will exist for the
contracts at a specified time. Furthermore, because, by definition,
futures contracts look to projected price levels in the future, and not to
current levels of valuation, market circumstances may result in there
being a discrepancy between the price of the stock index future and the
movement in the corresponding stock index. The absence of a perfect price
correlation between the futures contract and its underlying stock index
could stem from investors choosing to close futures contracts by
offsetting transactions rather than satisfying additional margin
requirements. This could result in a distortion of the relationship
between the index and the futures market. In addition, because the futures
market imposes less burdensome margin requirements than the securities
market, an increased amount of participation by speculators in the futures
market could result in price fluctuations.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The EMERGING MARKETS FUND may
enter into forward foreign currency exchange contracts. A forward foreign
currency exchange contract ("forward contract") is an obligation to
purchase or sell an amount of a particular currency at a specific price
and on a future date agreed upon by the parties. Generally, no commission
charges or deposits are involved. At the time the Fund enters into a
forward contract, Fund assets with a value equal to the Fund's obligation
under the forward contract are segregated on the Fund's records and are
maintained until the forward contract has been settled. The Fund will not
enter into a forward contract with a term of more than one year. The Fund
will generally enter into a forward contract to provide the proper
currency to settle a securities transaction at the time the transaction
occurs ("trade date"). The period between the trade date and settlement
date will vary between 24 hours and 30 days, depending upon local custom.
The EMERGING MARKETS FUND may also protect against the decline of a
particular foreign currency by entering into a forward contract to sell an
amount of that currency approximating the value of all or a portion of the
Fund's assets denominated in that currency ("hedging"). The success of
this type of short-term hedging strategy is highly uncertain due to the
difficulties of predicting short-term currency market movements and of
precisely matching forward contract amounts and the constantly changing
value of the securities involved. Although the investment adviser will
consider the likelihood of changes in currency values when making
investment decisions, the investment adviser believes that it is important
to be able to enter into forward contracts when it believes the interest
of the Fund will be served. The Fund will only enter into forward
contracts for hedging purposes and will not enter into forward contracts
in a particular currency in an amount in excess of the Fund's assets
denominated in that currency. No more than 30% of the Fund's assets will
be committed to forward contracts at any time. (This restriction does not
include forward contracts entered into to settle securities transactions.)
INDEX PARTICIPATION CONTRACTS. The EQUITY INDEX FUND may participate in
the purchasing and selling of index participation contracts based on the
S&P 500 Index. The Fund will utilize index participation contracts to aid
in the management of cash flows into and out of the Fund and not for
speculative purposes. These contracts provide the equivalent of a position
in the stocks of the Index, where each stock is represented in the same
proportion as it is represented in the Index. Unlike futures contracts,
positions in these instruments may last indefinitely, with no expiration
date and will pay dividends implied by the underlying stocks in the Index.
Generally, the value of an Index participation contract will rise and fall
as the value of the Index rises and falls. Index participation contracts
have lower transaction costs than those associated with the purchase and
sale of individual stocks. The Fund will invest in index participation
contracts only if there exists an active market for such contracts.
The value of these contracts, together with the value of the EQUITY INDEX
FUND'S investment in stock index futures contracts, options and options on
futures contracts will not exceed 20% of the Fund's total assets. The
Fund's use of these investments will be to accommodate cash flows and
maintain adequate liquidity to meet redemption requests, while
simultaneously maximizing the level of Fund assets which are tracking the
performance of the S&P 500 Index.
MORTGAGE-BACKED SECURITIES. The BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND may invest in mortgage-backed securities.
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans on real property. There are currently three basic types of mortgage-
backed securities: (i) those issued or guaranteed by the U.S. government
or one of its agencies or instrumentalities, such as the Government
National Mortgage Association ("Ginnie Mae"), the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"); (ii) those issued by private issuers that
represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole loans or
mortgage-backed securities without a government guarantee but usually
having some form of private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMS") are pass-through mortgage securities representing interests in
adjustable rather than fixed interest rate mortgages. The ARMS in which a
Fund invests are issued by Ginnie Mae, Fannie Mae or Freddie Mac, and are
actively traded. The underlying mortgages which collateralize ARMS issued
by Ginnie Mae are fully guaranteed by the Federal Housing Administration
or Veterans Administration, while those collateralizing ARMS issued by
Fannie Mae or Freddie Mac are typically conventional residential mortgages
conforming to strict underwriting size and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but may be collateralized by whole
loans or private pass-through securities.
A Fund will only invest in CMOs which are rated AAA by an NRSRO or are of
comparable quality as determined by a Fund's investment adviser, and which
may be: (a) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by the
issuer and such guarantee is collateralized by U.S. government securities;
or (c) collateralized by pools of mortgages without a government guarantee
as to payment of principal and interest, but which have some form of
credit enhancement.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS. Real estate mortgage investment
conduits ("REMICs") are offerings of multiple class real estate mortgage-
backed securities which qualify and elect treatment as such under
provisions of the Internal Revenue Code. Issuers of REMICs may take
several forms, such as trusts, partnerships, corporations, associations,
or segregated pools of mortgages. Once REMIC status is elected and
obtained, the entity is not subject to federal income taxation. Instead,
income is passed through the entity and is taxed to the person or persons
who hold interests in the REMIC. A REMIC interest must consist of one or
more classes of "regular interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
ASSET-BACKED SECURITIES. The BALANCED FUND, FIXED INCOME FUND, and SHORT-
TERM FIXED INCOME FUND may invest in asset-backed securities. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities but have underlying assets that are not mortgage loans or
interests in mortgage loans. A Fund may invest in asset-backed securities
rated A or higher at the time of purchase by an NRSRO including, but not
limited to, interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. These
securities may be in the form of pass-through instruments or asset-backed
bonds. The securities are issued by non-governmental entities and carry no
direct or indirect government guarantee.
Mortgage-backed and asset-backed securities generally pay back principal
and interest over the life of the security. At the time a Fund reinvests
the payments and any unscheduled prepayments of principal received, a Fund
may receive a rate of interest which is actually lower than the rate of
interest paid on these securities ("prepayment risks"). Mortgage-backed
and asset-backed securities are subject to higher prepayment risks than
most other types of debt instruments with prepayment risks because the
underlying mortgage loans or the collateral supporting asset-backed
securities may be prepaid without penalty or premium. Prepayment risks on
mortgage-backed securities tend to increase during periods of declining
mortgage interest rates because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Prepayments on mortgage-
backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally
are less likely to experience substantial prepayments than are mortgage-
backed securities, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the rate of
prepayments on asset-backed securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the
benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many
of which give such debtors the right to set off certain amounts owed on
the credit cards, thereby reducing the balance due. Most issuers of asset-
backed securities backed by motor vehicle installment purchase obligations
permit the servicer of such receivables to retain possession of the
underlying obligations. If the servicer sells these obligations to another
party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related asset-backed securities.
Further, if a vehicle is registered in one state and is then reregistered
because the owner and obligor moves to another state, such reregistration
could defeat the original security interest in the vehicle in certain
cases. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on these securities.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which the
Funds (except The Biltmore Municipal Funds) invest are either issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
These securities include, but are not limited to:
o direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes, and bonds;
o and notes, bonds and discount notes of U.S. government agencies or
instrumentalities, such as: the Farm Credit System, including the
National Bank for Cooperatives and Banks for Cooperatives;
o Federal Home Loan Banks; Federal Home Loan Mortgage Corporation;
Federal National Mortgage Corporation; Government National Mortgage
Association; and
o Student Loan Marketing Association.
Some of these obligations, such as Government National Mortgage
Association mortgage-backed securities, are backed by the full faith and
credit of the U.S. Treasury. No assurances can be given that the U.S.
government will provide financial support to other agencies or
instrumentalities, since it is not obligated to do so. These agencies and
instrumentalities are supported by:
o the issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
Some of the short-term U.S. government securities the Funds may purchase
carry variable interest rates. These securities have a rate of interest
subject to adjustment at least annually. This adjusted rate is ordinarily
tied to some objective standard, such as the 91-day U.S. Treasury bill
rate.
DEMAND MASTER NOTES. The Funds (except THE BILTMORE MUNICIPAL FUNDS) may
invest in variable amount demand master notes. Demand master notes are
short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as a Fund) payable upon demand by
either party. The notice period for demand typically ranges from one to
seven days, and the party may demand full or partial payment. Many demand
master notes give a Fund the option of increasing or decreasing the
principal amount of the master note on a daily or weekly basis within
certain limits. Demand master notes usually provide for floating or
variable rates of interest.
TEMPORARY INVESTMENTS. For temporary defensive purposes (up to 100% of
total assets) and to maintain liquidity (up to 35% of total assets), the
EQUITY FUND, QUANTITATIVE EQUITY FUND, SPECIAL VALUES FUND, and EMERGING
MARKETS FUND may invest in:
o certificates of deposit, demand and time deposits, savings shares,
bankers' acceptances, and other instruments of domestic and foreign
banks and savings and loans, which institutions have capital,
surplus, and undivided profits over $100 million, or if the principal
amount of the instrument is insured in full by the Bank Insurance
Fund ("BIF"), or by the Savings Association Insurance Fund ("SAIF"),
both of which are administered by the FDIC; and
o commercial paper (including Canadian Commercial Paper and Europaper)
rated A-1 or better by S&P, Prime-1 by Moody's, or F-1 by Fitch, or,
if unrated, of comparable quality as determined by the Funds'
investment adviser.
THE BILTMORE MUNICIPAL FUNDS may invest in short-term tax-exempt or
taxable temporary investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; other debt securities; commercial paper; certificates
of deposit of banks; shares of other investment companies; and repurchase
agreements (arrangements in which the organization selling the Fund a bond
or temporary investment agrees at the time of sale to repurchase it at a
mutually agreed upon time and price).
There are no rating requirements applicable to temporary investments.
However, each Fund's investment adviser will limit temporary investments
to those it considers to be of comparable quality to the Fund's acceptable
investments.
Although the Funds are permitted to make taxable, temporary investments,
there is no current intention of generating income subject to federal
regular income tax. However, it is anticipated that certain temporary
investments will generate income which is subject to Georgia or North
Carolina state income taxes.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objective and policies but
which are subject to restriction on resale under federal securities law.
However, a Fund will limit investments in illiquid securities, including
certain restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice,
to 15% of its net assets.
The restriction is not applicable to commercial paper issued under Section
4(2) of the Securities Act of 1933. Section 4(2) commercial paper is
restricted as to disposition under federal securities law, and is
generally sold to institutional investors, such as the Funds, who agree
that they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like a Fund through or with the assistance
of the issuer or investment dealers who make a market in Section 4(2)
commercial paper, thus providing liquidity. Each Fund believes that
Section 4(2) commercial paper and possibly certain other restricted
securities which meet the criteria for liquidity established by the
Trustees are quite liquid. Each Fund intends, therefore, to treat the
restricted securities which meet the criteria for liquidity established by
the Trustees, including Section 4(2) commercial paper, as determined by a
Fund's investment adviser, as liquid and not subject to the investment
limitations applicable to illiquid securities. In addition, because
Section 4(2) commercial paper is liquid, a Fund intends not to subject
such paper to the limitation applicable to restricted securities.
REPURCHASE AGREEMENTS. The U.S. government securities in which each Fund
invests may be purchased pursuant to repurchase agreements. Repurchase
agreements are arrangements in which banks, broker/dealers and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at
a mutually agreed upon time and price. To the extent that the original
seller does not repurchase the securities from a Fund, a Fund could
receive less than the repurchase price on any sale of such securities.
DEMAND FEATURES. The Funds ^ may acquire securities that are subject to
puts and standby commitments ("demand features") to purchase the
securities at their principal amount (usually with accrued interest)
within a fixed period (usually seven days) following a demand by a Fund.
The demand feature may be issued by the issuer of the underlying
securities, a dealer in the securities or by another third party, and may
not be transferred separately from the underlying security. A Fund uses
these arrangements to provide a Fund with liquidity and not to protect
against changes in the market value of the underlying securities. The
bankruptcy, receivership or default by the issuer of the demand feature,
or a default on the underlying security or other event that terminates the
demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of
credit enhancement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Funds may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which a Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete
these transactions may cause a Fund to miss a price or yield considered to
be advantageous. Settlement dates may be a month or more after entering
into these transactions, and the market values of the securities purchased
may vary from the purchase prices. Accordingly, a Fund may pay more or
less than the market value of the securities on the settlement date.
A Fund may dispose of a commitment prior to settlement if the Fund's
investment adviser deems it appropriate to do so. In addition, a Fund may
enter into transactions to sell its purchase commitments to third parties
at current market values and simultaneously acquire other commitments to
purchase similar securities at later dates. A Fund may realize short-term
profits or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
each Fund may lend portfolio securities on a short-term or long-term
basis, or both, to broker/dealers, banks or other institutional borrowers
of securities. The Funds will only enter into loan arrangements with
broker/dealers, banks or other institutions which a Fund's investment
adviser has determined are creditworthy under guidelines established by
the Trustees and in which a Fund will receive collateral equal to at least
100% of the value of the securities loaned. There is the risk that when
lending portfolio securities, the securities may not be available to a
Fund on a timely basis and a Fund may, therefore, lose the opportunity to
sell the securities at a desirable price. In addition, in the event that a
borrower of securities would file for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest
in the securities of other investment companies, but may not own more than
3% of the total outstanding voting stock of any investment company, invest
more than 5% of its total assets in any one investment company, or invest
more than 10% of its total assets in investment companies in general. A
Fund will invest in other open-end investment companies primarily for the
purpose of investing short-term cash which has not yet been invested in
other portfolio instruments. The investment adviser will waive its
investment advisory fee on assets invested in securities of open-end
investment companies. Each Fund would, however, continue to pay its own
investment advisory fees and other expenses with respect to its
investments in shares of closed-end investment companies. It should be
noted that investment companies incur certain expenses, such as custodian
and transfer agent fees, and therefore, any investment by a Fund in shares
of another investment company would be subject to such duplicate expenses.
RATINGS. If a security loses its rating or has its rating reduced after a
Fund purchased it, the Fund is not required to sell or otherwise dispose
of the security, but may consider doing so. If ratings made by Moody's,
S&P, or Fitch change because of changes in those organizations or in their
ratings systems, a Fund will attempt to identify other rating
organizations and systems with comparable standards, in accordance with
the investment policies of the Fund. A description of rating categories is
contained in the Appendices to the Statements of Additional Information.
MUNICIPAL LEASES. THE BILTMORE MUNICIPAL FUNDS may invest in municipal
leases. Municipal leases are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities and may be considered to be illiquid.
PARTICIPATION INTERESTS. The Funds may purchase participation interests
from financial institutions such as commercial banks, savings and loan
associations, and insurance companies. These participation interests would
give the Funds undivided interests in State Municipal Securities. The
financial institutions from which a Fund purchases participation interests
frequently provide or secure irrevocable letters of credit or guarantees
to assure that the participation interests are of high quality. The
Trustees will establish guidelines pursuant to which a Fund's investment
adviser determines that participation interests meet the prescribed
quality standards for the Fund.
VARIABLE RATE MUNICIPAL SECURITIES. Some of the State Municipal Securities
which the Funds purchase may have variable interest rates. Variable
interest rates are ordinarily based on a published interest rate, interest
rate index or a similar standard, such as the 91-day U.S. Treasury bill
rate. Many variable rate municipal securities are subject to payment of
principal on demand by a Fund, usually in not more than seven days. All
variable rate municipal securities will meet the quality standards for a
Fund. The Fund's investment adviser monitors the pricing, quality, and
liquidity of the variable rate municipal securities, including
participation interests held by a Fund, on the basis of published
financial information and reports of the rating agencies and other
analytical services pursuant to guidelines established by the Trustees.
MUNICIPAL BOND INSURANCE
The GEORGIA MUNICIPAL BOND FUND, NORTH CAROLINA MUNICIPAL BOND FUND, and
SOUTH CAROLINA MUNICIPAL BOND FUND may purchase municipal securities
covered by insurance which guarantees the timely payment of principal at
maturity and interest on such securities. These insured municipal
securities are either (1) covered by an insurance policy applicable to a
particular security, whether obtained by the issuer of the security or by
a third party ("Issuer-Obtained Insurance") or (2) insured under master
insurance policies issued by municipal bond insurers, which may be
purchased by a Fund (the "Policy" or"Policies").
THE BILTMORE MUNICIPAL FUNDS will require or obtain municipal bond
insurance when purchasing municipal securities which would not otherwise
meet a Fund's quality standards. A Fund may also require or obtain
municipal bond insurance when purchasing or holding specific municipal
securities when, in the opinion of the Fund's investment adviser, such
insurance would benefit the Fund (for example, through improvement of
portfolio quality or increased liquidity of certain securities). The
Funds' investment advisers anticipate that between 30% and 60% of each
Fund's net assets will be invested in municipal securities which are
insured.
Issuer-Obtained Insurance policies are noncancellable and continue in
force as long as the municipal securities are outstanding and their
respective insurers remain in business. If a municipal security is covered
by Issuer-Obtained Insurance, then such security need not be insured by
the Policies purchased by a Fund.
The Funds may purchase two types of Policies issued by municipal bond
insurers. One type of Policy covers certain municipal securities only
during the period in which they are in a Fund's portfolio. In the event
that a municipal security covered by such a Policy is sold from a Fund,
the insurer of the relevant Policy will be liable only for those payments
of interest and principal which are due and owing at the time of sale.
The other type of Policy covers municipal securities not only while they
remain in the Fund's portfolio but also until their final maturity even if
they are sold out of the Fund's portfolio, so that the coverage may
benefit all subsequent holders of those municipal securities. The Fund
will obtain insurance which covers municipal securities until final
maturity even after they are sold out of the Fund's portfolio only if, in
the judgment of the investment adviser, the Fund would receive net
proceeds from the sale of those securities, after deducting the cost of
such permanent insurance and related fees, significantly in excess of the
proceeds it would receive if such municipal securities were sold without
insurance. Payments received from municipal bond issuers may not be tax-
exempt income to shareholders of the Fund.
The premiums for the Policies are paid by the Fund and the yield on the
Fund's portfolio is reduced thereby. Premiums for the Policies are paid by
the Fund monthly, and are adjusted for purchases and sales of municipal
securities during the month. A Fund may purchase Policies from MBIA Corp.
("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty
Insurance Company ("FGIC"), or any other municipal bond insurer which is
rated AAA by S&P or Aaa by Moody's. Each Policy guarantees the payment of
principal and interest on those municipal securities it insures. The
Policies will have the same general characteristics and features. A
municipal security will be eligible for coverage if it meets certain
requirements set forth in the Policy. In the event interest or principal
on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such
payment not later than 30 days after it has been notified by the Fund that
such non-payment has occurred. MBIA, AMBAC, and FGIC will not have the
right to withdraw coverage on securities insured by their Policies so long
as such securities remain in the Fund's portfolio, nor may MBIA, AMBAC, or
FGIC cancel their Policies for any reason except failure to pay premiums
when due.
MBIA, AMBAC, and FGIC will reserve the right at any time upon 90 days'
written notice to a Fund to refuse to insure any additional municipal
securities purchased by the Fund after the effective date of such notice.
The Funds reserve the right to terminate any of the Policies if they
determine that the benefits to a Fund of having its portfolio insured
under such Policy are not justified by the expense involved.
Additionally, the Funds reserve the right to enter into contracts with
insurance carriers other than MBIA, AMBAC, or FGIC if such carriers are
rated AAA by S&P or Aaa by Moody's.
NON-DIVERSIFICATION
THE BILTMORE MUNICIPAL FUNDS is comprised of three non-diversified Funds.
As such, there is no limit on the percentage of assets which can be
invested by a Fund in any single issuer. An investment in a Fund,
therefore, will entail greater risk than would exist in a diversified
investment company because the higher percentage of investments among
fewer issuers may result in greater fluctuation in the total market value
of a Fund's portfolio. Any economic, political, or regulatory developments
affecting the value of the securities in a Fund's portfolio will have a
greater impact on the total value of the portfolio than would be the case
if the portfolio were diversified among more issuers. A Fund may purchase
an issue of municipal securities in its entirety.
The Funds intend to comply with Subchapter M of the Internal Revenue Code.
This undertaking requires that at the end of each quarter of the taxable
year, the aggregate value of all investments in any one issuer (except
U.S. government obligations, cash, and cash items) which exceed 5% of a
Fund's total assets shall not exceed 50% of the value of its total assets.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, or other fixed income security, or in a portfolio of
fixed income securities, prior to maturity. Volatility is the magnitude of
the change in the price of a bond relative to a given change in the market
rate of interest. A bond's price volatility depends on three primary
variables: the bond's coupon rate; maturity date; and the level of market
yields of similar fixed income securities. Generally, bonds with lower
coupons or longer maturities will be more volatile than bonds with higher
coupons or shorter maturities. Duration combines these variables into a
single measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows. When a Fund
invests in mortgage pass-through securities, its duration will be
calculated in a manner which requires assumptions to be made regarding
future principal prepayments. A more complete description of this
calculation is available upon request from the Funds.
INVESTMENT LIMITATIONS

BORROWING MONEY
The EQUITY FUND, QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL
VALUES FUND, EMERGING MARKETS FUND, BALANCED FUND, FIXED INCOME FUND, and
SHORT-TERM FIXED INCOME FUND will not borrow money directly or through
reverse repurchase agreements (arrangements in which a Fund sells a
portfolio instrument for a percentage of its cash value with an agreement
to buy it back on a set date) or pledge securities except, under certain
circumstances, a Fund may borrow up to one-third of the value of its total
assets and pledge, mortgage, or hypothecate up to 15% of the value of
those assets to secure such borrowings. The GEORGIA MUNICIPAL BOND FUND,
NORTH CAROLINA MUNICIPAL BOND FUND, and SOUTH CAROLINA MUNICIPAL BOND FUND
will not borrow money or pledge securities except, under certain
circumstances, a Fund may borrow up to one-third of the value of its total
assets and pledge up to 10% of the value of those assets to secure such
borrowings.
DIVERSIFICATION
With respect to 75% of the value of its total assets, the EQUITY FUND,
QUANTITATIVE EQUITY FUND, EQUITY INDEX FUND, SPECIAL VALUES FUND, BALANCED
FUND, FIXED INCOME FUND, and SHORT-TERM FIXED INCOME FUND will not invest
more than 5% of the value of its total assets in securities of any one
issuer (other than cash, cash items, or securities issued or guaranteed by
the government of the United States or its agencies or instrumentalities,
and repurchase agreements collateralized by such securities), or acquire
more than 10% of the outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, can be changed by the
Trustees without shareholder approval. Shareholders will be notified
before any material change in these limitations becomes effective.
In addition to the above limitations, The SOUTH CAROLINA MUNICIPAL BOND
FUND will not:
o invest more than 5% of its total assets in industrial development
bonds when the payment of principal and interest is the
responsibility of companies (or guarantors, where applicable) with
less than three years of continuous operations, including the
operation of any predecessor; or
o own securities of open-end or closed-end investment companies, except
under certain circumstances and subject to certain limitations
described in this prospectus, and, not exceeding 10% of its net
assets.
TRUST INFORMATION

B. Scott Sadler is a portfolio manager of the EMERGING MARKETS FUND. He is
a Vice President of Wachovia Asset Management. He joined Wachovia Bank of
North Carolina, N.A. in 1987, and is responsible for managing personal
trust investment portfolios. Mr. Sadler is a graduate of the University of
Virginia's McIntire School of Commerce with a bachelor's degree in
economics. Mr. Sadler is a Chartered Financial Analyst.
Scott C. Satterwhite is the portfolio manager of the ^ SPECIAL VALUES
FUND. Mr. Satterwhite is a Chartered Financial Analyst and Senior Vice
President and Manager of Personal Trust Portfolio Management in Georgia
for the Personal Financial Services Group. Mr. Satterwhite joined Wachovia
Bank of North Carolina, N.A. in 1981 and has held positions as a closely-
held business analyst and capital management counselor. Mr. Satterwhite
has a bachelor's degree from the University of the South and an MBA from
Tulane University.
Cherry Stribling is the portfolio manager of the QUANTITATIVE EQUITY FUND.
Mr. Stribling is a Vice President of Wachovia Bank of North Carolina,
N.A., and, as a Portfolio Investment Manager, managed the Wachovia Stock
Fund, a bank collective investment fund with an investment objective
similar to the Fund's. Mr. Stribling also manages individual and
institutional accounts with the same portfolio management style as the
Fund. Mr. Stribling has managed the Fund since its inception.
Timothy L. Swanson is an Assistant Vice President of Wachovia Asset
Management. He joined Wachovia Bank of North Carolina, N.A. in 1991. Mr.
Swanson is responsible for managing personal trust portfolios. Mr. Swanson
is a portfolio manager of the EMERGING MARKETS FUND. Mr. Swanson is a
graduate of Wake Forest University with a bachelor's degree in
mathematical economics, and of the University of Rochester with a master's
degree in economics. Mr. Swanson is a Chartered Financial Analyst.
Michael J. Tierney, who joined Wachovia Bank of North Carolina, N.A. in
1981, is Senior Vice President/Group Executive and Chief Investment
Officer with Wachovia Asset Management.^ Mr. Tierney is a portfolio
manager of the EMERGING MARKETS FUND. Mr. Tierney is a graduate of the
University of Connecticut, and has more than 25 years of experience
managing equity and fixed income investments.
DISTRIBUTION OF SHARES
Federated Securities Corp., Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 is the distributor for shares of the Funds. It is
a Pennsylvania corporation organized on November 14, 1969, and is the
distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
ADMINISTRATIVE ARRANGEMENTS
The distributor may pay financial institutions and other financial service
providers such as banks, fiduciaries custodians for public funds,
investment advisers, and broker/dealers a fee based upon the average net
asset value of shares of their customers for providing administrative
services to the Funds. This fee, if paid, will be reimbursed by the
Adviser or their affiliates, not the Funds.

ADMINISTRATION OF THE FUNDS
Federated Services Company, Pittsburgh, Pennsylvania, also provides the
Funds with the administrative personnel and services necessary to operate
the Funds. Such services include legal, accounting and other
administrative services. Federated Services Company provides these at an
annual rate, computed and payable daily, as specified below:
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS
ADMINISTRATIVE FEE AND THE BILTMORE MUNICIPAL FUNDS.
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year shall aggregate at
least $75,000 for each portfolio of THE BILTMORE FUNDS and at least
$50,000 for each portfolio of THE BILTMORE MUNICIPAL FUNDS. Federated
Services Company may choose voluntarily to waive or reimburse a portion of
its fee at any time.
EXPENSES OF THE FUNDS AND CLASS Y SHARES
Holders of Shares pay their allocable portion of Trust and respective
Fund expenses. The Trust expenses for which holders of Shares pay their
allocable portion include, but are not limited to: the cost of organizing
the Trust and continuing its existence; the cost of registering the
Trust; Trustees' fees; auditors' fees; the cost of meetings of Trustees;
legal fees of the Trust; association membership dues and such non-
recurring and extraordinary items as may arise.
Fund expenses for which holders of Shares pay their allocable portion
based on average daily net assets include, but are not limited to:
registering a Fund and Shares of that Fund; investment advisory services;
taxes and commissions; custodian fees; insurance premiums; auditors'
fees; and such non-recurring and extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the
Class B Shares. In addition, the Funds' expenses under a shareholder
services plan are incurred by the Class A Shares and Class B Shares. The
Trustees reserve the right to allocate certain expenses to holders of
Shares as they deem appropriate ("Class Expenses"). In any case, Class
Expenses would be limited to: transfer agent fees as identified by the
transfer agent as attributable to holders of shares; printing and postage
expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange commission and to
state securities commissions; expenses related to administrative
personnel and services as required to support holders of Class Y Shares;
legal fees relating solely to Class Y Shares; and Trustees fees incurred
as a result of issues relating solely to Class Y Shares.
BROKERAGE TRANSACTIONS
The Funds may engage in brokerage transactions. When selecting brokers and
dealers to handle the purchase and sale of portfolio instruments, the
Advisers look for prompt execution of the order at a favorable price. In
working with dealers, the Advisers will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. In selecting
among firms believed to meet these criteria, the Advisers may give
consideration to those firms which have sold or are selling shares of the
Funds. The Advisers make decisions on portfolio transactions and selects
brokers and dealers subject to review by the Trustees.
NET ASSET VALUE

The net asset value of Class Y Shares of a Fund may differ slightly from
that of Class A Shares and Class B Shares of the same Fund due to the
variability in daily net income resulting from different distribution
charges and shareholder services fees. The net asset value for each Fund
will fluctuate for all three classes.
The net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange, Monday through
Friday, except on: (i) days on which there are not sufficient changes in
the value of a Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no shares are tendered for
redemption and no orders to purchase shares are received; or (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day.
INVESTING IN THE FUNDS

SHARE PURCHASES
Fund Shares are sold on days on which Wachovia Banks, the New York Stock
Exchange and the Federal Reserve Wire System are open for business. Shares
may be purchased through the Trust Divisions of the Wachovia Banks. All
purchase orders must be transmitted to a Fund by 5:00 p.m. (Eastern time)
and will be purchased at the public offering price next determined after a
Fund receives the purchase request. Texas residents must purchase Shares
through Federated Securities Corp. at 1-800-618-8573. In connection with
the sale of Shares, the distributor may from time to time offer certain
items of nominal value to any shareholder or investor. Each Fund and the
distributor reserve the right to reject any purchase request.
Trust customers of the Wachovia Banks may purchase Shares of a Fund by
telephoning, sending written instructions, or placing the order in person
with their account officer in accordance with the procedures established
by the Wachovia Banks and as set forth in the relevant account agreement.
Payment may be made by check, by wire of federal funds, or by debiting a
customer's account with a Wachovia Bank. Purchase orders must normally be
received by Wachovia Bank by 3:00 p.m. (Eastern time), in order for Shares
to be purchased at that day's price. It is the responsibility of the
Wachovia Banks to transmit orders promptly to the Fund.
MINIMUM INVESTMENT REQUIRED
There are no sales charges imposed on Class Y Shares of the Funds. Minimum
initial investments on Class Y Shares may be waived from time to time for
purchases by Trust Divisions of the Wachovia Banks for their fiduciary or
custodial accounts. An institutional investor's minimum investment will be
calculated by combining all accounts it maintains with the Funds. The
minimum initial investment in THE BILTMORE FUNDS is $250, and $500 for THE
BILTMORE MUNICIPAL FUNDS. Subsequent investments in THE BILTMORE FUNDS
must be in amounts of at least $50, and for THE BILTMORE MUNICIPAL FUNDS,
subsequent investments must be in amounts of at least $100.
SYSTEMATIC INVESTMENT PROGRAM
Shareholders in any of the Funds may participate in a Systematic
Investment Program. Once a Fund account has been opened, shareholders in
THE BILTMORE FUNDS and THE BILTMORE MUNCIPAL FUNDS may add to their
investment on a regular basis in a minimum amount of $50 and $100,
respectively. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account and invested in Fund
shares at the net asset value next determined after an order is received
by a Fund. A shareholder may apply for participation in this program
through Wachovia Banks or through the distributor.
CERTIFICATES AND CONFIRMATIONS
As the transfer agent, Federated Shareholder Services Company maintains a
share account for each shareholder of record. Share certificates are not
issued unless requested in writing to a Fund.
Detailed confirmations of each purchase or redemption are sent to each
shareholder of record. Annual statements are sent to report dividends paid
during the year for THE BILTMORE FUNDS, and monthly confirmations are sent
to report dividends paid during that month for THE BILTMORE MUNICIPAL
FUNDS.
SUBACCOUNTING SERVICES
Institutions are encouraged to open single master accounts; however,
certain institutions may wish to use the Transfer Agent's subaccounting
system to minimize their internal recordkeeping requirements. The Transfer
Agent may charge a fee based on the level of subaccounting services
rendered. Institutions holding Shares of a Fund in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting
fees as part of or in addition to normal trust or agency account fees.
They may also charge fees for other services provided which may be related
to the ownership of Fund Shares. This prospectus should, therefore, be
read together with any agreement between the customer and the institution
with regard to the services provided, the fees charged for those services,
and any restrictions and limitations imposed.
DIVIDENDS AND CAPITAL GAINS
Dividends are declared and paid quarterly to shareholders invested in the
EQUITY FUND, the QUANTITATIVE EQUITY FUND, the EQUITY INDEX FUND and the
BALANCED FUND on the record date. Dividends are declared^ and paid monthly
to all shareholders invested in the FIXED INCOME FUND and the SHORT-TERM
FIXED INCOME FUND on the record date. Dividends are declared daily and
paid monthly to all shareholders invested in THE BILTMORE MUNICIPAL FUNDS
on the record date. Dividends are declared and paid annually to all
shareholders of the EMERGING MARKETS FUND and SPECIAL VALUES FUND on the
record date. Unless shareholders request cash payments by writing to a
Fund, dividends are automatically reinvested in additional Shares of a
Fund on the payment dates at the ex-dividend date net asset value without
a sales charge.
Dividends are declared just prior to determining net asset value. If an
order for Shares is placed on the preceding business day, Shares purchased
by wire begin earning dividends on the business day wire payment is
received by the Custodian. If the order for Shares and payment by wire are
received on the same day, Shares begin earning dividends on the next
business day. Shares purchased by check begin earning dividends on the
business day after the check is converted into federal funds.
Capital gains, when realized by a Fund, will be distributed at least once
every 12 months.
EXCHANGE PRIVILEGE

REDEEMING SHARES

Each Fund redeems Shares at its net asset value next determined after the
Fund receives the redemption request. Redemptions will be made on days on
which the Fund computes its net asset value. Telephone or written requests
for redemptions must be received in proper form and can be made through
the Wachovia Banks or directly to a Fund.
BY TELEPHONE. A shareholder may redeem Shares of a Fund by calling the
Wachovia Banks (call toll-free 1-800-994-4414) to request the redemption.
Redemption requests made through the Wachovia Banks must be received
before 3:00 p.m. (Eastern time) in order for Shares to be redeemed at that
day's net asset value. The Wachovia Banks are responsible for promptly
submitting redemption requests and providing proper written redemption
instructions to the Funds. Telephone redemption instructions may be
recorded. If reasonable procedures are not followed by a Fund, it may be
liable for losses due to unauthorized or fraudulent telephone
instructions.
Normally, a check for the proceeds is mailed within three business days,
but in no event will proceeds be credited more than seven days after a
proper request for redemption has been received. In the event of drastic
economic or market changes, a shareholder may experience difficulty in
redeeming by telephone. If such a case should occur, another method of
redemption should be considered.
BY MAIL. A shareholder may redeem Fund Shares by sending a written request
to the Wachovia Banks. The written request should include the
shareholder's name, the Fund name, the account number or brokerage account
numbers, and the share or dollar amount requested. If share certificates
have been issued, they must be properly endorsed and should be sent by
registered or certified mail with the written request to a Fund.
Shareholders should call the Wachovia Banks or Wachovia Investments, Inc.
for assistance in redeeming by mail.
SIGNATURES. Shareholders requesting a redemption to be sent to an address
other than that on record with a Fund or a redemption payable other than
to the shareholder of record must have signatures on written redemption
requests guaranteed by:
o a trust company or commercial bank whose deposits are insured by the
BIF;
o a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchange; a savings bank or savings association whose deposits are
insured by the SAIF; or
o any other "eligible guarantor institution," as defined in the
Securities Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and the Transfer Agent have adopted standards for accepting
signature guarantees from the above institutions. A Fund may elect in the
future to limit eligible signature guarantors to institutions that are
members of a signature guarantee program. The Funds and the Transfer Agent
reserve the right to amend these standards at any time without notice.
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders having an account value of at least $10,000 and who desire to
receive payments of a predetermined amount may take advantage of the
Systematic Withdrawal Program. Under this program, shares are redeemed to
provide for monthly or quarterly withdrawal payments in a minimum of $100
as directed by the shareholder. Depending upon the amount of the
withdrawal payments, the amount of dividends paid and capital gains
distributions, and the fluctuation of net asset value of shares redeemed
under this program, redemptions may reduce, and eventually deplete, the
shareholder's investment in a Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in a Fund. A shareholder may apply for participation in this
program through his financial institution.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, each Fund
may redeem Shares in any account and pay the proceeds to the shareholder
if, due to shareholder redemptions, the account balance falls below the
required minimum value of $250 for THE BILTMORE FUNDS and $500 for THE
BILTMORE MUNICIPAL FUNDS. This requirement does not apply, however, if the
balance falls below the required minimum because of changes in a Fund's
net asset value. Before Shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase
additional Shares to meet the minimum requirement.
SHAREHOLDER INFORMATION

VOTING RIGHTS
Each share of a Fund gives the shareholder one vote in Trustee elections
and other matters submitted to shareholders for vote. All shares of all
classes of each Fund in a Trust have equal voting rights, except that in
matters affecting only a particular Fund or class, only shares of that
Fund or class are entitled to vote.
As Massachusetts business trusts, neither Trust is required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in a Trust or a Fund's operation and for the election of Trustees
under certain circumstances.
As of June 4, 1996, the Wachovia Banks and their various affiliates and
subsidiaries, acting in various capacities for numerous accounts, were the
owners of record of in excess of 25% of the outstanding shares of the
Quantitative Equity Fund, Equity Index Fund, Special Values Fund, and
Short-Term Fixed Income Fund, and therefore may, for certain purposes, be
deemed to control these Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special
meeting. A special meeting of a Trust's shareholders shall be called by
the Trustees upon the written request of shareholders owning at least 10%
of a Trust's outstanding shares.
EFFECT OF BANKING LAWS

The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company
Act of 1956 or any bank or non-bank affiliate thereof from sponsoring,
organizing, controlling or distributing the shares of a registered open-
end investment company continuously engaged in the issuance of its shares,
and prohibit banks generally from issuing, underwriting or distributing
most securities. However, such banking laws and regulations do not
prohibit such a holding company or its bank and non-bank affiliates
generally from acting as investment adviser, transfer agent or custodian
to such an investment company or from purchasing shares of such a company
as agent for and upon the order of their customers.
Some entities providing services to the Funds are subject to such banking
laws and regulations. The Wachovia Banks believe, based on the advice of
their counsel, that they may perform the services for a Fund contemplated
by their investment advisory contracts and custodian agreements with the
Trusts without violating those laws or regulations. Changes in either
federal or state statutes and regulations relating to the permissible
activities of banks and their subsidiaries or affiliates, as well as
further judicial or administrative decisions or interpretations of present
or future statutes and regulations, could prevent the Wachovia Banks from
continuing to perform all or a part of the above services for their
customers and/or a Fund. If this happens, the Trustees would consider
alternative means of continuing available investment services. In such
event, changes in the operation of a Fund may occur, including the
possible termination of any automatic or other Fund share investment and
redemption services then being provided by the Wachovia Banks. It is not
expected that existing Fund shareholders would suffer any adverse
financial consequences (if another service provider with equivalent
abilities to the Wachovia Banks is found) as a result of any of these
occurrences.
The Glass-Steagall Act prohibits a depository institution (such as a
commercial bank or a savings association) from being an underwriter or
distributor of most securities. In the event the Glass-Steagall Act is
deemed to prohibit depository institutions from acting in the
administrative capacities described above, or should Congress relax
current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.
State securities laws governing the ability of depository institutions to
act as underwriters or distributors of securities may differ from
interpretations given to the Glass-Steagall Act and, therefore, banks and
financial institutions may be required to register as dealers pursuant to
state law.
TAX INFORMATION

The Funds expect to pay no federal income tax because each intends to meet
requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to
such companies.
Each Fund will be treated as a single, separate entity for federal income
tax purposes so that income (including capital gains) and losses realized
by a Trust's other portfolios will not be combined for tax purposes with
those realized by a Fund.
Unless otherwise exempt, shareholders of THE BILTMORE FUNDS are subject to
federal income tax on any dividends and other distributions, including
capital gains distributions, received. This applies whether dividends and
distributions are received in cash or as additional shares. The Funds will
provide shareholders with tax information for reporting purposes.
Distributions representing long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains no matter how long the
shareholders have held the shares.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
THE BILTMORE MUNICIPAL FUNDS TAX INFORMATION

FEDERAL INCOME TAXES
Shareholders of THE BILTMORE MUNICIPAL FUNDS are not required to pay
federal regular income tax on any dividends received from the Fund that
represent net interest on tax-exempt municipal bonds. However, under the
Tax Reform Act of 1986, dividends representing net interest income earned
on some municipal bonds may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax
for corporations.
The alternative minimum tax, equal to up to 28% of alternative minimum
taxable income for individuals and 20% for corporations, applies when it
exceeds the regular tax for the taxable year. Alternative minimum taxable
income is equal to the regular taxable income of the taxpayer increased by
certain "tax preference" items not included in regular taxable income and
increased or reduced by certain alternative minimum tax adjustments.
The Tax Reform Act of 1986 treats interest on certain "private activity"
bonds issued after August 7, 1986, as a tax preference item for both
individuals and corporations. Unlike traditional governmental purpose
municipal bonds, which finance roads, schools, libraries, prisons, and
other public facilities, private activity bonds provide benefits to
private parties. A Fund may purchase all types of municipal bonds,
including private activity bonds. Thus, should it purchase any such bonds,
a portion of the Fund's dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, dividends of a Fund
which represent interest on municipal bonds may become subject to the 20%
corporate alternative minimum tax because the dividends are included in a
corporations's "adjusted current earnings." The corporate alternative
minimum tax treats 75% of the excess of the taxpayer's "adjusted current
earnings" over the taxpayer's preadjustment alternative minimum taxable
income as an alternative minimum tax adjustment. "Adjusted current
earnings" is based upon the concept of a corporation's "earnings and
profits". Since "earnings and profits" generally includes the full amount
of any Fund dividend, and preadjustment alternative minimum taxable income
does not include the portion of a Fund's dividend attributable to
municipal bonds which are not private activity bonds, 75% of the
difference will be included in the calculation of the corporation's
alternative minimum tax.
Shareholders should consult with their tax advisers to determine whether
they are subject to the alternative minimum tax or the corporate
alternative minimum tax and, if so, the tax treatment of dividends paid by
a Fund.
Dividends of a Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income. Distributions representing net long-term capital gains
realized by a Fund, if any, will be taxable as long-term capital gains
regardless of the length of time shareholders have held their shares.
These tax consequences apply whether dividends are received in cash or as
additional shares. Information on the tax status of dividends and
distributions is provided annually.
GEORGIA AND NORTH CAROLINA TAXES
Under existing Georgia and North Carolina laws, shareholders of the
GEORGIA MUNICIPAL BOND FUND and NORTH CAROLINA MUNICIPAL BOND FUND will
not be subject to Georgia or North Carolina income taxes, respectively, on
Fund dividends to the extent that such dividends represent exempt-interest
dividends as defined in the Internal Revenue Code of 1986, as amended,
which are directly attributable to (i) interest on obligations issued by
or on behalf of the States of Georgia or North Carolina, respectively, or
their respective political subdivisions; or (ii) interest on obligations
of the United States or any other issuer whose obligations are exempt from
state income taxes under federal law.
To the extent that Fund dividends are attributable to other sources,
such dividends will be subject to the relevant state's income taxes.
For purposes of the Georgia intangibles tax, shareholders of the GEORGIA
MUNICIPAL BOND FUND may exclude from the share value of the Fund that
portion of the total share value which is attributable to the value of
United States obligations held in the Fund. To the extent that the Fund
is comprised of other types of obligations, shares of the Fund will be
taxable at the rate of 10 cents per $1,000 in value of the shares held on
January 1 of each year.
SOUTH CAROLINA TAXES
Under current South Carolina law, shareholders of the SOUTH CAROLINA
MUNICIPAL BOND FUND who are subject to South Carolina individual or
corporate income taxes will not be subject to such taxes on Fund dividends
to the extent that such dividends qualify as either (1) exempt-interest
dividends under the Internal Revenue Code, which are derived from interest
on obligations of the state of South Carolina or any of its political
subdivisions; (2) dividends derived from interest on certain obligations
of the United States; and (3) dividends derived from interest on
obligations of any agency or instrumentality of the United States that is
prohibited by federal law from being taxed by a state or any political
subdivision of a state. To the extent that Fund dividends are attributable
to other sources, such dividends will be subject to South Carolina
taxes.
OTHER STATE AND LOCAL TAXES
Income from THE BILTMORE MUNICIPAL FUNDS is not necessarily free from
state income taxes in states other than Georgia, North Carolina, or South
Carolina, respectively, or from personal property taxes. State laws differ
on this issue, and shareholders are urged to consult their own tax
advisers regarding the status of their accounts under state and local tax
laws.
OTHER CLASSES OF SHARES

THE BILTMORE FUNDS and THE BILTMORE MUNICIPAL FUNDS offer three classes
of shares: Class Y Shares for institutional investors, and Class A Shares
and Class B Shares of the Equity Fund, the Quantitative Equity Fund, the
Balanced Fund, and the Fixed Income Fund for institutional investors,
individuals and other customers of the Wachovia Banks.
Class A Shares and Class B Shares are sold at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed
either (i) at the time of purchase (the Class A Shares), or (ii) on a
contingent deferred basis (the Class B Shares). Class B Shares are
distributed pursuant to Rule 12b-1 Plans adopted by the Trusts, whereby
the distributor is paid a fee of 0.75 of 1% of Class B Shares' average
daily net asset value. In addition, Class A Shares and Class B Shares
pay a shareholder services fee of 0.25% of the respective class' average
daily net assets.
Class A Shares of a Fund may be purchased at net asset value, without a
sales charge, by certain investors described in the Class A Shares'
prospectus.
The stated advisory fee is the same for all classes of the Funds.
Financial institutions and brokers providing sales and/or administrative
services may receive different compensation with respect to one class of
shares than with respect to another class of shares of the same Fund.
The amount of dividends payable to Class A Shares and Class B Shares will
be less than those payable to Class Y Shares by the difference between
Class Expenses and distribution and shareholder services expenses borne by
the shares of each respective class.
PERFORMANCE INFORMATION

From time to time, the Funds advertise their total return, yield, and if
applicable, tax-equivalent yield.
Total return represents the change, over a specified period of time, in
the value of an investment in a Fund after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by
the initial investment and is expressed as a percentage.
The yield of each Fund is calculated by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share
of the Fund on the last day of the period. This number is then annualized
using semi-annual compounding.
The tax-equivalent yield of THE BILTMORE MUNICIPAL FUNDS is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that
the Fund would have had to earn to equal its actual yield, assuming a
specific tax rate.
The yield and the tax-equivalent yield do not necessarily reflect income
actually earned by a Fund and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Class Y Shares,
Class A Shares, and Class B Shares of a Fund. Because Class B Shares are
subject to a Rule 12b-1 fee, and Class A Shares and Class B Shares are
subject to a shareholder services fee, the yield will be lower than that
of Class Y Shares. The sales load applicable to Class A Shares also
contributes to a lower total return for Class A Shares. The performance
information reflects the effect of the maximum sales load which, if
excluded, would increase the total return, yield, and, as applicable,
tax-equivalent yield. In addition, Class B Shares are subject to similar
non-recurring charges, such as the contingent deferred sales charge,
which, if excluded, would increase the total return for Class B Shares.
From time to time, advertisements for a Fund may refer to ratings,
rankings, and other information in certain financial publications and/or
compare a Fund's performance to certain indices.
ADDRESSES

Investment Adviser Wachovia Asset Management
(The Biltmore Funds) 100 North Main Street
(North Carolina Municipal Bond Fund) Winston-
Salem, North Carolina 27101

Investment Adviser Wachovia Bank of Georgia, N.A.
(Georgia Municipal Bond Fund) 191 Peachtree Street, N.E.
Atlanta, Georgia 30303

Investment Adviser Wachovia Bank of South Carolina, N.A.
(South Carolina Municipal Bond Fund) 1426 Main
Street
Columbia, South Carolina 29226
Counsel to The Biltmore Funds and Kirkpatrick &
Lockhart LLP
The Biltmore Municipal Funds 1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800

Counsel to the Independent Trustees Piper &
Marbury L.L.P.
1200 Nineteenth Street, N.W.
Washington, D.C. 20036-2430

The Biltmore Service Center 101 Greystone Boulevard
SC-9215
Columbia, South Carolina 29226

THE BILTMORE FUNDS
THE BILTMORE MUNICIPAL FUNDS

July 22, 1996 G01689-01-IS (7/96)

BILTMORE EQUITY FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Equity Fund (the "Fund"), a portfolio of The Biltmore Funds
(the "Trust"), dated January 31, 1996. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write the Fund or call The
Biltmore Service Center toll-free at 1-800-994-4414.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996

FEDERATED SECURITIES
CORP.

Distributor
A subsidiary of FEDERATED
INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 5
THE BILTMORE FUNDS MANAGEMENT 8

Officers and Trustees 8
Fund Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10

Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 11

OTHER SERVICES 11

Administration 11
Custodian 11
Transfer Agent 12
Legal Services 12
Independent Auditors 12
Portfolio Turnover 12
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND
SHAREHOLDER SERVICES PLAN (CLASS A AND
CLASS B SHARES ONLY) 12

PURCHASING FUND SHARES 12

Conversion to Federal Funds 12
Exchanging Securities for Fund Shares 13
DETERMINING NET ASSET VALUE 13

DETERMINING MARKET VALUE OF SECURITIES 13

REDEEMING FUND SHARES 13

Redemption in Kind 13
MASSACHUSETTS BUSINESS TRUSTS 14

TAX STATUS 14

The Fund's Tax Status 14
Shareholders' Tax Status 14
Capital Gains 14
TOTAL RETURN 14

YIELD 15

PERFORMANCE COMPARISONS 15

FINANCIAL STATEMENTS 16

APPENDIX 17

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991.
Shares of Biltmore Equity Fund are currently offered in three classes: Class A
Shares, Class B Shares, and Class Y Shares. Prior to July 22, 1996, this Fund
offered a single class of shares, which is currently designated as Class A
Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to produce growth of principal and income.
The investment objective cannot be changed without the approval of shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (the "Trustees" or the "Board") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective. Capitalized terms not otherwise defined in
this Statement have the same meaning assigned in the prospectus.
TYPES OF INVESTMENTS
The Fund invests primarily in a professionally-managed and diversified portfolio
of common stocks of companies with an established market. The Fund's investment
adviser seeks to identify undervalued stocks with improving prospects by
integrating two disciplines to capture both growth and value opportunities.
Although the Fund may invest in other securities of these companies, in money
market instruments, and in U.S. government obligations in such proportions as
prevailing market conditions warrant in the judgment of the Fund's investment
adviser, it is the Fund's policy, under normal market conditions, to invest at
least 65% of its total assets in equity securities.

Set forth below are other securities in which the Fund may invest from time to
time:
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge its portfolio by buying and selling
financial futures contracts, buying put options on portfolio securities and
listed put options on futures contracts, and writing call options on futures
contracts. The Fund may also write covered call options on portfolio securities
to attempt to increase its current income.
The Fund will maintain its positions in cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on financial
futures contracts may be closed out over-the-counter or on a nationally-
recognized exchange which provides a secondary market for options of the same
series.
In addition to purchasing put options and writing call options as described in
the prospectus, the Fund may purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or writers of
the options when options on the portfolio securities held by the Fund are not
traded on an exchange. The Fund purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks or
savings and loan associations) deemed creditworthy by the Fund's investment
adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.

The Fund may also write call options and purchase put options on financial
futures and stock index futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
A stock index futures contract is a bilateral agreement which obligates the
seller to deliver (and the purchaser to take delivery of) an amount of cash
equal to a specific dollar amount times the difference between the value of
a specific stock index at the close of trading of the contract and the
price at which the agreement is originally made. There is no physical
delivery of the stocks constituting the index, and no price is paid upon
entering into a futures contract. In general, contracts are closed out
prior to their expiration.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund
will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the

second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio. When the Fund
writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the prices
of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.

If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change

in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.

RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under the
Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The Fund
believes that the staff of the Securities and Exchange Commission has left the
question of determining the liquidity of all restricted securities to the
Trust's Board. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and the number
of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of a foreign issuer may present greater risks than investments in
U.S. securities, including higher transaction costs. In addition, investments in
foreign issuers may include additional risks associated with less market
liquidity and political instability. The possible imposition of withholding
taxes on interest income might adversely affect the payment of principal and
interest on obligations of foreign issuers. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars of the

Fund's assets and income may be affected by changes in exchange rates and
regulations.
DEMAND MASTER NOTES
The Fund may invest in variable amount demand master notes. Demand notes are
short-term borrowing arrangements between a corporation or government agency and
an institutional lender (such as the Fund) payable upon demand by either party.
The notice period for demand typically ranges from one to seven days, and the
party may demand full or partial payment. Many master notes give the Fund the
option of increasing or decreasing the principal amount of the master note on a
daily or weekly basis within certain limits. Demand master notes usually provide
for floating or variable rates of interest.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to put the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.

REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the

extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that, under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's investment
adviser to be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
The Fund may also invest in the following temporary investments, from time to
time, for defensive purposes:
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed
by:
o the full faith and credit of the U.S. Treasury;
o the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
o the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible investments
which may not always receive financial support from the U.S. government are:
o Farm Credit System, including the National Bank for Cooperatives and Banks
for Cooperatives;

o Federal Home Loan Banks;
o Federal Home Loan Mortgage Corporation;
o Federal National Mortgage Association;
o Government National Mortgage Association; and
o Student Loan Marketing Association.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured in full by the Bank
Insurance Fund, or by the Savings Association Insurance Fund, both of which
are administered by the Federal Deposit Insurance Corporation; and
o commercial paper rated A-1 or better by Standard & Poor's Ratings Group,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch Investors
Service, Inc., or, if unrated, of comparable quality as determined by the
Fund's investment adviser.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not always have the right to vote securities on loan. In
circumstances where the Fund does not, the Fund would terminate the loan and

regain the right to vote, if that were considered important with respect to the
investment.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures contracts,
put options on stock index futures, put options on financial futures and
portfolio securities, and writing covered call options, but may obtain such
short-term credits as are necessary for the clearance of purchases and
sales of portfolio securities. The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
or related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its net assets, including the amounts borrowed. The
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure to facilitate management of the portfolio by enabling the Fund to
meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. The Fund will not purchase
any securities while borrowings in excess of 5% of the value of the Fund's
total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In those cases, the Fund may mortgage, pledge
or hypothecate assets to secure such borrowings having a market value not

exceeding the lesser of the dollar amounts borrowed or 15% of the value of
total assets at the time of the borrowing. For purposes of this limitation,
the following are not deemed to be pledges: margin deposits for the
purchase and sale of futures contracts and related options, and segregation
or collateral arrangements made in connection with options activities or
the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options on
stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered
call options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of restricted securities which the Fund may purchase pursuant
to its investment objective, policies and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if as a result more than 5%

of the value of the Fund's total assets would be invested in the securities
of that issuer. Also, the Fund will not acquire more than 10% of the voting
securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the value
of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities, the
market value of which do not exceed one-third of the value of the Fund's
total assets. This shall not prevent the Fund from purchasing or holding
U.S. government obligations, money market instruments, demand master notes,
bonds, debentures, notes, certificates of indebtedness, or other debt
securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective, policies,
and limitations.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of

closed-end investment companies only in open market transactions involving
customary brokers commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. While it is the Fund's policy to
waive its investment advisory fees on Fund assets invested in securities of
other open-end investment companies, it should be noted that investment
companies incur certain expenses, such as custodian and transfer agent
fees, and therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses. The Fund
will invest in other investment companies primarily for the purpose of
investing its short-term cash on a temporary basis. The Fund has a present
intention of investing no more than 5% of its total assets in investment
companies during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933, except
for certain restricted securities which meet the criteria for liquidity as
established by the Trustees.

INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options, certain
securities not determined under guidelines established by the Trustees to
be liquid, and non-negotiable fixed income time deposits with maturities
over seven days.

INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may
purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the securities
are held in the Fund's portfolio and not more than 5% of the value of the
Fund's total assets would be invested in premiums on open put option
positions.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange.

WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan, having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.

THE BILTMORE FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal occupations,
birthdates, and present positions. Each of the Trustees and officers listed
below holds an identical position with The Biltmore Municipal Funds, another
investment company. Except as listed below, none of the Trustees or officers are
affiliated with Wachovia Bank of North Carolina, N.A., Federated Investors,
Federated Securities Corp., Federated Services Company or Federated
Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic American
Corporation (until 1988); Director, Vice Chairman and Chief Executive Officer,
Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director, Atlantic
American Life Insurance Co., Georgia Casualty & Surety Company, and Bankers
Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village

Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts Mutual
Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee

President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

President and Treasurer
President and Chief Executive Officer, Federated Investors Management Company;
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, Federated
Research, and Federated Services Company; and Director, Federated Securities
Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Vice President and Assistant Treasurer
Senior Vice President, Federated Services Company; Director of Proprietary
Client Services and member of the Office of the President, Federated
Administrative Services; formerly Associate Corporate Counsel, Federated
Investors; Vice President and Assistant Treasurer for certain investment
companies for which Federated Securities Corp. is the principal distributor.

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholders of record owned 5% or more of the
outstanding shares of the Fund: Wachovia Bank of North Carolina, Winston-Salem,
North Carolina, on behalf of certain underlying accounts, owned approximately
942,897 shares (8.19%), and Wachovia Bank of Georgia, Winston-Salem, North
Carolina, on behalf of certain underlying accounts, owned approximately
1,203,330 shares (10.45%).

TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one other
Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

*Information is furnished for the fiscal year ended November 30, 1995.
+The aggregate compensation is paid by the Trust, which is comprised of twelve
portfolios.
# The Fund Complex is comprised of 15 portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable for
errors of judgment or mistakes of fact or law. However, they are not protected
against any liability to which they would otherwise be subject by reason of

willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Asset Management (the "Adviser"). The
Adviser is a business unit of Wachovia Bank of North Carolina, N.A., which is a
wholly-owned subsidiary of Wachovia Corporation of North Carolina, a wholly-
owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investments are typically made without
any knowledge of the Wachovia Banks' or their affiliates' lending relationships
with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and 1994, and for the period from
May 10, 1993 (date of initial public investment) to November 30, 1993, the
Adviser earned $754,597, $ 511,439, and $244,017, respectively, of which
$76,995, $73,062, and $34,860, respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are

registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per year
of the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will waive its fee or reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Trustees. The adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the adviser and may include: advice as to
the advisability of investing in securities; security analysis and economic
reports; economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant

services for which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offfer brokerage and
research transactions. They determine in good faith that commissions charged by
such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the fiscal years ended November 30, 1995 and
1994, and for the period from May 10, 1993 (date of initial public investment)
to November 30, 1993, the Fund paid $176,610, $142,056, and $125,447,
respectively, in commissions on brokerage transactions.
As of November 30, 1995, the Fund owned $3,171,173, $501,287, and $523,036 of
securities issued by General Electric Co., American Express, and Salomon, Inc.
respectively, several of the Fund's regular broker/dealers, each of which
derives more than 15% of its gross revenues from securities-related activities.
Although investment decisions for the Fund are made independently frm those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available to investments or opportunities for
sales will be allocated in a manner believed by the adviser to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS'), a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as

described in the prospectus. For the fiscal years ended November 30, 1995 and
1994, and for the period from May 10, 1993 (date of initial public investment)
to November 30, 1993, FAS earned $96,714, $75,000, and $75,000, respectively,
of which $0, $2,936, and $32,208, respectively, were voluntarily waived. In
addition, for the fiscal years ended November 30, 1995 and 1994, and for the
period from May 10, 1993 (date of initial public investment) to November 30,
1993, FAS reimbursed $0, $40,467, and $37,225, respectively, in other Fund
operating expenses.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and which is payable monthly. The Custodian will
also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of Federated
Investors, is transfer agent for the shares of the Fund, and dividend
disbursing agent for the Fund. Federated Services Company also provides certain
accounting and recordkeeping services with respect to the Fund's portfolio
investments.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel to
the independent Trustees.

INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. Transactions for the Fund's portfolio will be based only
upon investment considerations and will not be limited by any other
considerations when the Adviser deems it appropriate to make changes in the
Fund's portfolio. For the fiscal years ended November 30, 1995 and 1994, the
Fund's portfolio turnover rates were 65% and 35%, respectively.
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND SHAREHOLDER SERVICES PLAN (CLASS A
AND CLASS B SHARES ONLY)

By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
PURCHASING FUND SHARES

not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least equal to the
minimum investment requirement of the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

ofor short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service; or
ofor all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.
REDEEMING FUND SHARES

maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Fund to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of the Fund's net asset value
during any 90-day period. Any redemption beyond this amount will also be in cash
unless the Trustees determine that payments should be in kind.
MASSACHUSETTS BUSINESS TRUSTS

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect shareholders,
the Trust has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of the Trust. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or the Trustees enter into or sign on behalf
of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the shareholder.
On request, the Trust will defend any claim made and pay any judgment against a
shareholder of the Fund for any act or obligation of the Trust on behalf of the
Fund. Therefore, financial loss resulting from liability as a shareholder of the
Fund will occur only if the Trust cannot meet its obligations to indemnify
shareholders and pay judgments against them from the assets of the Fund.
TAX STATUS

THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to

regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
oderive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
oderive less than 30% of its gross income from the sale of securities held less
than three months;
oinvest in securities within certain statutory limits; and
odistribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation, and to the extent designated by the Fund as
so qualifying. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held shares.
TOTAL RETURN

Class A Shares' average annual total returns for the one-year period ended
November 30, and 1995, and for the period from May 10, 1993 (date of initial
public investment) to November 30, 1995, were 22.9% and 11.23%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the

ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the reinvestment of all
dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995 , was
1.52%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:
ostock market fluctuations;
oportfolio quality;

oaverage portfolio maturity;
otype of instruments in which the portfolio is invested;
ochanges in interest rates and market value of portfolio securities;
ochanges in the Fund's expenses;
othe relative amount of Fund cash flow; and
ovarious other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price (i.e., net asset value plus any sales charge) per
share fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in maximum offering price over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the
"equity, growth and income funds" category in advertising and sales
literature.
oDOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for
the stock market as a whole.

oSTANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (THE "S&P
INDEX"), is a composite index of common stocks in industry, transportation,
and financial and public utility companies. In addition, the S&P Index assumes
reinvestment of all dividends paid by stocks listed on the S&P Index. Taxes
due on any of these distributions are not included, nor are brokerage or other
fees calculated in the S&P Index figures.
oMORNINGSTAR, INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
quarterly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1995 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may be
obtained without charge by contacting The Biltmore Service Center at the address
located on the back cover of the prospectus or by calling The Biltmore Service
Center at 1-800-994-4414.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS

AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P may apply a plus (+) or
minus (-) to the above rating classifications to show relative standing within
the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "AAA" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in "AAA"
securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security

to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA" through "B" in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
NR--"NR" indicates that Fitch does not rate the specific issue.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-1"
repayment capacity will normally be evidenced by the following characteristics:
o leading market positions in well-established industries;
o high rates of return on funds employed;
o conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o well-established access to a range of financial markets and assured sources
of alternate liquidity.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated "F-
1+."

BILTMORE QUANTITATIVE EQUITY FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES

Cusip 09090297839
3012914B (1/96)

CLASS B SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Quantitative Equity Fund (the "Fund"), a portfolio of The
Biltmore Funds (the "Trust"), dated January 31, 1996. This Statement is not
a prospectus itself. To receive a copy of the prospectus, write the Fund or
call The Biltmore Service Center toll-free at 1-800-994-4414.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996

FEDERATED SECURITIES
CORP.

Distributor
A subsidiary of FEDERATED
INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 5
THE BILTMORE FUNDS MANAGEMENT 8

Officers and Trustees 8
Fund Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10

Adviser to the Fund and Sub-Adviser10
Advisory and Sub-Advisory Fees 11
BROKERAGE TRANSACTIONS 11

OTHER SERVICES 11

Administration 11
Custodian 12
Transfer Agent 12
Legal Services 12
Independent Auditors 12
Portfolio Turnover 12
DISTRIBUTION PLAN
(CLASS B SHARES ONLY) AND
SHAREHOLDER SERVICES PLAN (CLASS A AND
CLASS B SHARES ONLY) 13

PURCHASING FUND SHARES 14

Conversion to Federal Funds 14
Exchanging Securities for Fund Shares
14
DETERMINING NET ASSET VALUE 14

DETERMINING MARKET VALUE OF SECURITIES14

REDEEMING FUND SHARES 15

Redemption in Kind 15
MASSACHUSETTS BUSINESS TRUSTS 15

TAX STATUS 15

The Fund's Tax Status 15
Shareholders' Tax Status 15
Capital Gains 15
TOTAL RETURN 16

YIELD 16

PERFORMANCE COMPARISONS 16

STANDARD & POOR'S CORPORATION 18

FINANCIAL STATEMENTS 18

APPENDIX 19

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991.
Shares of Biltmore Quatitative Equity Fund are currently offered in three
classes: Class A Shares, Class B Shares and Class Y Shares. Prior to July 22,
1996, this Fund offered a single class of shares, which is currently designated
as Class A Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide growth of principal and income.
The investment objective cannot be changed without the approval of shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (the "Trustees" or the "Board") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective. Capitalized terms not otherwise defined in
this Statement have the same meaning assigned in the prospectus.
TYPES OF INVESTMENTS
As more fully described in the prospectus, the Fund invests in a professionally-
managed and diversified portfolio consisting primarily of large capitalization
common stocks. The Fund's investment adviser seeks to identify undervalued
stocks with improving prospects by utilizing a computer valuation model to
capture both growth and value opportunities. Although the Fund may invest in
other securities of these companies, in money market instruments, and in U.S.
government obligations, in such proportions as prevailing market conditions
warrant in the judgment of the Fund's investment adviser, it is the Fund's
policy, under normal market conditions, to invest at least 65% of its total
assets in equity securities.

Set forth below are other securities in which the Fund may invest from time to
time:
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income.
The Fund will maintain its positions in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or
have expired. An option position on financial futures contracts may be
closed out over-the-counter or on a nationally-recognized exchange which
provides a secondary market for options of the same series.
In addition to purchasing put options and writing call options as described
in the prospectus, the Fund may purchase and write over-the-counter options
on portfolio securities in negotiated transactions with the buyers or
writers of the options when options on the portfolio securities held by the
Fund are not traded on an exchange. The Fund purchases and writes options
only with investment dealers and other financial institutions (such as
commercial banks or savings and loan associations) deemed creditworthy by
the Fund's investment adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded

options have a continuous liquid market while over-the-counter options may
not.
The Fund may also write call options and purchase put options on financial
futures and stock index futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
A stock index futures contract is a bilateral agreement which obligates the
seller to deliver (and the purchaser to take delivery of) an amount of cash
equal to a specific dollar amount times the difference between the value of
a specific stock index at the close of trading of the contract and the
price at which the agreement is originally made. There is no physical
delivery of the stocks constituting the index, and no price is paid upon
entering into a futures contract. In general, contracts are closed out
prior to their expiration.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in
value and the option will increase in value. In such an event, the Fund

will normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of the
second option will be large enough to offset both the premium paid by the
Fund for the original option plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio. When the Fund
writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the prices
of futures to go down, the Fund's obligation under a call option on a
future (to sell a futures contract) costs less to fulfill, causing the
value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can
substantially offset the drop in value of the Fund's fixed income or
indexed portfolio which is occurring as interest rates rise.

Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current
market value of its securities portfolio plus or minus the unrealized gain
or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation
is exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature
of initial margin in futures transactions is different from that of margin
in securities transactions in that initial margin in futures transactions
does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.

A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark to market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in futures
transactions if the sum of its initial margin deposits on open contracts
will exceed 5% of the market value of the Fund's total assets, after taking
into account the unrealized profits and losses on those contracts it has
entered into. Second, the Fund will not enter into these contracts for
speculative purposes. Third, since the Fund does not constitute a commodity
pool, it will not market itself as such, nor serve as a vehicle for trading
in the commodities futures or commodity options markets. Connected with
this, the Fund will disclose to all prospective investors the limitations
on its futures and option transactions, and make clear that these
transactions are entered into only for bona fide hedging purposes, or other
permissible purposes pursuant to regulations promulgated by the Commodity
Futures Trading Commission ("CFTC"). Finally, because the Fund will submit
to the CFTC special calls for information, the Fund will not register as a
commodities pool operator.

RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under the
Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The Fund
believes that the staff of the Securities and Exchange Commission has left the
question of determining the liquidity of all restricted securities to the Board.
The Board considers the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of foreign issuers may include debt obligations of supranational
entities, which include international organizations designed or supported by
governmental entities to promote economic reconstruction or development, and
international banking institutions and related government agencies. Examples of
these include, but are not limited to, the International Bank for Reconstruction
and Development (World Bank), European Investment Bank and InterAmerican
Development Bank.

DEMAND MASTER NOTES
The Fund may invest in variable amount demand master notes. Demand notes are
short-term borrowing arrangements between a corporation or government agency and
an institutional lender (such as the Fund) payable upon demand by either party.
The notice period for demand typically ranges from one to seven days, and the
party may demand full or partial payment. Many master notes give the Fund the
option of increasing or decreasing the principal amount of the master note on a
daily or weekly basis within certain limits. Demand master notes usually provide
for floating or variable rates of interest.
CONVERTIBLE SECURITIES
Convertible bonds and convertible preferred stocks are fixed income securities
that generally retain the investment characteristics of fixed income securities
until they have been converted but also react to movements in the underlying
equity securities. The holder is entitled to receive the fixed income of a bond
or the dividend preference of a preferred stock until the holder elects to
exercise the conversion privilege. Usable bonds are corporate bonds that can be
used in whole or in part, customarily at full face value, in lieu of cash to
purchase the issuer's common stock. When owned as part of a unit along with
warrants, which are options to buy the common stock, they function as
convertible bonds, except that the warrants generally will expire before the
bond's maturity. Convertible securities are senior to equity securities and,
therefore, have a claim to assets of the corporation prior to the holders of
common stock in the case of liquidation. However, convertible securities are
generally subordinated to similar nonconvertible securities of the same company.
The interest income and dividends from convertible bonds and preferred stocks
provide a stable stream of income with generally higher yields than common
stocks, but lower than nonconvertible securities of similar quality.

The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which, in
the Fund's investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objective. Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the Fund's investment adviser
evaluates the investment characteristics of the convertible security as a fixed
income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Fund's investment adviser considers
numerous factors, including the economic and political outlook, the value of the
security relative to other investment alternatives, trends in the determination
of the issuer's profits, and the issuer's management capability and practices.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches its
face amount at maturity. Zero coupon convertible securities are convertible into
a specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the holder
with the opportunity to put the bonds back to the issuer at a stated price
before maturity. Generally, the prices of zero coupon convertible securities may
be more sensitive to market interest rate fluctuations than conventional
convertible securities.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject to
repurchase agreements, and these securities are marked to market daily. To the

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These securities are marked to market daily and
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
TEMPORARY INVESTMENTS
From time to time, during periods of other than normal market conditions, the
Fund may also invest in the following temporary investments for defensive
purposes:
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are backed
by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are:

oFarm Credit System, including the National Bank for Cooperatives and
Banks for Cooperatives;
oFederal Home Loan Banks;
oFederal Home Loan Mortgage Corporation;
oFederal National Mortgage Association;
oGovernment National Mortgage Association; and
oStudent Loan Marketing Association.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
oinstruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is insured in full by the Bank
Insurance Fund, or by the Savings Association Insurance Fund, both of
which are administered by the Federal Deposit Insurance Corporation; and
ocommercial paper rated A-1 or better by Standard & Poor's Ratings Group,
Prime-1 by Moody's Investors Service, Inc., or F-1 by Fitch Investors
Service, Inc., or, if unrated, of comparable quality as determined by the
Fund's investment adviser.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker.

INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures contracts,
put options on stock index futures, put options on financial futures and
portfolio securities, and writing covered call options, but may obtain such
short-term credits as are necessary for the clearance of transactions. The
deposit or payment by the Fund of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of the value
of the Fund's total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the Fund may mortgage, pledge
or hypothecate assets to secure such borrowings having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value of
total assets at the time of the borrowing. For purposes of this limitation,
the following are not deemed to be pledges: margin deposits for the

purchase and sale of futures contracts and related options and segregation
or collateral arrangements made in connection with options activities or
the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options on
stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered
call options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of any securities which the Fund may purchase pursuant to its
investment objective, policies and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities, and repurchase
agreements collateralized by such securities) if, as a result, more than 5%
of the value of the Fund's total assets would be invested in the securities
of that issuer or if the Fund would own more than 10% of the outstanding
voting securities of that issuer.

CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the value
of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities.
This shall not prevent the Fund from purchasing or holding U.S. government
obligations, money market instruments, demand master notes, bonds,
debentures, notes, certificates of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging in other transactions
where permitted by the Fund's investment objective, policies, and
limitations.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions involving
customary brokers commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,
reorganization, or acquisition of assets. While it is the policy of the

Fund to waive investment advisory fees on Fund assets invested in
securities of other open-end investment companies, it should be noted that
investment companies incur certain expenses, such as custodian and transfer
agent fees and, therefore, any investment by the Fund in shares of another
investment company would be subject to such duplicate expenses. The Fund
will invest in other investment companies primarily for the purpose of
investing its short-term cash on a temporary basis. The Fund has a present
intention of investing no more than 5% of its total assets in investment
companies during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933, except
for certain restricted securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options, certain
securities not determined to be liquid under guidelines established by the
Trustees, and non-negotiable fixed income time deposits with maturities
over seven days.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may
purchase the securities of issuers which invest in or sponsor such
programs.

INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their predecessors,
that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the securities
are held in the Fund's portfolio and not more than 5% of the value of the
Fund's total assets would be invested in premiums on open put option
positions.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall 5%
limit on investments in warrants, may be warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.

Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan, having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.
THE BILTMORE FUNDS MANAGEMENT

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee

Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts Mutual
Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

- ------------------------
Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholders of record owned 5% or more of the
outstanding shares of the Fund: Wachovia Bank of North Carolina, Winston-Salem,
North Carolina, on behalf of certain underlying accounts, owned approximately
5,135,963 shares (49.34%), and Wachovia Bank of South Carolina, Winston-Salem,
North Carolina, on behalf of certain underlying accounts, owned approximately
699,363 shares (6.72%).

TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one
other
Trustee investment company in the Fund
Complex
Samuel E. Hudgins, $22,937 $23,850 for the Trust and one other
Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one other
Trustee investment company in the
Fund Complex
D. Dean Kaylor, $19,483 $20,250 for the Trust and one other
Trustee investment company in the
Fund Complex
Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

ADVISER TO THE FUND AND SUB-ADVISER
The Fund's investment adviser is Wachovia Asset Management (the "Adviser"). The
Adviser is a business unit of Wachovia Bank of North Carolina, N.A., which is a
wholly-owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of

any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investments are typically made without
any knowledge of the Wachovia Banks' or their affiliates lending relationships
with an issuer.
Twin Capital Management, Inc. (the "Sub-Adviser" or "Twin Capital") serves as
the sub-adviser under the terms of an investment sub-advisory agreement between
the Adviser and the Sub-Adviser. Twin Capital, incorporated as a Pennsylvania
corporation in 1989, is a registered investment adviser under the Investment
Advisers Act of 1940.

ADVISORY AND SUB-ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For its services as Sub-Adviser, Twin
Capital receives an annual sub-advisory fee, payable solely by the Adviser, as
described in the prospectus.
For the fiscal year ended November 30, 1995 ,and for the period from March 28,
1994 (date of initial public investment) to November 30, 1994, the Adviser
earned $728,298 and $439,878, respectively, of which $89,503 and $62,841,
respectively, was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including

brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per year
of the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will waive its fee or reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
BROKERAGE TRANSACTIONS

reasonable business judgment in selecting brokers who offfer brokerage and
research transactions. They determine in good faith that commissions charged by
such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the fiscal year ended November 30, 1995, and for
the period from March 28, 1994 (date of initial public investment) to November
30, 1994, the Fund paid $98,771and $163,527, respectively, in commissions on
brokerage transactions.
Although investment decisions for the Fund are made independently frm those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available to investments or opportunities for
sales will be allocated in a manner believed by the adviser to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.
OTHER SERVICES

ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the fiscal year ended November 30, 1995, and for the period from
March 28, 1994 (date of initial public investment) to November 30, 1994, FAS
earned $93,391and $59,254, respectively.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under the

Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and which is payable monthly. The Custodian will
also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of Federated
Investors, is transfer agent for the shares of the Fund, and dividend disbursing
agent for the Fund. Federated Services Company also provides certain accounting
and recordkeeping services with respect to the Fund's portfolio investments.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel to
the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objective. Securities in its portfolio will be sold
whenever the Adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Adviser does not anticipate that the Fund's annual
portfolio turnover rate will exceed 100% under normal market conditions. A
portfolio turnover rate of 100% would occur, for example, if all the securities
in the Fund's portfolio were replaced once in a period of one year. Transactions
for the Fund's portfolio will be based only upon investment considerations and

will not be limited by any other considerations when the Adviser deems it
appropriate to make changes in the Fund's portfolio.
For the fiscal year ended November 30, 1995, and for the period from March 28,
1994 (date of initial public investment) to November 30, 1994, the Fund's
portfolio turnover rates were 63% and 64%.
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND SHAREHOLDER SERVICES PLAN (CLASS A
AND CLASS B SHARES ONLY)

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services Company, to stimulate
distribution activities and to cause services to be provided to shareholders by
a representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to:
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in pursuing its investment objectives. By identifying potential
investors whose needs are served by the Fund's objectives, and properly
servicing these accounts, it may be possible to curb sharp fluctuations in rates
of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets

with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
PURCHASING FUND SHARES

Shares of the Fund are sold at net asset value plus an applicable sales charge
on days on which the Wachovia Banks, the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. The Wachovia Banks act as the
shareholders' agent in depositing checks and converting them to federal funds.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will allow
such exchanges only upon the prior approval of the Fund and a determination by
the Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, must be liquid and must
not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least equal to the
minimum investment requirement of the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights

attached to the securities become the property of the Fund, along with the
securities.
If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an independent
pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with maturities of less than 60 days, at amortized cost; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.

The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.
REDEEMING FUND SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the Fund's portfolio. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Fund to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of the Fund's net asset value
during any 90-day period. Any redemption beyond this amount will also be in cash
unless the Trustees determine that payments should be in kind.

MASSACHUSETTS BUSINESS TRUSTS

THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, the Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;

o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation, and to the extent designated by the Fund as
so qualifying. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held the shares.
TOTAL RETURN

Class A Shares' average annual total return for the one year period ended
November 30, 1995, and for the period from March 25, 1994 (start of performance)
to November 30, 1995, were 33.09% and 16.33%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the reinvestment of all
dividends and distributions.

YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
1.32%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS

The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price (i.e., net asset value plus any sales charge) per
share fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in maximum offering price over a specific
period of time. From time to time, the Fund will quote its Lipper ranking in
the "equity, growth and income funds" category in advertising and sales
literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for
the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (THE "INDEX"),
is a composite index of common stocks in industry, transportation, and
financial and public utility companies. In addition, the Index assumes
reinvestment of all dividends paid by stocks listed on the index. Taxes due
on any of these distributions are not included, nor are brokerage or other
fees calculated on index figures.

o MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
quarterly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.

STANDARD & POOR'S CORPORATION

Standard & Poor's Corporation ("S&P") makes no representation or warranty,
express or implied, to the owners of the Fund or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly, or the ability of the Index to track general stock market
performance. S&P's only relationship to Federated Securities Corp., the Fund's
distributor (the "Licensee"), is the licensing of certain trademarks and trade
names of S&P and of the Index which is determined, composed and calculated by
S&P without regard to the Licensee or the Fund. S&P has no obligation to take
the needs of the Licensee or the owners of the Fund into consideration in
determining, composing or calculating the Index. S&P is not responsible for and
has not participated in the determination of, the timing of, prices at, or
quantities of the Fund to be issued or in the determination or calculation of
the equation by which the Fund is to be converted into cash. S&P has no

obligation or liability in connection with the administration, marketing or
trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the Index or any
data included therein. S&P makes no warranty, express or implied, as to results
to be obtained by the Licensee, owners of the Fund, or any other person or
entity from the use of the Index or any data included therein in connection with
the rights licensed hereunder or for any other use. S&P makes no express or
implied warranties, and expressly disclaims all warranties of merchant ability
or fitness for a particular purpose or use with respect to the Index or any data
included therein. Without limiting any of the foregoing, in no event shall S&P
have any liability for any special, punitive, indirect or consequential damages
(including lost profits), even if notified of the possibility of such damages.
FINANCIAL STATEMENTS

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group ("S&P"). Capacity to pay interest and repay principal is extremely
strong.

AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
NR--"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P may apply a plus (+) or
minus (-) to the above rating classifications to show relative standing within
the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edgeD." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "AAA" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in "AAA"
securities.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA " through "B "in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS

AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--"NR" indicates that Fitch does not rate the specific issue.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-1"
repayment capacity will normally be evidenced by the following characteristics:
o leading market positions in well-established industries;
o high rates of return on funds employed;

o conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o well-established access to a range of financial markets and assured sources
of alternate liquidity.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this rating is
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated "F-
1+."

BILTMORE EQUITY INDEX FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS Y SHARES

Cusip 090297813

3101206B (1/96)

STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Equity Index Fund (the "Fund"), a portfolio of The Biltmore
Funds (the "Trust"), dated January 31, 1996. This Statement is not a
prospectus itself. To receive a copy of the prospectus, write the Fund or
call The Biltmore Service Center toll-free at 1-800-994-4414.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996

FEDERATED SECURITIES
CORP.

Distributor
A subsidiary of FEDERATED
INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 4
THE BILTMORE FUNDS MANAGEMENT 7

Officers and Trustees 7
Fund Ownership 8
Trustees Compensation 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9

Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10

OTHER SERVICES 10

Administration 10
Custodian 10
Transfer Agent 11
Legal Services 11
Independent Auditors 11
Portfolio Turnover 11
Shareholder Servicing Agent (Class A Shares
Only) 11
PURCHASING FUND SHARES 11

Conversion to Federal Funds 11

Exchanging Securities for Fund Shares 11
DETERMINING NET ASSET VALUE 12

DETERMINING MARKET VALUE OF SECURITIES 12

REDEEMING FUND SHARES 12

Redemption in Kind 12
MASSACHUSETTS BUSINESS TRUSTS 13

TAX STATUS 13

The Fund's Tax Status 13
Shareholders' Tax Status 13
Capital Gains 13
TOTAL RETURN 13

YIELD 13

PERFORMANCE COMPARISONS 14

FINANCIAL STATEMENTS 14

STANDARD & POOR'S CORPORATION 14

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991.
Shares of Biltmore Equity Index Fund are currently offered in two classes: Class
A Shares and Class Y Shares. Prior to July 22, 1996, this Fund offered a single
class of shares, which is currently designated as Class A Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide a total return that approximates
that of the stock market as measured by the Standard & Poor's Composite Index of
500 Stocks. The investment objective cannot be changed without approval of
shareholders.
TYPES OF INVESTMENTS
In addition to the common stocks described in the prospectus, the Fund may also
invest in money market instruments and U.S. government obligations and
securities in such proportions as, in the judgment of the Adviser, prevailing
market conditions warrant. The following discussion supplements the description
of the Fund's investment policies in the prospectus. Unless otherwise indicated,
the investment policies described below may be changed by the Board of Trustees
(the "Trustees" or the "Board") without shareholder approval. Shareholders will
be notified before any material change in the policies becomes effective.
Capitalized terms not otherwise defined in this Statement have the same meaning
assigned in the prospectus.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by

U.S. government agencies or instrumentalities. These securities are backed
by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow from the U.S. Treasury;
othe discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
othe credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
oFarm Credit System, including the National Bank for Cooperatives and
Banks for Cooperatives;
oFederal Home Loan Banks;
oFederal Home Loan Mortgage Corporation;
oFederal National Mortgage Association;
oGovernment National Mortgage Association; and
oStudent Loan Marketing Association.
VARIABLE RATE U.S. GOVERNMENT SECURITIES
In the case of certain U.S. government securities purchased by the Fund
that carry variable interest rates, these rates will reduce the changes in
the market value of such securities from their original purchase prices.
Accordingly, the potential for capital appreciation or capital depreciation
should not be greater than the potential for capital appreciation or
capital depreciation of fixed interest rate U.S. government securities
having maturities equal to the interest rate adjustment dates of the
variable rate U.S. government securities.
The Fund may purchase variable rate U.S. government securities upon the
determination by the Trustees that the interest rate as adjusted will cause

the instrument to have a current market value that approximates its par
value on the adjustment date.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
oinstruments of domestic and foreign banks and savings and loans having
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured in full by the Federal
Deposit Insurance Corporation;
ocommercial paper issued by domestic or foreign corporations, such as
Europaper, rated A-1 by Standard & Poor's Ratings Group, Prime-1 by
Moody's Investors Service, Inc., or F-1 by Fitch Investors Service, Inc.
or, if unrated, of comparable quality as determined by the Fund's
investment adviser;
otime and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), or institutions whose accounts are insured by the
Savings Association Insurance Fund ("SAIF"), including certificates of
deposit issued by, and other time deposits in, foreign branches of BIF-
insured banks which, if negotiable, mature in six months or less or if
not negotiable, either mature in ninety days or less, or are withdrawable
upon notice not exceeding ninety days; or
obankers' acceptances.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements and these securities will be marked to
market daily. To the extent that the original seller does not repurchase
the securities from the Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that a

defaulting seller of the securities filed for bankruptcy or became
insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in
favor of the Fund and allow retention or disposition of such securities.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to guidelines established
by the Trustees.
DEMAND MASTER NOTES
The Fund may invest in variable amount demand master notes. Demand notes
are short-term borrowing arrangements between a corporation or government
agency and an institutional lender (such as the Fund) payable upon demand
by either party. The notice period for demand typically ranges from one to
seven days, and the party may demand full or partial payment. Many master
notes give the Fund the option of increasing or decreasing the principal
amount of the master note on a daily or weekly basis within certain limits.
Demand master notes usually provide for floating or variable rates of
interest.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus
accrued interest. Such securities typically bear interest at a rate that is
intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to annually),
and is normally based on a published interest rate or interest rate index.

Most variable rate demand notes allow the Fund to demand the repurchase of
the security on not more than seven days prior notice. Other notes only
permit the Fund to tender the security at the time of each interest rate
adjustment or at other fixed intervals. See "Demand Features."
DEMAND FEATURES
The Fund may acquire securities that are subject to puts and standby
commitments ("demand features") which require the issuer of the demand
feature to purchase the securities at their principal amount (usually with
accrued interest) within a fixed period (usually seven days) following a
demand by the Fund. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third
party, and may not be transferred separately from the underlying security.
The Fund uses these arrangements to provide the Fund with liquidity and not
to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the
demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect
the liquidity of the underlying security. Demand features that are
exercisable even after a payment default on the underlying security may be
treated as a form of credit enhancement.
STOCK INDEX FUTURES AND OPTIONS
The Fund may utilize stock index futures contracts, options, and options on
futures contracts as discussed in the prospectus.
A stock index futures contract is a bilateral agreement which obligates the
seller to deliver (and the purchaser to take delivery of) an amount of cash
equal to a specific dollar amount times the difference between the value of
a specific stock index at the close of trading of the contract and the
price at which the agreement is originally made. There is no physical

delivery of the stocks constituting the index, and no price is paid upon
entering into a futures contract. In general, contracts are closed out
prior to their expiration. The Fund, when purchasing or selling a futures
contract, will initially be required to deposit in a segregated account in
the broker's name with the Fund's custodian an amount of cash or U.S.
government securities approximately equal to 5-10% of the contract value.
This amount is known as "initial margin," and it is subject to change by
the exchange or board of trade on which the contract is traded. Subsequent
payments to and from the broker are made on a daily basis as the price of
the index or the securities underlying the futures contract fluctuates.
These payments are known as "variation margins," and the fluctuation in
value of the long and short positions in the futures contract is a process
referred to as "marking to market." The Fund may decide to close its
position on a contract at any time prior to the contract's expiration. This
is accomplished by the Fund taking an opposite position at the then
prevailing price, thereby terminating its existing position in the
contract. Because both the initial and variation margin resemble a
performance bond or good faith deposit on the contract, they are returned
to the Fund upon the termination of the contract, assuming that all
contractual obligations have been satisfied. Therefore, the margin utilized
in futures contracts is readily distinguishable from the margin employed in
security transactions, since futures contracts margin does not involve the
borrowing of funds to finance the transaction.
A put option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option. Put options on stock indices are similar to put options
on stocks except for the delivery requirements. Instead of giving the Fund
the right to make delivery of stock at a specified price, a put option on a

stock index gives the Fund, as holder, the right to receive an amount of
cash upon exercise of the option.
The Fund may also write covered call options. As the writer of a call
option, the Fund has the obligation upon exercise of the option during the
option period to deliver the underlying security upon payment of the
exercise price.
The Fund may only: (1) buy listed put options on stock indices; (2) buy
listed put options on securities held in its portfolio; and (3) sell listed
call options either on securities held in its portfolio or on securities
which it has the right to obtain without payment of further consideration
(or has segregated cash in the amount of any such additional
consideration). The Fund will maintain its positions in securities, option
rights, and segregated cash subject to puts and calls until the options are
exercised, closed, or expired.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or

interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan. In
circumstances where the Fund does not, the Fund would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled.
INVESTMENT LIMITATIONS
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts or
commodity futures contracts. However, the Fund may purchase put options on

stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered
call options.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with buying stock index futures contracts,
put options on stock index futures, put options on financial futures, and
put options on portfolio securities, and writing covered call options, but
may obtain such short-term credits as are necessary for the clearance of
purchases and sales of transactions. The deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts
or related options transactions is not considered the purchase of a
security on margin.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities, the
market value of which does not exceed one-third of the value of the Fund's
total assets. This shall not prevent the purchase or holding of corporate
or government bonds, debentures, notes, certificates of indebtedness or
other debt securities of an issuer, repurchase agreements, or engaging in
other transactions where permitted by the Fund's investment objective,
policies and limitations.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.

ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may enter into
reverse repurchase agreements and otherwise borrow up to one-third of the
value of its total assets, including the amount borrowed. The Fund will not
borrow money or engage in reverse repurchase agreements for investment
leverage, but rather as a temporary, extraordinary, or emergency measure to
facilitate management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio instruments is deemed
to be inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of the value of the Fund's
total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of the total assets at the time
of the borrowing. For the purpose of this limitation, the following are not
deemed to be pledges: margin deposits for the purchase and sale of futures
contracts and related options, and segregation or collateral arrangements
made in connection with options activities or the purchase of securities on
a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in securities of issuers
whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.

DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total assets,
the Fund will not purchase securities issued by any one issuer (other than
cash, cash items or securities issued or guaranteed by the government of
the United States or its agencies or instrumentalities, and repurchase
agreements collateralized by U.S. government securities) if, as a result,
more than 5% of the value of the Fund's total assets would be invested in
the securities of that issuer. Also, the Fund will not acquire more than
10% of the voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
securities of companies in any one industry, except that the Fund may
invest 25% or more of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and
repurchase agreements secured by such instruments.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investments in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions involving
only customary brokers' commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation,

reorganization, or acquisition of assets. While it is the Fund's policy to
waive its investment advisory fees on Fund assets invested in securities of
open-end investment companies, it should be noted that investment companies
incur certain expenses, such as custodian and transfer agency fees, and
therefore, any investment by the Fund in shares of another investment
company would be subject to such duplicate expenses. The Fund will invest
in other investment companies primarily for the purpose of investing its
short-term cash on a temporary basis. However, the Fund may invest in
Standard & Poor's Depository Receipts (SPDRs), which represent interests in
the portfolio of securities held by a unit investment trust, a type of
investment company. SPDRs trade like shares of common stock on the American
Stock Exchange and are intended to provide investment results that
generally correspond to the price and yield performance of the S&P 500
Index. The Fund's purchase of SPDRs are subject to the 3%, 5% and 10%
limitations described above and secondary market purchases and sales are
subject to ordinary brokerage commissions. The Fund has a present intention
of investing no more than 5% of its total assets in investment companies
during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its net assets in securities
subject to restrictions on resale under federal securities law, except for
certain restricted securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
income time deposits with maturities over seven days, over-the-counter

options, and certain securities not determined under guidelines established
by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
securities of unseasoned issuers, including their predecessors, that have
been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, although it may invest in
the securities of issuers which invest in or sponsor such programs.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them in
deliverable form without further payment or after segregating cash in the
amount of any further payment.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, other than put
options on stock indices, unless the securities are held in the Fund's
portfolio and not more than 5% of the value of the Fund's total assets
would be invested in premiums on open put option positions.

INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall 5%
limit on investments in warrants which are not listed on the New York Stock
Exchange or the American Stock Exchange.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan, having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current year.

THE BILTMORE FUNDS MANAGEMENT

Federated Securities Corp., Federated Services Company, or Federated
Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts Mutual
Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Investors; Vice President and Assistant Treasurer for certain investment
companies for which Federated Securities Corp. is the principal distributor.

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of the
outstanding shares of the Fund: Wachovia Bank of North Carolina, Winston-Salem,
North Carolina, on behalf of certain underlying accounts, owned approximately
8,953,519 shares (58.20%).

TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one other
Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Asset Management ("Adviser"). The
Adviser is a business unit of Wachovia Bank of North Carolina, N.A., which is a
wholly-owned subsidiary of Wachovia Corporation of North Carolina, a wholly-
owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investments are typically made without
any knowledge of the Wachovia Banks' or their affiliates' lending relationships
with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and 1994, and for the period from
May 10, 1993 (date of initial public investment) to November 30, 1993, the
Adviser earned $545,415, $503,953, and $249,910, respectively, of which $97,171,
$83,992, and $41,652, respectively, were voluntarily waived.

STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses) exceed
2-1/2% per year of the first $30 million of average net assets, 2% per year
of the next $70 million of average net assets, and 1-1/2% per year of the
remaining average net assets, the Adviser will waive its fee or reimburse
the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this limitation,
the investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
BROKERAGE TRANSACTIONS

evaluations; and similar services. Research services provided by brokers and
dealers may be used by the adviser or its affiliates in advising the Fund and
other accounts. To the extent that receipt of these services may supplant
services for which the adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offfer brokerage and
research transactions. They determine in good faith that commissions charged by
such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the fiscal years ended November 30, 1995 and
1994, and for the period from May 10, 1993 (date of initial public investment)
to November 30, 1993, the Fund paid $28,337, $32,790, and $20,407, respectively,
in commissions on brokerage transactions.
As of November 30, 1995, the Fund owned $4,241,458, $771,545, $320,739,
$364,455, and $143,790 of securities issued by General Electric Co., American
Express, Dean Witter Discover & Co., Merrill Lynch & Co., Inc., and Salomon,
Inc., respectively, several of the Fund's regular broker/dealers, each of which
derives more than 15% of its gross revenues from securities-related activities.
Although investment decisions for the Fund are made independently frm those of
the other accounts managed by the adviser, investments of the type the Fund may
make may also be made by those other accounts. When the Fund and one or more
other accounts managed by the adviser are prepared to invest in, or desire to
dispose of, the same security, available to investments or opportunities for
sales will be allocated in a manner believed by the adviser to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by the
Fund. In other cases, however, it is believed that coordination and the ability
to participate in volume transactions will be to the benefit of the Fund.

OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. For the fiscal years ended November 30, 1995 and
1994, and for the period from May 10, 1993 (date of initial public investment)
to November 30, 1993, FAS earned $163,299, $166,703, and $102,301, respectively.
In addition, for the fiscal years ended November 30, 1995 and 1994, and for the
period from May 10, 1993 (date of initial public investment) to November 30,
1993, FAS reimbursed $0, $50,455, and $49,405, respectively, in other Fund
operating expenses.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and which is payable monthly. The Custodian will
also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of Federated
Investors, is transfer agent (the "Transfer Agent") for the shares of the Fund,
and dividend disbursing agent for the Fund. Federated Services Company also
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments.

LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel to
the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, and the Fund will be managed passively, securities in its
portfolio will be sold whenever it is appropriate to approximate the investment
return of the S&P 500 Index, without regard to the length of time a particular
security may have been held. The Fund will not attempt to set or meet a
portfolio turnover rate since any turnover would be incidental to transactions
undertaken in an attempt to achieve the Fund's investment objective. For the
fiscal years ended November 30, 1995 and 1994, the Fund's portfolio turnover
rates were 60% and 9%, respectively.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts. These
activities and services may include, but are not limited to: providing office
space, equipment, telephone facilities, and various clerical, supervisory,
computer, and other personnel as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries; and assisting clients in changing dividend
options, account designations, and addresses.

PURCHASING FUND SHARES

If an exchange is permitted, it will be treated as a sale for federal income tax
purposes. Depending upon the cost basis of the securities exchanged for Fund
shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market values of the Fund's portfolio securities are determined as follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an independent
pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.

REDEEMING FUND SHARES

documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument the Trust or the Trustees enter into or sign on behalf
of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the shareholder.
On request, the Trust will defend any claim made and pay any judgment against a
shareholder of the Fund for any act or obligation of the Trust on behalf of the
Fund. Therefore, financial loss resulting from liability as a shareholder of the
Fund will occur only if the Trust cannot meet its obligations to indemnify
shareholders and pay judgments against them from the assets of the Fund.
TAX STATUS

SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash or
additional shares. The dividends received deduction for corporations will apply
to ordinary income distributions to the extent the distribution represents
amounts that would qualify for the dividends received deduction to the Fund if
the Fund were a regular corporation, and to the extent designated by the Fund as
so qualifying. These dividends, and any short-term capital gains, are taxable as
ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-term
capital gains regardless of how long shareholders have held shares.
TOTAL RETURN

Class A Shares' average annual total returns for the one-year period ended
November 30, 1995, and for the period from May 10, 1993 (date of initial public
investment) to November 30, 1995, were 30.07% and 13.48%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at the
beginning of the period with $1,000, less any applicable sales load, adjusted
over the period by any additional shares, assuming the reinvestment of all
dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
1.82%.

The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the Fund
over a thirty-day period by the maximum offering price per share of the Fund on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a 12-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the Fund,
the performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o types of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in Fund expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net earnings
and the maximum offering price (i.e., net asset value plus any sales charge) per
share fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.

Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o STANDARD & POOR'S COMPOSITE INDEX OF 500 STOCKS, a composite index of common
stocks in industry, transportation, and financial and public utility
companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard
& Poor's index assumes reinvestments of all dividends paid by stocks listed
on its index. Taxes due on any of these distributions are not included, nor
are brokerage or other fees calculated in Standard & Poor's figures.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in the maximum offering price over a specific
period of time. From time to time, the Fund will quote its Lipper ranking in
the "index funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on nonstandardized base periods. These total returns also
represent the historic change in the value of an investment in the Fund based on
quarterly reinvestment of dividends over a specified period of time.

Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

Standard & Poor's Corporation ("S&P") makes no representation or warranty,
express or implied, to the owners of the Fund or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of the S&P 500 Index (as defined in the prospectus)
to track general stock market performance. S&P's only relationship to Federated
Securities Corp., the Fund's distributor (the "Licensee") is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to the Licensee or the
Fund. S&P has no obligation to take the needs of the Licensee or the owners of
the Fund into consideration in determining, composing or calculating the S&P 500
Index. S&P is not responsible for and has not participated in the determination
of, the timing of, prices at, or quantities of the Fund to be issued or in the
determination or calculation of the equation by which the Fund is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein. S&P makes no warranty, express or implied, as to

results to be obtained by the Licensee, owners of the Fund, or any other person
or entity from the use of the S&P 500 Index or any data included therein in
connection with the rights licensed hereunder or for any other use. S&P makes no
express or implied warranties, and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to the
S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect or consequential damages (including lost profits), even if notified of
the possibility of such damages.

Cusip 090297847

BILTMORE SPECIAL VALUES FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Biltmore Special Values Fund (the "Fund"), a portfolio of
The Biltmore Funds (the "Trust"), dated January 31, 1996. This Statement
is not a prospectus itself. To receive a copy of the prospectus, write the
Fund or call The Biltmore Service Center toll-free at 1-800-994-4414.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 5
THE BILTMORE FUNDS MANAGEMENT 8

Officers and Trustees 8
Fund Ownership 9
Trustees Compensation 10
Trustee Liability 10
INVESTMENT ADVISORY SERVICES 10

Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 11

OTHER SERVICES 11

Administration 11
Custodian 11
Transfer Agent 12
Legal Services 12
Independent Auditors 12
Portfolio Turnover 12
Shareholder Servicing Agent (Class A Shares Only)
12
PURCHASING FUND SHARES 12

Conversion to Federal Funds 12

Exchanging Securities for Fund Shares 12
DETERMINING NET ASSET VALUE 13

DETERMINING MARKET VALUE OF SECURITIES 13

REDEEMING FUND SHARES 13

Redemption in Kind 13
MASSACHUSETTS BUSINESS TRUSTS 14

TAX STATUS 14

The Fund's Tax Status 14
Shareholders' Tax Status 14
Capital Gains 14
TOTAL RETURN 14

YIELD 14

PERFORMANCE COMPARISONS 15

FINANCIAL STATEMENTS 16

APPENDIX 17

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991.
Shares of Biltmore Special Values Fund are currently offered in two classes:
Class A Shares and Class Y Shares. Prior to July 22, 1996, this Fund offered
a single class of shares, which is designated as Class A Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to produce growth of principal. The
investment objective cannot be changed without the approval of shareholders.
Unless otherwise indicated, the investment policies described below may be
changed by the Board of Trustees (the "Trustees" or the "Board") without
shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective. Capitalized terms not otherwise
defined in this Statement have the same meaning assigned in the prospectus.
TYPES OF INVESTMENTS
The Fund invests primarily in a professionally-managed and diversified
portfolio of equity securities of companies that have a market capitalization
of up to $1 billion. The Fund's investment adviser attempts to select
companies with potential for above-average capital appreciation commensurate
with increased risk. Although the Fund may invest in other securities of
these companies, in money market instruments, and in U.S. government
obligations in such proportions as prevailing market conditions warrant in
the judgment of the Fund's investment adviser, it is the Fund's policy, under
normal market conditions, to invest at least 65% of its total assets in
equity securities. For purposes of managing the Fund's portfolio, the Fund's

investment adviser will treat master limited partnerships and certain other
publicly-traded equity interests as common stocks.
Set forth below are other securities in which the Fund may invest from time
to time:
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of
the Fund, the Fund may attempt to hedge all or a portion of its
portfolio by buying and selling financial futures contracts, buying put
options on portfolio securities and listed put options on futures
contracts, and writing call options on futures contracts. The Fund may
also write covered call options on portfolio securities to attempt to
increase its current income.
The Fund will maintain its positions in securities, options and
segregated cash subject to puts and calls until the options are
exercised, closed, or have expired. An option position on financial
futures contracts may be closed out over-the-counter or on a nationally-
recognized exchange which provides a secondary market for options of the
same series.
In addition to purchasing put options and writing call options as
described in the prospectus, the Fund may purchase and write over-the-
counter options on portfolio securities in negotiated transactions with
the buyers or writers of the options when options on the portfolio
securities held by the Fund are not traded on an exchange. The Fund
purchases and writes options only with investment dealers and other
financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's investment adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded

options are third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while over-the-
counter options may not.
The Fund may also write call options and purchase put options on
financial futures and stock index futures contracts as a hedge to
attempt to protect securities in its portfolio against decreases in
value.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery
of the security ("going long") at a certain time in the future.

A stock index futures contract is a bilateral agreement which obligates
the seller to deliver (and the purchaser to take delivery of) an amount
of cash equal to a specific dollar amount times the difference between
the value of a specific stock index at the close of trading of the
contract and the price at which the agreement is originally made. There
is no physical delivery of the stocks constituting the index, and no
price is paid upon entering into a futures contract. In general,
contracts are closed out prior to their expiration.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but

does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price.
If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the premium
paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts to hedge its portfolio. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.

In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts to
bring its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds

by the Fund to finance the transactions. Initial margin is in the nature
of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.

A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in
futures transactions if the sum of its initial margin deposits on open
contracts will exceed 5% of the market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the Fund does not
constitute a commodity pool, it will not market itself as such, nor
serve as a vehicle for trading in the commodities futures or commodity
options markets. Connected with this, the Fund will disclose to all
prospective investors the limitations on its futures and option
transactions, and make clear that these transactions are entered into

only for bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures Trading
Commission ("CFTC"). Finally, because the Fund will submit to the CFTC
special calls for information, the Fund will not register as a
commodities pool operator.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the Trust's
Board. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of a foreign issuer may present greater risks than investments in
U.S. securities, including higher transaction costs. In addition, investments

in foreign issuers may include additional risks associated with less market
liquidity and political instability. The possible imposition of withholding
taxes or interest income might adversely affect the payment of principal and
interest on obligations of foreign issuers. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars of
the Fund's assets and income may be affected by changes in exchange rates and
regulations.
HIGH YIELD SECURITIES
The lowest-rated securities in which the Fund may invest, under normal market
circumstances, are rated B by Standard & Poor's Ratings Group ("S&P") or
Moody's Investors Service, Inc. ("Moody's") or are not rated but are
determined by the Fund's investment adviser to be of comparable quality.
Securities rated B are judged to have speculative elements and are high
yield, high risk bonds (i.e., junk bonds), typically subject to greater
market fluctuations and greater risk of loss of income and principal due to
an issuer's default. To a greater extent than investment-grade bonds, lower-
rated bonds and speculative grade securities tend to reflect short-term
corporate, economic and market developments, as well as investor perceptions
of the issuer's credit quality. In addition, lower-rated bonds and
speculative grade securities may be more difficult to dispose of or to value
than high-rated, lower-yielding bonds. In circumstances where, in the
judgment of the Fund's investment adviser, the investment opportunities may
benefit the Fund, the Fund may invest in securities which are rated D by S&P.
Debt that is rated D is in default, and payment of interest and/or repayment
of principal on such debt is in arrears.

The Fund's investment adviser attempts to reduce the risks described above
through diversification of the portfolio and by credit analysis of each

issuer, as well as by monitoring broad economic trends and corporate and
legislative developments.
DEMAND MASTER NOTES
The Fund may invest in variable amount demand master notes. Demand notes are
short-term borrowing arrangements between a corporation or government agency
and an institutional lender (such as the Fund) payable upon demand by either
party. The notice period for demand typically ranges from one to seven days,
and the party may demand full or partial payment. Many master notes give the
Fund the option of increasing or decreasing the principal amount of the
master note on a daily or weekly basis within certain limits. Demand master
notes usually provide for floating or variable rates of interest.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements, and these securities are marked to market daily. To
the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that, under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.

REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to another
person, such as a financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable the Fund to
avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These assets are marked to market daily and
are maintained until the transaction has been settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.

TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. These securities are
backed by:
othe full faith and credit of the U.S. Treasury;
othe issuer's right to borrow an amount limited to a specific line of
credit from the U.S. Treasury;
o the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or

o the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which are permissible
investments which may not always receive financial support from the U.S.
government are:
o Farm Credit System, including the National Bank for Cooperatives and
Banks for Cooperatives;
oFederal Home Loan Banks;
oFederal Home Loan Mortgage Corporation;
oFederal National Mortgage Association;
oGovernment National Mortgage Association; and
oStudent Loan Marketing Association.

MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
o instruments of domestic and foreign banks and savings and loans if
they have capital, surplus, and undivided profits of over
$100,000,000, or if the principal amount of the instrument is insured
in full by the Bank Insurance Fund, or by the Savings Association
Insurance Fund, both of which are administered by the Federal Deposit
Insurance Corporation; and
o commercial paper rated A-1 or better by S&P, Prime-1 by Moody's , or
F-1 by Fitch, or, if unrated, of comparable quality as determined by
the Fund's investment adviser.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The Fund does not have the
right to vote securities on loan. In circumstances where the Fund does not,
the Fund would terminate the loan and regain the right to vote if that were
considered important with respect to the investment.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index futures

contracts, put options on stock index futures, put options on financial
futures and portfolio securities, and writing covered call options, but
may obtain such short-term credits as are necessary for the clearance of
purchases and sales of portfolio securities. The deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of its net assets, including the amounts
borrowed. The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of the value of the Fund's total assets are
outstanding.

PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, the Fund may mortgage,
pledge or hypothecate assets to secure such borrowings having a market
value not exceeding the lesser of the dollar amounts borrowed or 15% of
the value of total assets at the time of the borrowing. For purposes of
this limitation, the following are not deemed to be pledges: margin

deposits for the purchase and sale of futures contracts and related
options, and segregation or collateral arrangements made in connection
with options activities or the purchase of securities on a when-issued
basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options
on stock index futures, put options on financial futures, stock index
futures contracts, and put options on portfolio securities, and may
write covered call options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities,
and repurchase agreements collateralized by such securities) if as a
result more than 5% of the value of the Fund's total assets would be

invested in the securities of that issuer. Also, the Fund will not
acquire more than 10% of the voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities,
the market value of which do not exceed one-third of the value of the
Fund's total assets. This shall not prevent the Fund from purchasing or
holding U.S. government obligations, money market instruments, demand
master notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or engaging
in other transactions where permitted by the Fund's investment
objective, policies, and limitations.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions

involving customary brokers commissions. However, these limitations are
not applicable if the Fund's securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is the
Fund's policy to waive its investment advisory fees on Fund assets
invested in securities of other open-end investment companies, it should
be noted that investment companies incur certain expenses, such as
custodian and transfer agent fees, and therefore, any investment by the
Fund in shares of another investment company would be subject to such
duplicate expenses. The Fund will invest in other investment companies
primarily for the purpose of investing its short-term cash on a
temporary basis. The Fund has no present intention of investing more
than 5% of its total assets in investment companies during the current
fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement in
more than seven days after notice, over-the-counter options, certain
securities not determined under guidelines established by the Trustees
to be liquid, and non-negotiable fixed income time deposits with
maturities over seven days.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may

purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser,
owning individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them

in deliverable form without further payment or after segregating cash in
the amount of any further payment.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."

The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.
THE BILTMORE FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal
occupations, birthdates, and present positions. Each of the Trustees and
officers listed below holds an identical position with The Biltmore Municipal
Funds, another investment company. Except as listed below, none of the
Trustees or officers are affiliated with Wachovia Bank of North Carolina,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL

August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and
Vice Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief
Executive Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and
Director, Atlantic American Life Insurance Co., Georgia Casualty & Surety
Company, and Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle

Federated Investors Tower
Pittsburgh, PA
October 26, 1938

President and Treasurer
President and Chief Executive Officer, Federated Investors Management
Company; Executive Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Trustee, Federated Advisers, Federated Management,
Federated Research, and Federated Services Company; and Director, Federated
Securities Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Wachovia Bank of North Carolina,
Winston-Salem, North Carolina, on behalf of certain underlying accounts,
owned approximately 1,117,493 shares (36.84 %).

TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one
other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one
other

Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one
other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one
other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

*Information is furnished for the fiscal year ended November 30, 1995.
+The aggregate compensation is paid by the Trust, which is comprised of
twelve portfolios.
# The Fund Complex is comprised of 15 portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Asset Management (the "Adviser").
The Adviser is a business unit of Wachovia Bank of North Carolina, N.A.,
which is a wholly-owned subsidiary of Wachovia Corporation of North Carolina,
a wholly-owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of the Wachovia Banks' or their affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and 1994, and for the period
from May 10, 1993 (date of initial public investment) to November 30, 1993,
the Adviser earned $160,840, $117,003, and $54,274, respectively, of which
$59,075, $58,501, and $14,352, respectively, were voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating

expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, the Adviser will waive its
fee or reimburse the Fund for its expenses over the limitation.If the
Fund's monthly projected operating expenses exceed this limitation, the
investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to guidelines established by the Trustees. The adviser may
select brokers and dealers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the adviser and may
include: advice as to the advisability of investing in securities; security
analysis and economic reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the adviser or its affiliates might

otherwise have paid, it would tend to reduce their expenses. The adviser and
its affiliates exercise reasonable business judgment in selecting brokers who
offfer brokerage and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. For the fiscal years
ended November 30, 1995 and1994, and for the period from May 10, 1993 (date
of initial public investment) to November 30, 1993, the Fund paid $57,052,
$56,762, and $26,369, respectively, in commissions on brokerage transactions.
Although investment decisions for the Fund are made independently frm those
of the other accounts managed by the adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available to investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES

respectively, of which $56,955, $60,820, and $ 66,674, respectively, were
voluntarily waived.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under
the Custodian Agreement, the Custodian holds the Fund's portfolio securities
in safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the
Custodian Agreement, the Trust pays the Custodian an annual fee based upon
the average daily net assets of the Fund and which is payable monthly. The
Custodian will also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of
Federated Investors, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund. Federated Services Company also
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objective. Securities in its portfolio will be
sold whenever the Adviser believes it is appropriate to do so in light of the

Fund's investment objective, without regard to the length of time a
particular security may have been held. The Adviser does not anticipate that
the Fund's annual portfolio turnover rate will exceed 100% under normal
market conditions. A portfolio turnover rate of 100% would occur, for
example, if all the securities in the Fund's portfolio were replaced once in
a period of one year. Transactions for the Fund's portfolio will be based
only upon investment considerations and will not be limited by any other
considerations when the Adviser deems it appropriate to make changes in the
Fund's portfolio.
For the fiscal years ended November 30, 1995 and1994, the Fund's portfolio
turnover rates were 57% and 62%, respectively.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
PURCHASING FUND SHARES

Shares of the Fund are sold at net asset value on days on which the Wachovia
Banks, the New York Stock Exchange and the Federal Reserve Wire System are
open for business.

CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be
in federal funds or be converted into federal funds. The Wachovia Banks act
as the shareholders' agent in depositing checks and converting them to
federal funds.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid and
must not be subject to restrictions on resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment requirement of the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of the Fund,
along with the securities.
If an exchange is permitted, it will be treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.

REDEEMING FUND SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. Any redemption beyond this amount will
also be in cash unless the Trustees determine that payments should be in
kind.
MASSACHUSETTS BUSINESS TRUSTS

expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given
in each agreement, obligation, or instrument the Trust or the Trustees enter
into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration
of Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder of the Fund for any act or obligation of the
Trust on behalf of the Fund. Therefore, financial loss resulting from
liability as a shareholder of the Fund will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from the assets of the Fund.
TAX STATUS

SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash
or additional shares. The dividends received deduction for corporations will
apply to ordinary income distributions to the extent the distribution
represents amounts that would qualify for the dividends received deduction to
the Fund if the Fund were a regular corporation, and to the extent designated
by the Fund as so qualifying. These dividends, and any short-term capital
gains, are taxable as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders have held the shares.
TOTAL RETURN

Class A Shares' average annual total returns for the one-year period ended
November 30, 1995, and for the period from May 10, 1993 (date of initial
public investment) to November 30, 1995, were 20.24% and 7.77%, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment to
the ending redeemable value of that investment. The ending redeemable value
is computed by multiplying the number of shares owned at the end of the
period by the net asset value per share at the end of the period. The number
of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable
sales load, adjusted over the period by any additional shares, assuming the
reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
0.30%.

The yield for the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over a 12-
month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:
o stock market fluctuation;
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price (i.e., net asset value plus any sales

charge) per share fluctuate daily. Both net earnings and offering price per
share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors, such as the composition of
any index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
o RUSSELL 2000 INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used to
compare the total returns of funds whose portfolios are invested primarily
in small capitalization common stocks.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in maximum offering price over a specific
period of time. From time to time, the Fund will quote its Lipper ranking
in the "growth funds" category in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents the top
corporations of America, the DJIA index is a leading economic indicator for
the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (THE "S&P
INDEX"), is a composite index of common stocks in industry, transportation,
and financial and public utility companies. In addition, the S&P Index
assumes reinvestment of all dividends paid by stocks listed on the S&P

Index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the S&P's Index figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on quarterly reinvestment of dividends over a specified period
of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1995 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may
be obtained without charge by contacting The Biltmore Service Center at the
address located on the back cover of the prospectus or by calling The
Biltmore Service Center at 1-800-994-4414.

APPENDIX

STANDARD & POOR'S RATINGS GROUP ("S&P") CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated "BB", "B", "CCC", and "CC" is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposure to adverse conditions.
C -- The rating "C" is reserved for income bonds on which no interest is
being paid.
D -- Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
NR--"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy. S&P may apply a plus
(+) or minus (-) to the above rating classifications to show relative
standing within the classifications.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") CORPORATE BOND RATING DEFINITIONS

AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "AAA" securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in "AAA" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated "BAA" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA--Bonds which are "BA" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded

during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated "CAA" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to
principal or interest.
CA--Bonds which are rated "CA" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects or ever attaining
any real investment standing.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA" through "B" in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the

"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
NR--"NR" indicates that Fitch does not rate the specific issue.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus (+) sign.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-
1" repayment capacity will normally be evidenced by the following
characteristics:
o leading market positions in well-established industries;
o high rates of return on funds employed;
o conservative capitalization structure with moderate reliance on debt and
ample asset protection;

o broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o well-established access to a range of financial markets and assured sources
of alternate liquidity.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."

BILTMORE EMERGING MARKETS FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
prospectus of Biltmore Emerging Markets Fund (the "Fund") of The Biltmore
Funds (the "Trust"), dated January 31, 1996. This Statement is not a

Cusip 090297870
3012918B (1/96)

prospectus itself. To receive a copy of the prospectus, write the Fund or
call The Biltmore Service Center toll-free 1-800-994-4414.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Statement dated January 31, 1996

FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

TYPES OF INVESTMENTS 1

INVESTMENT LIMITATIONS 18

THE BILTMORE FUNDS MANAGEMENT 23

Officers and Trustees 23
Fund Ownership
27
Trustees Compensation 12
Trustee Liability
29
INVESTMENT ADVISORY SERVICES 29

Adviser to the Fund 29
Advisory Fees 29
BROKERAGE TRANSACTIONS 30

OTHER SERVICES 31

Administration 13
Custodian 13
Transfer Agent 13
Legal Services 32
Independent Auditors 32
Portfolio Turnover 14
Shareholder Servicing Agent
(Class A Shares Only) 14

PURCHASING FUND SHARES 33

Conversion to Federal Funds 34
DETERMINING NET ASSET VALUE 34

DETERMINING MARKET VALUE OF SECURITIES 34

REDEEMING FUND SHARES 35

Redemption in Kind 35
MASSACHUSETTS BUSINESS TRUSTS 36

TAX STATUS 37

The Fund's Tax Status 37
Shareholders' Tax Status 37
Capital Gains 38
TOTAL RETURN 38

YIELD 38

PERFORMANCE COMPARISONS 39

FINANCIAL STATEMENTS 41

APPENDIX 42

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in The Biltmore Funds (the "Trust"). The Trust was
established as a Massachusetts business trust under a Declaration of Trust
dated November 19, 1991.
Shares of Biltmore Emerging Markets Fund are currently offered in two
classes: Class A Shares and Class Y Shares. Prior to July 22, 1996, this
Fund offered a single class of shares, which is currently designated as Class
A Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to produce long-term capital appreciation.
The objective cannot be changed without approval of shareholders. Unless
otherwise indicated, the investment policies described below may be changed
by the Board of Trustees ("Trustees") without shareholder approval.
Shareholders will be notified before any material change in these policies
becomes effective.
TYPES OF INVESTMENTS
The Fund invests principally in a professionally managed and diversified
portfolio of securities of issuers and companies located in countries having
emerging markets. Although the Fund may invest in other securities and in
money market instruments, it is the Fund's policy, under normal market
conditions, to invest at least 65% of its assets in securities of issuers and
companies located in countries having emerging markets.
INVESTMENT PHILOSOPHY
As described in the Fund's prospectus under "Investment Policies" and
"Investment Process," the Fund's investment adviser (the "Adviser") manages
the Fund's portfolio to attempt to capture the return opportunities presented
by securities of issuers and companies located in emerging markets. In light

of recent political events (for example, the fall of Communism in Europe, the
opening of China to Western investment, the move toward free-market
capitalism in many developing countries, etc.), conditions for investing in
many emerging market economies have become attractive. A number of emerging
market capitalist economies present striking market growth opportunities
(stemming from the increasing number of working-class and middle-class
citizens in those nations who are now demanding improved housing,
infrastructure such as roads and utilities and a greater array of consumer
goods). In view of the fact that approximately 75% of the world's population
resides in emerging market countries, and many of these countries are still
in the early or initial stages of growth and development, it is conceivable
that many of these emerging market countries will exhibit economic and
earnings growth that exceeds similar measurements in what have been
traditionally characterized as the developed nations of Europe, Japan, and
the United States. While past performance is not a guarantee of future
results, this trend has been seen in recent years, as the stock markets of a
number of emerging market economies have outperformed the stock markets of
more developed countries. Investors should recognize that investments in
emerging market countries present a number of risks, which are discussed in
the Fund's prospectus. Currently, the Fund may invest in the securities of
issuers located in the following countries: Argentina, Brazil, Chile, China,
the Czech Republic, Greece, Hong Kong, Hungary, India, Indonesia, Malaysia,
Mexico, Peru, the Philippines, Poland, Portugal, South Korea, Taiwan,
Thailand, and Turkey.
MORTGAGE-BACKED SECURITIES
The mortgages underlying mortgage-backed securities often may be prepaid
without penalty or premium. Therefore, mortgage-backed securities are
generally subject to higher prepayment risks than most other types of debt

instruments. Prepayment risks on mortgage-backed securities tend to increase
during periods of declining mortgage interest rates, because many borrowers
refinance their mortgages to take advantage of the more favorable rates.
Depending upon market conditions, the yield that the Fund receives from the
reinvestment of such prepayments, or any scheduled principal payments, may be
lower than the yield on the original mortgage security. As a consequence,
mortgage-backed securities may be a less effective means of "locking in"
interest rates than other types of debt securities having the same stated
maturity and may also have less potential for capital appreciation. For
certain types of asset pools, such as collateralized mortgage obligations,
prepayments may be allocated to one tranche of securities ahead of other
tranches in order to reduce the risk of prepayments for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated principal amount. Conversely, the prepayment of mortgage-backed
securities purchased at a market discount from their stated principal amount
will accelerate the recognition of interest income by the Fund, which would
be taxed as ordinary income when distributed to the shareholders.
CONVERTIBLE SECURITIES
When owned as part of a unit along with warrants, which are options to buy
the common stock, convertible securities function as convertible bonds,
except that the warrants generally will expire before the bond's maturity.
Convertible securities are senior to equity securities and, therefore, have a
claim to assets of the corporation prior to the holders of common stock in
the case of liquidation. However, convertible securities are generally
subordinated to similar nonconvertible securities of the same company. The
interest income and dividends from convertible bonds and preferred stock

provide a stable stream of income with generally higher yields than common
stock, but lower than non-convertible securities of similar quality.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in which,
in the Adviser's opinion, the investment characteristics of the underlying
common shares will assist the Fund in achieving its investment objective.
Otherwise, the Fund will hold or trade the convertible securities. In
selecting convertible securities for the Fund, the Adviser evaluates the
investment characteristics of the convertible security as a fixed income
instrument, and the investment potential of the underlying equity security
for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determination of the
issuer's profits, and the issuer's management capability and practices.
WARRANTS
Warrants are basically options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life
ranging from less than a year to twenty years or may be perpetual. However,
most warrants have expiration dates after which they are worthless. In
addition, if the market price of the common stock does not exceed the
warrant's exercise price during the life of the warrant, the warrant will
expire as worthless. Warrants have no voting rights, pay no dividends, and
have no right with respect to the assets of the corporation issuing them. The
percentage increase or decrease in the market price of the warrant may tend
to be greater than the percentage increase or decrease in the market price of
the optioned common stock.

SOVEREIGN DEBT OBLIGATIONS
The Fund may purchase sovereign debt instruments issued or guaranteed by
foreign governments or their agencies, including debt of Latin American
nations or other developing countries. Sovereign debt may be in the form of
conventional securities or other types of debt instruments, such as loans or
loan participations. Sovereign debt of developing countries may involve a
high degree of risk. Governmental entities responsible for repayment of the
debt may be unable or unwilling to repay principal and interest when due, and
may require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on political as
well as economic factors. The Fund may also invest in debt obligations of
supranational entities, which include international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, and international banking institutions and related government
agencies. Examples of these include, but are not limited to, the
International Bank for Reconstruction and Development (World Bank), European
Investment Bank and Inter-American Development Bank.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge its portfolio by buying and selling
financial futures contracts and stock index futures contracts, buying put
options on portfolio securities and listed put options on futures contracts,
and writing call options on futures contracts. The Fund may also write
covered call options on portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or
have expired. An option position on financial futures contracts may be closed

out over-the-counter or on a nationally-recognized exchange which provides a
secondary market for options of the same series.
In addition to purchasing put options and writing call options as described
in the prospectus, the Fund may purchase and write over-the-counter options
on portfolio securities in negotiated transactions with the buyers or writers
of the options when options on the portfolio securities held by the Fund are
not traded on an exchange. The Fund purchases and writes options only with
investment dealers and other financial institutions (such as commercial banks
or savings and loan associations) deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates
and are purchased from a clearing corporation. Exchange-traded options have a
continuous liquid market while over-the-counter options may not.
The Fund may also write call options and purchase put options on financial
futures and stock index futures contracts as a hedge to attempt to protect
securities in its portfolio against decreases in value.
FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer, who agrees to take delivery of the
security ("going long") at a certain time in the future.
A stock index futures contract is a bilateral agreement which obligates the
seller to deliver (and the purchaser to take delivery of) an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of trading of the contract and the price at
which the agreement is originally made. There is no physical delivery of the
stocks constituting the index and no price is paid upon entering into a

futures contract. In general, contracts are closed out prior to their
expiration.
There are several risks accompanying the utilization of futures contracts to
effectively anticipate market movements. First, positions in futures
contracts may be closed only on an exchange or board of trade that furnishes
a secondary market for such contracts. While the Fund plans to utilize
futures contracts only if there exists an active market for such contracts,
there is no guarantee that a liquid market will exist for the contracts at a
specified time. Furthermore, because, by definition, futures contracts look
to projected price levels in the future, and not to current levels of
valuation, market circumstances may result in there being a discrepancy
between the price of the stock index future and the movement in the
corresponding stock index. The absence of a perfect price correlation between
the futures contract and its underlying stock index could stem from investors
choosing to close futures contracts by offsetting transactions rather than
satisfying additional margin requirements. This could result in a distortion
of the relationship between the index and the futures market. In addition,
because the futures market imposes less burdensome margin requirements than
the securities market, an increased amount of participation by speculators in
the futures market could result in price fluctuations.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified price,
the purchase of a put option on a futures contract entitles (but does not
obligate) its purchaser to decide on or before a future date whether to
assume a short position at the specified price.

Generally, if the hedged portfolio securities decrease in value during the
term of an option, the related futures contracts will also decrease in value
and the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by the Fund upon the sale of the second
option will be large enough to offset both the premium paid by the Fund for
the original option, plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract of
the type underlying the option (for a price less than the strike price of the
option) and exercise the option. The Fund would then deliver the futures
contract in return for payment of the strike price. If the Fund neither
closes out nor exercises an option, the option will expire on the date
provided in the option contract, and only the premium paid for the contract
will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write listed
call options on futures contracts to hedge its portfolio. When the Fund
writes a call option on a futures contract, it is undertaking the obligation
of assuming a short futures position (selling a futures contract) at the
fixed strike price at any time during the life of the option if the option is
exercised. As stock prices fall, causing the prices of futures to go down,
the Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call option
position to increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that
the Fund keeps the premium received for the option. This premium can

substantially offset the drop in value of the Fund's fixed income or indexed
portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it by
the buyer, the Fund may close out the option by buying an identical option.
If the hedge is successful, the cost of the second option will be less than
the premium received by the Fund for the initial option. The net premium
income of the Fund will then substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market
value of its securities portfolio, plus or minus the unrealized gain or loss
on those open positions, adjusted for the correlation of volatility between
the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a
sufficient number of open contracts to bring its open futures and options
positions within this limitation.
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although the
Fund values its assets daily in U.S. dollars, the Fund may not convert
its holdings to U.S. dollars daily. The Fund may incur conversion costs
when it converts its holdings to another currency. Foreign exchange
dealers may realize a profit on the difference between the price at
which the Fund buys and sells currencies.

The Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. The Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange
market or through forward contracts to purchase or sell foreign
currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect against possible loss resulting from an adverse change
in the relationship between the U.S. dollar and a foreign currency
involved in an underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could result from a
positive change in such currency relationships. The Adviser believes
that it is important to have the flexibility to enter into forward
currency exchange contracts whenever it determines that it is in the
Fund's best interest to do so. The Fund will not speculate in foreign
currency exchange.
The Fund will not enter into forward foreign currency exchange contracts
or maintain a net exposure in such contracts when it would be obligated
to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency or, in
the case of a "cross-hedge" denominated in a currency or currencies that
the Adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, the Fund will not
enter into a forward foreign currency exchange contract with a term
longer that one year.

FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price on
a specified date or during the option period. The owner of a call option
has the right, but not the obligation, to buy the currency. Conversely,
the owner of a put option has the right, but not the obligation, to sell
the currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position
during the option period at any time prior to expiration.
A call option on a foreign security generally rises in value if the
underlying currency appreciates in value, and a put option on a foreign
currency generally falls in value if the underlying currency depreciates
in value. Although purchasing a foreign currency option can protect the
Fund against an adverse movement in the value of a foreign currency, the
option will not limit the movement in the value of such currency. For
example, if the Fund was holding securities denominated in a foreign
currency that was appreciating and had purchased a foreign currency to
put a hedge against a decline in the value of the currency, the Fund
would not have to exercise its put option. Likewise, if the Fund were to
enter into a contract to purchase a security denominated in foreign
currency and, in conjunction with that purchase, were to purchase a
foreign currency call option to hedge against a rise in value of the
currency, and if the value of the currency instead depreciated between
the date of purchase and the settlement date, the Fund would not have to
exercise its call. Instead, the Fund could acquire in the spot market
the amount of foreign currency needed for settlement.

SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets
in foreign currency options are relatively new, and the Fund's ability
to establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Fund will not
purchase or write such options unless and until, in the opinion of the
Adviser, the market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater than the risks
in connection with the underlying currency, there can be no assurance
that a liquid secondary market will exist for a particular option at any
specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits of
a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors
may be disadvantaged by having to deal in an odd market lot (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available

through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of
very large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e., less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a
global, around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies
remain open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until
they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such
contracts, the Fund may be able to achieve many of the same objectives
as it would through the use of forward foreign currency exchange
contracts. The Fund may be able to achieve these objectives possibly
more effectively and at a lower cost by using futures transactions
instead of forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND
RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition,
there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options
on futures currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts
is relatively new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market.

To reduce this risk, the Fund will not purchase or write options on
foreign currency futures contracts unless and until, in the opinion of
the Adviser, the market for such options has developed sufficiently that
the risks in connection with such options are not greater than the risks
in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Fund because the maximum
amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call
or put option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or futures
contract.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that initial margin in futures transactions does
not involve the borrowing of funds by the Fund to finance the transactions.
Initial margin is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price or the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to

market." Variation margin does not represent a borrowing or loan by the Fund
but is instead settlement between the Fund and the broker of the amount one
would owe the other if the futures contract expired. In computing its daily
net asset value, the Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in futures
transactions if the sum of its initial margin deposits on open contracts will
exceed 5% of the market value of the Fund's total assets, after taking into
account the unrealized profits and losses on those contracts it has entered
into. Second, the Fund will not enter into these contracts for speculative
purposes. Third, since the Fund does not constitute a commodity pool, it will
not market itself as such, nor serve as a vehicle for trading in the
commodities futures or commodity options markets. Connected with this, the
Fund will disclose to all prospective investors, the limitations on its
futures and option transactions, and make clear that these transactions are
entered into only for bona fide hedging purposes, or other permissible
purposes pursuant to regulations promulgated by the Commodity Futures Trading
Commission ("CFTC"). Finally, because the Fund will submit to the CFTC
special calls for information, the Fund will not register as a commodities
pool operator.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission (the
"SEC") Staff position set forth in the adopting release for Rule 144A under
the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-
harbor for certain secondary market transactions involving securities subject

to restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Trust, on behalf of the Fund, believes that the Staff of the
SEC has left the question of determining the liquidity of all restricted
securities for determination to the Trustees. The Trustees consider the
following criteria in determining the liquidity of certain restricted
securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price and yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements and these securities are marked to market daily. To
the extent that the original seller does not repurchase the securities from

the Fund, the Fund could receive less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that, under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy pursuant
to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement, the Fund transfers possession of a portfolio instrument to another
person, such as a financial institution, broker, or dealer, in return for a
percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable the Fund to
avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund in a
dollar amount sufficient to make payment for the obligations to be purchased
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.

LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index futures
contracts, put options on stock index futures, put options on financial
futures and portfolio securities, and writing covered call options, but
may obtain such short-term credits as may be necessary for clearance of
purchases and sales of portfolio securities. A deposit or payment by the
Fund of initial or variation margin in connection with futures contracts
or related options transactions is not considered the purchase of a
security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its total assets, including the
amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,

extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. For purposes of this limitation, the
following will not be deemed to be pledges of the Fund's assets: (a) the
deposit of assets in escrow in connection with the writing of covered
put or call options and the purchase of securities on a when-issued
basis; and (b) collateral arrangements with respect to (i) the purchase
and sale of stock options (and options on stock indices) and (ii)
initial or variation margin for futures contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, including limited
partnership interests, although it may invest in the securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. However, the Fund may purchase put options
on stock index futures, put options on financial futures, stock index
futures contracts, and put options on portfolio securities, and may
write covered call options.

UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities which the Fund may purchase
pursuant to its investment objective, policies, and limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items, or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if, as a
result, more than 5% of the value of its total assets would be invested
in the securities of that issuer or if it would own more than 10% of the
outstanding voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry. However, the Fund may invest 25% or more of the value
of its assets in cash or cash items, securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities, or instruments
secured by these money market instruments, such as repurchase
agreements.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities.
This shall not prevent the Fund from purchasing or holding money market
instruments, repurchase agreements, obligations of the U.S. government,
its agencies or instrumentalities, bonds, debentures, notes, or certain
debt instruments as permitted by its investment objective, policies, and
limitations or the Trust's Declaration of Trust.

The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, non-negotiable fixed
time deposits with maturities over seven days, over-the-counter options,
and certain securities not determined by the Trustees to be liquid.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except it may invest in
the securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
Officers and Trustees of the Trust or the Adviser, owning individually

more than 1/2 of 1% of the issuer's securities, together own more than
5% of the issuer's securities.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purpose of
exercising control or management.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not
listed on the New York or American Stock Exchange.
INVESTING IN OPTIONS
The Fund will not purchase put or call options on securities or futures
contracts if more than 5% of the value of the Fund's total assets would
be invested in premiums on open option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
ARBITRAGE TRANSACTIONS
The Fund will not enter into transactions for the purpose of engaging in
arbitrage.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of

closed-end investment companies only in open market transactions
involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, reorganization, or acquisition of assets.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
The Fund does not intend to borrow money or pledge securities in excess of 5%
of the value of its net assets during the coming fiscal year.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment to be "cash items."
To comply with registration requirements in certain states, the Fund (1) will
limit the margin deposits on futures contracts entered into by the Fund to 5%
of its net assets, (2) will limit the aggregate value of the assets
underlying covered call options or put options written by the Fund to not
more than 25% of its net assets, and (3) will limit the premiums paid for
options purchased by the Fund to 5% of its net assets. (If state requirements
change, these restrictions may be revised without shareholder notification.)
THE BILTMORE FUNDS MANAGEMENT

Trustees or officers are affiliated with Wachovia Bank of North Carolina,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Executive Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and
Director, Atlantic American Life Insurance Co., Georgia Casualty & Surety
Company, and Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.

December 18, 1937

Trustee

President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

President and Treasurer
President and Chief Executive Officer, Federated Investors Management
Company; Executive Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Trustee, Federated Advisers, Federated Management,
Federated Research, and Federated Services Company; and Director, Federated
Securities Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Wachovia Bank of North Carolina,
Winston-Salem, North Carolina, on behalf of certain underlying accounts,
owned approximately 1,044,779 shares (12.21%).

TRUSTEES COMPENSATION

NAME AND AGGREGATE TOTAL COMPENSATION PAID

POSITION WITH THE COMPENSATION FROM TO THE TRUSTEES FROM THE TRUST
TRUST THE TRUST*+ AND FUND COMPLEX#

James A. Hanley, $21,857 $22,725 for the Trust and one
other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one
other
Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one
other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one
other
Trustee investment company in the
Fund Complex
Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

*Information is furnished for the fiscal year ended November 30, 1995.

+The aggregate compensation is paid by the Trust, which is comprised of
twelve portfolios.
# The Fund Complex is comprised of 15 portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, the Adviser will waive its
fee or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
BROKERAGE TRANSACTIONS

analysis and economic reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The adviser and
its affiliates exercise reasonable business judgment in selecting brokers who
offfer brokerage and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. For the period from
December 26, 1994 (date of initial public investment) to November 30, 1995,
the Fund paid $437,055 in commissions on brokerage transactions.
Although investment decisions for the Fund are made independently frm those
of the other accounts managed by the adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available to investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS'), a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for a

fee as described in the prospectus. For the period from December 26, 1994
(date of initial public investment) to November 30, 1995, FAS earned $75,000,
of which $41,860 was voluntarily waived.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under
the Custodian Agreement, the Custodian holds the Fund's portfolio securities
in safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the
Custodian Agreement, the Trust pays the Custodian an annual fee based upon
the average daily net assets of the Fund and which is payable monthly. The
Custodian will also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of
Federated Investors, is transfer agent (the "Transfer Agent") for the shares
of the Fund, and dividend disbursing agent for the Fund. Federated Services
Company also provides certain accounting and recordkeeping services with
respect to the Fund's portfolio investments.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objective. Securities in its portfolio will be

sold whenever the Adviser believes it is appropriate to do so in light of the
Fund's investment objective, without regard to the length of time a
particular security may have been held. Transactions for the Fund's portfolio
will be based only upon investment considerations and will not be limited by
any other considerations when the Adviser deems it appropriate to make
changes in the Fund's portfolio. For the period ending November 30, 1995, the
Adviser does not expect the Fund's portfolio turnover to exceed 100%.
For the period from December 26, 1994 (date of initial public investment) to
November 30, 1995, the Fund's portfolio turnover rate was 17%.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
PURCHASING FUND SHARES

Shares of the Fund are sold at net asset value plus an applicable sales
charge on days on which the New York Stock Exchange, the Wachovia Banks (as
such term is defined in the prospectus) and the Federal Reserve Wire System
are open for business.

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market value of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service or for short-term
obligations with remaining maturities of 60 days or less at the time of
purchase at amortized cost;
o for all other securities, at fair value as determined in good faith by
the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices, and may reflect: institutional trading

in similar groups of securities; yield; quality; coupon rate; maturity; type
of issue; trading characteristics; and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing its net asset value, the
Fund values foreign securities at the latest closing price on the exchange on
which the securities are traded immediately prior to the closing of the New
York Stock Exchange. Certain foreign currency exchange rates may also be
determined at the latest rate prior to the closing of the New York Stock
Exchange. Foreign securities quoted in foreign currencies are translated into
U.S. dollars at current rates. Occasionally, events that affect these values
and exchange rates may occur between the times at which they are determined
and the closing of the New York Stock Exchange. If such events materially
affect the value of portfolio securities, these securities may be valued at
their fair value as determined in good faith by the Trustees, although the
actual calculation may be done by others.
REDEEMING FUND SHARES

by a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable SEC rules,
taking such securities at the same value employed in determining net asset
value and selecting the securities in a manner the Trustees determine to be
fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
The Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
MASSACHUSETTS BUSINESS TRUSTS

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given
in each agreement, obligation, or instrument the Trust or the Trustees enter
into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration
of Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder of the Fund for any act or obligation of the

Trust on behalf of the Fund. Therefore, financial loss resulting from
liability as a shareholder of the Fund will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from the assets of the Fund.
TAX STATUS

THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities
held less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash
or additional shares. The dividends received deduction for corporations will
apply to ordinary income distributions to the extent the distribution
represents amounts that would qualify for the dividends received deduction to
the Fund if the Fund were a regular corporation, and to the extent designated
by the Fund as so qualifying. These dividends, and any short-term capital
gains, are taxable as ordinary income.

CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders have held shares.
TOTAL RETURN

For the period from December 26, 1994 (date of initial public investment) to
November 30, 1995, Class A Shares' cumulative total return was (0.57%).
Cumulative total return reflects a Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of
the maximum sales load. The Fund's total return is representative of only
eleven months activity since the Fund's effective date.
YIELD

The yield for the Fund is determined by dividing the net investment income
per share (as defined by the SEC) earned by the Fund over a thirty-day period
by the maximum offering price per share of the Fund on the last day of the
period. This value is then annualized using semi-annual compounding. This
means that the amount of income generated during the thirty-day period is
assumed to be generated each month over a 12-month period and is reinvested
every six months. The yield does not necessarily reflect income actually
earned by the Fund because of certain adjustments required by the SEC and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:
o stock market fluctuations;
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per share fluctuate daily. Both net earnings and
net asset value per share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors, such as the composition of
any index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in maximum offering price
over a specific period of time.

o EUROPE, AUSTRALIA, AND FAR EAST ("EAFE") is a market capitalization
weighted foreign securities index, which is widely used to measure the
performance of European, Australian, New Zealand and Far Eastern stock
markets. The index covers approximately 1,020 companies drawn from 18
countries in the above regions. The index values its securities daily
in both U.S. dollars and local currency and calculates total returns
monthly. EAFE U.S. dollar total return is a net dividend figure less
Luxembourg withholding tax. The EAFE is monitored by Capital
International, S.A., Geneva, Switzerland.
o INTERNATIONAL FINANCE CORPORATION ("IFC") EMERGING MARKET INDICES are
market capitalization-weighted foreign securities indices, which are
used to measure the performance of emerging markets (as defined by the
World Bank) in Europe, Asia, Latin America, and the Middle East/Africa.
The IFC calculates both a "Global" and an "Investable" version of its
index. The "Global" version includes companies and countries with
regard to their access to foreign investors. The "Investable" Index
adjusts company and market weights to reflect their accessibility to
foreign investors. The IFC Global Index currently covers approximately
1,200 securities in 25 markets; the IFC Investable Index currently
covers approximately 900 securities in 24 markets. Both indices are
presently calculated in local currency and in US dollars, without
dividends and with gross dividends reinvested (e.g., before withholding
taxes). The IFC is a subsidiary of the World Bank, and has been
collecting data on emerging markets since 1975.
o MORGAN STANLEY CAPITAL INTERNATIONAL ("MSCI") EMERGING MARKETS INDICES
are market capitalization-weighted foreign securities indices, which
are used to measure the performance of emerging markets (as defined by
the World Bank) in Europe, Asia, Latin America, and the Middle

East/Africa. MSCI calculates a "Global" and a "Free" version of its
index. The "Global" version includes companies and countries without
regards to their access to foreign investors. The "Free" Index adjusts
company and market weights to reflect their assessibility to foreign
investors. The MSCI Global Index currently covers approximately 630
securities in 20 markets; the MSCI Free Index currently covers
approximately 560 securities in 19 markets. Both indices are presently
calculated in local currency and in US dollars, without dividends and
with gross dividends reinvested (e.g., before withholding taxes).
o MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDQ-listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on the annual reinvestment of dividends over a specified
period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

address located on the back cover of the prospectus or by calling The
Biltmore Service Center at 1-800-994-4414.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C--The rating "C" is reserved for income bonds on which no interest is being
paid.

D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC., CORPORATE BOND RATINGS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in "Aaa" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.

BA--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Cusip 090297797
G00648-02 (1/96)

BILTMORE BALANCED FUND
(A PORTFOLIO OF THE BILTMORE FUNDS
CLASS A SHARES
CLASS B SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Biltmore Balanced Fund (the "Fund"), a portfolio of The
Biltmore Funds (the "Trust"), dated January 31, 1996. This Statement is
not a prospectus itself. To receive a copy of the prospectus, write the
Fund or call The Biltmore Service Center toll-free at 1-800-994-4414

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVES AND POLICIES 1

Types of Investments 1
Investment Limitations 7
THE BILTMORE FUNDS MANAGEMENT 10

Officers and Trustees 10
Fund Ownership 11
Trustees Compensation 12
Trustee Liability 12
INVESTMENT ADVISORY SERVICES 12

Adviser to the Fund 12
Advisory Fees 12
BROKERAGE TRANSACTIONS 13

OTHER SERVICES 13

Administration 13
Custodian 13
Transfer Agent 14
Legal Services 14
Independent Auditors 14
Portfolio Turnover 14
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND
SHAREHOLDER SERVICES PLAN (CLASS A AND CLASS B SHARES ONLY)
14

PURCHASING FUND SHARES 14

Conversion to Federal Funds 14
Exchanging Securities for Fund Shares 14
DETERMINING NET ASSET VALUE 15

DETERMINING MARKET VALUE OF SECURITIES 15

REDEEMING FUND SHARES 15

Redemption in Kind 15
MASSACHUSETTS BUSINESS TRUSTS 15

TAX STATUS 16

The Fund's Tax Status 16
Shareholders' Tax Status 16
Capital Gains 16
TOTAL RETURN 16

YIELD 16

PERFORMANCE COMPARISONS 17

FINANCIAL STATEMENTS 19

APPENDIX 20

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991.
Shares of Biltmore Balanced Fund are currently offered in three classes:
Class A Shares, Class B Shares, and Class Y Shares. Prior to July 22, 1996,
this Fund offered a single class of shares, which is currently designated as
Class A Shares.
INVESTMENT OBJECTIVES AND POLICIES

The Fund's investment objective is to provide long-term growth of principal
and current income. The investment objective cannot be changed without
approval of shareholders. Unless otherwise indicated, the investment policies
described below may be changed by the Board of Trustees ("Trustees" or the
"Board") without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective. Capitalized terms
not otherwise defined in this Statement have the same meaning assigned in the
prospectus.
TYPES OF INVESTMENTS
The Fund invests primarily in a diversified portfolio of equity securities
and debt securities. The following discussion supplements the description of
the Fund's investment policies in the prospectus. Below are securities in
which the Fund may invest from time to time:
o common or preferred stocks and other equity securities which generally have
bond-like attributes, including zero coupon and/or convertible securities;
o domestic issues of corporate debt obligations (including convertible bonds)
rated, at the time or purchase, A or better by Moody's Investors Service,
Inc. ("Moody's), Standard & Poor's Ratings Group ("S&P") or Fitch Investors

Service, Inc. ("Fitch"), or if not rated, determined by the Fund's
investment adviser to be of comparable quality;
o investments in American Depositary Receipts ("ADRs") of foreign companies
traded on the New York Stock Exchange or in the over-the-counter market;
o obligations issued or guaranteed by the U.S. government, its agencies, or
instrumentalities;
o asset-backed securities;
o commercial paper rated, at the time of purchase, not less than A-1 by S&P,
Prime-1 by Moody's or F-1 by Fitch, or if not rated, of comparable quality
as determined by the Fund's investment adviser;
o time and savings deposits (including certificates of deposit) in commercial
or savings banks;
o bankers' acceptances;
o demand master notes; and
o repurchase agreements collateralized by high quality, liquid investments.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments such as:
o instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is federally insured;
o commercial paper rated, at the time of purchase, not less than A-1 by S&P,
Prime-1 by Moody's, or F-1 by Fitch, or if not rated, are determined to be
of comparable quality by the Fund's investment adviser;
o time and savings deposits (including certificates of deposit) in commercial
or savings banks whose accounts are insured by the Bank Insurance Fund
("BIF"), or institutions whose accounts are insured by the Savings
Association Insurance Fund ("SAIF"), including certificates of deposit
issued by, and other time deposits in, foreign branches of BIF-insured

banks which, if negotiable, mature in six months or less or if not
negotiable, either mature in ninety days or less, or are withdrawable upon
notice not exceeding ninety days; or
o bankers' acceptances.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the
Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under
the Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under
the Rule. The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the Trust's

Board. The Board considers the following criteria in determining the
liquidity of certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Fund's investment adviser to be
creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements under certain
circumstances. This transaction is similar to borrowing cash. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument
to another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and agrees

that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at
an agreed upon rate. The use of reverse repurchase agreements may enable the
Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
LENDING PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The Fund does not have the
right to vote securities on loan. In circumstances where the Fund does not,
the Fund would terminate the loan and regain the right to vote if that were
considered important with respect to the investment.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or

a different issuer, participations based on revenues, sales, or profits, or
the purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Increasing rate securities, which currently do not make up a significant
share of the market in corporate debt securities, are generally offered at an
initial interest rate which is at or above prevailing market rates. Interest
rates are reset periodically (most commonly every 90 days) at different
levels on a predetermined scale. These levels of interest are ordinarily set
at progressively higher increments over time. Some increasing rate securities
may, by agreement, revert to a fixed rate status. These securities may also
contain features which allow the issuer the option to convert the increasing
rate of interest to a fixed rate under such terms, conditions, and
limitations as are described in each issuer's prospectus.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the Fund's
investment adviser's opinion, the investment characteristics of the
underlying common shares will assist the Fund in achieving its investment
objectives. Otherwise, the Fund may hold or trade convertible securities. In
selecting convertible securities for the Fund, the Fund's investment adviser
evaluates the investment characteristics of the convertible security as a
fixed income instrument, and the investment potential of the underlying
equity security for capital appreciation. In evaluating these matters with
respect to a particular convertible security, the Fund's adviser considers
numerous factors, including the economic and political outlook, the value of
the security relative to other investment alternatives, trends in the

determinants of the issuer's profits, and the issuer's management capability
and practices.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero
coupon convertible securities accretes at a stated yield until the security
reaches its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock. In
addition, zero coupon convertible securities usually have put features that
provide the holder with the opportunity to put the bonds back to the issuer
at a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of a foreign issuer may present greater risks than investments in
U.S. securities, including higher transaction costs. In addition, investments
in foreign issuers may include additional risks associated with less market
liquidity and political instability. The possible imposition of withholding
taxes on interest income might also adversely affect the payment of principal
and interest on obligations of foreign issuers. Foreign securities may be
denominated in foreign currencies. Therefore, the value in U.S. dollars of
the Fund's assets and income may be affected by changes in exchange rates and
regulations.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those
issued by Government National Mortgage Association. The terms and

characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities
dealers and other investors makes government-related pools highly liquid.
RESETS OF INTEREST
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund
invests generally are readjusted at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury Note rates, the three-month Treasury
Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to be somewhat less
volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable rate
mortgage securities that closely mirror the market. Certain residual interest
tranches of CMOs may have adjustable interest rates that deviate

significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In the
event the Fund purchases such residual interest mortgage securities, it will
factor in the increased interest and price volatility of such securities when
determining its dollar-weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in
which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change
up or down: (1) per reset or adjustment interval, and (2) over the life of
the loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps
or floors on the underlying residential mortgage loans. Additionally, even
though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge its portfolio by buying and selling
financial futures contracts, buying put options on portfolio securities and
put options on financial futures contracts for portfolio securities, and
writing call options on futures contracts. The Fund also may write covered

call options on portfolio securities to attempt to increase its current
income.
The Fund will maintain its position in securities, options and segregated
cash subject to puts and calls until the options are exercised, closed, or
have expired. An option position on financial futures transactions may be
closed out over-the-counter or on a nationally recognized exchange which
provides a secondary market for options of the same series.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund also may purchase
and sell stock index futures to hedge against changes in prices. The
Fund will not engage in futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short"), and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future. For
example, in the fixed income securities market, prices generally move
inversely to interest rates. A rise in rates means a drop in price.
Conversely, a drop in rates typically means a rise in price. In order to
hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver
securities at a predetermined price (i.e., "go short") to protect itself
against the possibility that the prices of its fixed income securities
may decline during the Fund's anticipated holding period. The Fund would
"go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.

Stock index futures contracts are based on indices that reflect the
market value of common stock of the firms included in the indices. An
index futures contract is an agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to the
differences between the value of the index at the close of the last
trading day of the contract and the price at which the index contract
was originally written.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in the nature
of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.

The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in
futures transactions if the sum of its initial margin deposits on open
contracts will exceed 5% of the market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts it has entered into. Second, the Fund will not enter into
these contracts for speculative purposes. Third, since the Fund does not
constitute a commodity pool, it will not market itself as such, nor
serve as a vehicle for trading in the commodities futures or commodity
options markets. Connected with this, the Fund will disclose to all
prospective investors the limitations on its futures and options
transactions, and make clear that these transactions are entered into
only for bona fide hedging purposes, or other permissible purposes
pursuant to regulations promulgated by the Commodity Futures Trading
Commission ("CFTC"). Finally, because the Fund will submit to the CFTC
special calls for information, the Fund will not register as a
commodities pool operator.
STOCK INDEX OPTIONS
The Fund may purchase put options on stock indices listed on national
securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks
included in the index.
The effectiveness of purchasing stock index options will depend upon the
extent to which price movements in the Fund's portfolio correlate with
price movements of the stock index selected. Because the value of an
index option depends upon movements in the level of the index rather

than the price of a particular stock, whether the Fund will realize a
gain or loss from the purchase of options on an index depends upon
movements in the level of stock prices in the stock market generally or,
in the case of certain indices, in an industry or market segment, rather
than movements in the price of a particular stock. Accordingly,
successful use by the Fund of options on stock indices will be subject
to the ability of the Fund's investment adviser to predict correctly
movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
The Fund would use these options solely to protect portfolio securities
against decreases in value resulting from market factors such as an
anticipated increase in rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.

Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would then
deliver the futures contract in return for payment of the strike price.
If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and only the premium
paid for the contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on financial futures contracts or over-the-counter
call options on future contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on
a futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price
at any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to decrease,
the Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase. In other words, as the underlying futures
price goes down below the strike price, the buyer of the option has no
reason to exercise the call, so that the Fund keeps the premium received
for the option. This premium can substantially offset the drop in value
of the Fund's portfolio securities.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.

The net premium income of the Fund will then substantially offset the
realized decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio, plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts to
bring its open futures and options positions within this limitation.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option. The Fund may purchase these put options as long
as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write call options on securities either held in its
portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration. As the writer of a call option, the Fund has
the obligation, upon exercise of the option during the option period, to
deliver the underlying security upon payment of the exercise price. The
call options which the Fund writes and sells must be listed on a
recognized options exchange. Writing of call options by the Fund is

intended to generate income for the Fund and thereby protect against
price movements in particular securities in the Fund's portfolio.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
RISKS
When the Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to
market changes. In addition, the Fund's investment adviser could be
incorrect in its expectations about the direction or extent of market
factors such as stock price movements. In these events, the Fund may
lose money on the futures contract or option. Furthermore, it is not
certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Fund's investment
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at
any particular time. The Fund's ability to establish and close out
futures and options positions depends on this secondary market. The
inability to close out these positions could have an adverse effect on
the Fund's ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures contracts
or related options if immediately thereafter the sum of the amount of

margin deposits on the Fund's existing futures positions and premiums
paid for related options would exceed 5% of the market value of the
Fund's total assets. When the Fund purchases futures contracts, an
amount of cash and cash equivalents, equal to the underlying commodity
value of the futures contracts (less any related margin deposits), will
be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby
insure that the use of such futures contract is unleveraged. When the
Fund sells futures contracts, it will either own or have the right to
receive the underlying future or security, or will make deposits to
collateralize the position as discussed above.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value
of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than a year to twenty years
or may be perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common stock does
not exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease in
the market price of the optioned common stock.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin, other than in connection with buying stock index futures

contracts, put options on stock index futures, put options on financial
futures, and put options on portfolio securities, and writing covered
call options, but may obtain such short-term credits as are necessary
for clearance of purchases and sales of securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In these cases, the Fund may mortgage,
pledge or hypothecate assets having a market value not exceeding the
lesser of the dollar amounts borrowed or 15% of the value of total
assets at the time of the borrowing. For purposes of this limitation,
the following are not deemed to be pledges: margin deposits for the
purchase and sale of futures contracts and related options, and
segregation or collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objective, policies, and
limitations.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
futures contracts and related options.

INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities,
the market value of which does not exceed one-third of the value of the
Fund's total assets. This shall not prevent the Fund from purchasing or
holding U.S. government obligations, money market instruments, variable
rate demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by the
Fund's investment objective, policies, and limitations.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amount borrowed.
The Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary,
extraordinary, or emergency measure to facilitate management of the
portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio securities is deemed to be inconvenient or
disadvantageous. The Fund will not purchase any portfolio instruments
while borrowings in excess of 5% of the value of the Fund's total assets
are outstanding.

DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if as a result
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, and repurchase
agreements collateralized by such securities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions
involving only customary brokers' commissions. However, these
limitations are not applicable if the securities are acquired in a

merger, consolidation, reorganization or acquisition of Fund assets.
While it is the Fund's policy to waive its investment advisory fees on
assets invested in securities of other open-end investment companies, it
should be noted that investment companies incur certain expenses, such
as custodian and transfer agency fees, and therefore, any investment by
the Fund in shares of another investment company would be subject to
such duplicate expenses. The Fund will invest in other investment
companies primarily for the purpose of investing its short-term cash on
a temporary basis. The Fund has a present intention of investing no more
than 5% of its total assets in investment companies during the current
fiscal year.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets
in portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser,
owning individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, other than put
options on stock indices, unless the securities are held in the Fund's

portfolio and not more than 5% of the value of the Fund's total assets
would be invested in premiums on open put options.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange or the American Stock Exchange.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 5% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter
options, certain restricted securities not determined by the Trustees to
be liquid, and non-negotiable time deposits with maturities over seven
days.

Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.

THE BILTMORE FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal
occupations, birthdates, and present positions. Each of the Trustees and
officers listed below holds an identical position with The Biltmore Municipal
Funds, another investment company. Except as listed below, none of the
Trustees or officers are affiliated with Wachovia Bank of North Carolina,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company, or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and
Vice Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief
Executive Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and
Director, Atlantic American Life Insurance Co., Georgia Casualty & Surety
Company, and Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee

Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower

Pittsburgh, PA
October 26, 1938

President and Treasurer
President and Chief Executive Officer, Federated Investors Management
Company; Executive Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Trustee, Federated Advisers, Federated Management,
Federated Research, and Federated Services Company; and Director, Federated
Securities Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Wachovia Bank of North Carolina,
Winston-Salem, North Carolina, on behalf of certain underlying accounts,
owned approximately 4,337,677 shares (23.26%).

TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one
other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one
other
Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one
other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one
other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

*Information is furnished for the fiscal year ended November 30, 1995.
+The aggregate compensation is paid by the Trust, which is comprised of
twelve portfolios.
# The Fund Complex is comprised of 15 portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees are not liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Asset Management (the "Adviser").
The Adviser is a business unit of Wachovia Bank of North Carolina, N.A.,
which is a wholly-owned subsidiary of Wachovia Corporation of North Carolina,
a wholly-owned subsidiary of Wachovia Corporation.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of
the Fund for any losses that may be sustained in the purchase, holding, or
sale of any security, or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the
Trust.
Because of the internal controls maintained by the Wachovia Banks to restrict
the flow of non-public information, Fund investments are typically made
without any knowledge of the Wachovia Banks, or their affiliates' lending
relationships with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and 1994, and for the period
from May 10, 1993 (date of initial public investment) to November 30, 1993,
the Adviser earned $1,394,516, $1,291,534, and $616,635, respectively, of
which $316,346, $274,994, and $102,649, respectively, were voluntarily
waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are

registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2%
per year of the remaining average net assets, the Adviser will waive its
fee or reimburse the Fund for its expenses over the limitation. If the
Fund's monthly projected operating expenses exceed this limitation, the
investment advisory fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the expense limitation is
exceeded, the amount to be reimbursed by the Adviser will be limited, in
any single fiscal year, by the amount of the investment advisory fee.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to guidelines established by the Trustees. The adviser may
select brokers and dealers who offer brokerage and research services. These
services may be furnished directly to the Fund or to the adviser and may
include: advice as to the advisability of investing in securities; security
analysis and economic reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund and other accounts. To the extent that receipt of these

services may supplant services for which the adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The adviser and
its affiliates exercise reasonable business judgment in selecting brokers who
offfer brokerage and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. For the fiscal years
ended November 30, 1995 and1994, and for the period from May 10, 1993 (date
of initial public investment) to November 30, 1993, the Fund paid $140,316,
$262,992, and $157,549, respectively, in commissions on brokerage
transactions.
As of November 30, 1995, the Fund owned $3,239,499 of securities issued by
General Electric Co., one of the Fund's regular broker/dealers, which
derives more than 15% of its gross revenues from securities-related
activities.
Although investment decisions for the Fund are made independently frm those
of the other accounts managed by the adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available to investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained
or disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.

OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for a
fee as described in the prospectus. For the fiscal years ended November 30,
1995 and 1994, and for the period from May 10, 1993 (date of initial public
investment) to November 30, 1993, FAS earned $178,968, $183,610, and
$108,092, respectively. In addition, for the fiscal years ended November 30,
1995 and 1994, and for the period from May 10, 1993 (date of initial public
investment) to November 30, 1993, FAS reimbursed $0, $46,191, and $44,122,
respectively, in other Fund operating expenses.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under
the Custodian Agreement, the Custodian holds the Fund's portfolio securities
in safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the
Custodian Agreement, the Trust pays the Custodian an annual fee based upon
the average daily net assets of the Fund and which is payable monthly. The
Custodian will also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of
Federated Investors, is transfer agent for the shares of the Fund, and
dividend disbursing agent for the Fund. Federated Services Company also
provides certain accounting and recordkeeping services with respect to the
Fund's portfolio investments.

By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more efficient portfolio
management and assist the Fund in pursuing its investment objectives. By
identifying potential investors whose needs are served by the Fund's
objectives, and properly servicing these accounts, it may be possible to curb
sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
PURCHASING FUND SHARES

Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid and
must not be subject to restrictions on resale. The market value of any
securities exchanged in an initial investment, plus any cash, must be at
least equal to the minimum investment requirement of the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends, subscription
or other rights attached to the securities become the property of the Fund,
along with the securities.
If an exchange is permitted, it will be treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading
in similar groups of securities, yield, quality, coupon rate, maturity, type
of issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.
REDEEMING FUND SHARES

Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. Any redemption beyond this amount will
also be in cash unless the Trustees determine that payments should be in
kind.
MASSACHUSETTS BUSINESS TRUSTS

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given
in each agreement, obligation, or instrument the Trust or the Trustees enter
into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration
of Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder of the Fund for any act or obligation of the
Trust on behalf of the Fund. Therefore, financial loss resulting from
liability as a shareholder of the Fund will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from the assets of the Fund.

TAX STATUS

THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, the Fund will
be required to distribute income accrued with respect to zero coupon
convertible securities which it owns, and may have to sell portfolio
securities (perhaps at disadvantageous times) in order to generate cash to
satisfy these distribution requirements.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. No portion of any income dividend paid
by the Fund is eligible for the dividends received deduction available to

corporations. These dividends, and any short-term capital gains, are taxable
as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders have held Fund shares.
TOTAL RETURN

Class A Shares' average annual total returns for the one-year period ended
November 30, 1995, and for the period from May 10, 1993 (date of initial
public investment) to November 30, 1995, were 20.61% and 9.45%, respectively.
The average annual total return for the Fund is the average compounded rate
of return for a given period that would equate a $1,000 initial investment to
the ending redeemable value of that investment. The ending redeemable value
is computed by multiplying the number of shares owned at the end of the
period by the net asset value per share at the end of the period. The number
of shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, less any applicable
sales load, adjusted over the period by any additional shares, assuming the
monthly reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
2.84%.
The yield for the Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by
the Fund over a thirty-day period by the maximum offering price per share of
the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated
during the thirty-day period is assumed to be generated each month over a 12-

month period and is reinvested every six months. The yield does not
necessarily reflect income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange Commission and,
therefore, may not correlate to the dividends or other distributions paid to
shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS

any index used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
o LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly issued,
fixed rate, non-convertible domestic bonds of companies in industry, public
utilities and finance. The average maturity of these bonds approximates
nine years. Tracked by Lehman Brothers, the index calculates total returns
for one month, three month, twelve month and ten year periods and year-to-
date.
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is comprised of
approximately 66 issues of U.S. Treasury securities maturing between 1 and
4.99 years, with coupon rates of 4.25% or more. These total return figures
are calculated for one, three, six, and twelve month periods and year-to-
date and include the value of the bond plus income and any price
appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEAR GOVERNMENT INDEX quotes total returns for U.S.
Treasury issues (excluding flower bonds) which have maturities of three to
five years. These total returns are year-to-date figures which are
calculated each month following January 1.
o SALOMON BROTHERS AAA-AA CORPORATES calculates total returns of
approximately 775 issues which include long-term, high-grade domestic
corporate taxable bonds, rated AAA-AA, with maturities of twelve years or
more. It also includes companies in industry, public utilities and finance.

o LEHMAN BROTHERS GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
o LEHMAN BROTHERS AGGREGATE BOND INDEX is a total return index measuring both
the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Lehman Brothers Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index and the Yankee Bond Index. These

indices include: U.S. Treasury obligations, including bonds and notes; U.S.
agency obligations, including those of the Farm Credit System, including
the National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal
Home Loan Mortgage Corporation; Federal National Mortgage Association;
Government National Mortgage Association; and Student Loan Marketing
Association; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the
Aggregate Bond Index has a minimum S&P rating of BBB, a minimum Moody's
rating of Baa, or a Fitch rating of BBB.
o MERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues which must be
in the form of publicly placed, nonconvertible, coupon-bearing domestic
debt and must carry a term of maturity of at least one year. Par amounts
outstanding must be no less than $10 million at the start and at the close
of the performance measurement period. Corporate instruments must be rated
by S&P or by Moody's as investment grade issues (i.e., BBB/Baa or better).
o MERRILL LYNCH DOMESTIC MASTER INDEX includes issues which must be in the
form of publicly placed, nonconvertible, coupon-bearing domestic debt and
must carry a term to maturity of at least one year. Par amounts outstanding
must be no less than $10 million at the start and at the close of the
performance measurement period. The Domestic Master Index is a broader
index than the Merrill Lynch Corporate and Government Index and includes,
for example, mortgage-related securities. The mortgage market is divided by
agency, type of mortgage and coupon and the amount outstanding in each
agency/type/coupon subdivision must be no less than $200 million at the
start and at the close of the performance measurement period. Corporate
instruments must be rated by S&P or by Moody's as investment-grade issues
(i.e. BBB/Baa or better).

o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected
blue-chip industrial corporations. The DJIA indicates daily changes in the
average price of stock of these corporations. Because it represents top
United States corporations, the DJIA index is a leading economic indicator
for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, is a
composite index of common stocks in industry, transportation, and financial
and public utility companies. In addition, the Standard & Poor's index
assumes reinvestment of all dividends paid by stocks listed on the index.
Taxes due on any of these distributions are not included, nor are brokerage
or other fees calculated in Standard & Poor's figures.
o S&P 500/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED INDEX) and the S&P
500/Lehman Brothers Government (Weighted Index) combine the components of a
stock-oriented index and a bond-oriented index to obtain results which can
be compared to the performance of a managed fund. The indices' total
returns will be assigned various weights depending upon the Fund's current
asset allocation.
o SALOMON BROTHERS AAA-AA CORPORATE index calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an
unmanaged index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.

Investors may also consult the fund evaluation consulting universe listed
below. Consulting universes may be composed of pension, profit-sharing,
commingled, endowment/foundation and mutual funds.
o SEI BALANCED UNIVERSE is composed of 916 portfolios managed by 390 managers
representing $86 billion in assets. To be included in the universe, a
portfolio must contain a 5% minimum commitment in both equity and fixed-
income securities.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
Advertisements and other sales literature for the Fund may quote total
returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
the Fund based on monthly reinvestment of dividends over a specified period
of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1995 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may
be obtained without charge by contacting The Biltmore Service Center at the
address located on the back cover of the prospectus or by calling The
Biltmore Service Center at 1-800-994-4414.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
NR--"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy. S&P may apply a plus
(+) or minus (-) to the above rating classifications to show relative
standing within the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "AAA" securities or

fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in "AAA" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA" through "B" in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be

strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-
1" repayment capacity will normally be evidenced by the following
characteristics:
o leading market positions in well-established industries;
o high rates of return on funds employed;
o conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o well-established access to a range of financial markets and assured sources
of alternate liquidity.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."

Cusip 090297821
3012915B (1/96)

BILTMORE FIXED INCOME FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS B SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Fixed Income Fund (the "Fund"), a portfolio in The Biltmore
Funds (the "Trust"), dated January 31, 1996. This Statement is not a
prospectus itself. To receive a copy of the prospectus, call The Biltmore
Service Center toll-free at 1-800-994-4414.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVES AND POLICIES 1

Types of Investments 1
Investment Limitations 6
THE BILTMORE FUNDS MANAGEMENT 9

Officers and Trustees 9
Fund Ownership 11
Trustees Compensation 11
Trustee Liability 11
INVESTMENT ADVISORY SERVICES 11

Adviser to the Fund 11
Advisory Fees 12
BROKERAGE TRANSACTIONS 12

OTHER SERVICES 12

Administration 12
Custodian 13
Transfer Agent 13
Legal Services 13
Independent Auditors 13
Portfolio Turnover 13
DISTRIBUTION PLAN (CLASS B SHARES ONLY)
AND
SHAREHOLDER SERVICES PLAN (CLASS A AND
CLASS B SHARES ONLY) 14

PURCHASING FUND SHARES 13

Conversion to Federal Funds 13
Exchanging Securities for Fund Shares
13
DETERMINING NET ASSET VALUE 14

DETERMINING MARKET VALUE OF SECURITIES14

REDEEMING FUND SHARES 14

Redemption in Kind 14
MASSACHUSETTS BUSINESS TRUSTS 14

TAX STATUS 15

The Fund's Tax Status 15
Shareholders' Tax Status 15
Capital Gains 15
TOTAL RETURN 15

YIELD 15

PERFORMANCE COMPARISONS 16

FINANCIAL STATEMENTS 17

APPENDIX 18

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991. Unless otherwise indicated, the investment policies described below may
be changed by the Board of Trustees ("Trustees" or the "Board") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective. Capitalized terms not otherwise defined
in this Statement shall have the same meaning assigned in the prospectus.
Shares of Biltmore Fixed Income Fund are currenty offered in three classes:
Class A Shares, Class B Shares, and Class Y Shares. Prior to July 22, 1996,
this Fund offered a single class of shares, which is currently designated as
Class A Shares.
INVESTMENT OBJECTIVES AND POLICIES

The investment objective of the Fund is to seek a high level of total return.
As a secondary investment objective, the Fund will attempt to minimize
volatility of principal relative to the fixed income markets. The investment
objectives cannot be changed without the approval of shareholders.
TYPES OF INVESTMENTS
The Fund pursues its investment objectives by investing primarily in fixed
income securities that, at the time of purchase, are of high grade quality,
which consists of securities that are rated in the top three investment grade
categories by an NRSRO or, if unrated, are of comparable quality to securities
with such ratings as determined by the Fund's investment adviser. The
following discussion supplements the description of the Fund's investment
policies in the prospectus. Listed below are securities in which the Fund may
invest from time to time.

MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments such as:
oinstruments of domestic and foreign banks and savings and loans if they have
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is federally insured;
ocommercial paper rated, at the time of purchase, A-1 or better by Standard &
Poor's Ratings Group ("S&P"), Prime-1 or better by Moody's Investors Service
("Moody's"), or F-1 or better by Fitch Investors Service, Inc. ("Fitch") or,
if unrated, are of comparable quality as determined by the Fund's investment
Adviser;
otime and savings deposits whose accounts are insured by the Bank Insurance
Fund ("BIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), or in institutions whose accounts are insured by the
Savings Association Insurance Fund ("SAIF"), which is also administered by
the FDIC, including certificates of deposit issued by and other time
deposits in foreign branches of BIF-insured banks; or
obankers' acceptances.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, warrants for the acquisition of common stock of the same or a
different issuer, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon

convertible securities accretes at a stated yield until the security reaches
its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock. In
addition, zero coupon convertible securities usually have features that
provide the holder with the opportunity to put the bonds back to the issuer at
a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those
issued by Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities
dealers and other investors makes government-related pools highly liquid.
RESETS OF INTEREST RATES
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund
invests generally are readjusted at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury Note rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the one-month or three-month
LIBOR, the prime rate of a specific bank, or commercial paper rates. Some

indices, such as the one-year constant maturity Treasury Note rate, closely
mirror changes in market interest rate levels. Others tend to lag changes in
market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate mortgage
security will tend to be less sensitive to interest rate changes than a fixed
rate debt security of the same stated maturity. Hence, adjustable rate
mortgage securities which use indices that lag changes in market rates should
experience greater price volatility than adjustable rate mortgage securities
that closely mirror the market. Certain residual interest tranches of CMOs may
have adjustable interest rates that deviate significantly from prevailing
market rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event the Fund purchases
such residual interest mortgage securities, it will factor in the increased
interest and price volatility of such securities when determining its dollar-
weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICs in
which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change
up or down: (1) per reset or adjustment interval, and (2) over the life of the
loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps
or floors on the underlying residential mortgage loans. Additionally, even

though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are segregated
on the Fund`s records at the trade date. These assets are marked to market
daily and are maintained until the transaction has been settled. The Fund
does not intend to engage in when-issued and delayed delivery transactions to
an extent that would cause the segregation of more than 20% of the total value
of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under
the Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule. The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the Trust's

Board. The Board considers the following criteria in determining the liquidity
of certain restricted securities:
othe frequency of trades and quotes for the security;
othe number of dealers willing to purchase or sell the security and the
number of other potential buyers;
odealer undertakings to make a market in the security; and
othe nature of the security and the nature of the marketplace trades.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended
to cause the securities to trade at par. The interest rate may float or be
adjusted at regular intervals (ranging from daily to annually), and is
normally based on an interest rate index or a published interest rate. Many
variable rate demand notes allow the Fund to demand the repurchase of the
security on not more than seven days prior notice. Other notes only permit the
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that, under the
regular procedures normally in effect for custody of the Fund's portfolio

securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund also may enter into reverse repurchase agreements under certain
circumstances. This transaction is similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument
to another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future the Fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable the Fund to
avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or

The Fund will maintain its position in securities, options and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on a
nationally-recognized exchange which provides a secondary market for options
of the same series. The Fund currently does not intend to invest more than 5%
of its total assets in options transactions.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions without

necessarily buying or selling the securities. The Fund will not engage in
futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short"), and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
For example, in the fixed income securities market, prices generally move
inversely to interest rates. A rise in rates means a drop in price.
Conversely, a drop in rates typically means a rise in price. In order to
hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities
at a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long"
(agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of
a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.

A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in
futures transactions if the sum of its initial margin deposits on open
contracts will exceed 5% of the market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts it has entered into. Second, the Fund will not enter into these
contracts for speculative purposes. Third, since the Fund does not
constitute a commodity pool, it will not market itself as such, nor serve
as a vehicle for trading in the commodities futures or commodity options
markets. Connected with this, the Fund will disclose to all prospective
investors the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for bona fide
hedging purposes, or other permissible purposes pursuant to regulations
promulgated by the Commodity Futures Trading Commission ("CFTC").
Finally, because the Fund will submit to the CFTC special calls for
information, the Fund will not register as a commodities pool operator.

PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
The Fund would use these options solely to protect portfolio securities
against decreases in value resulting from market factors such as an
anticipated increase in rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.

CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on financial futures contracts or over-the-counter
call options on future contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on
a futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price
at any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to decrease,
the Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can substantially offset the drop in value of the Fund's portfolio
securities.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset the
realized decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio, plus or minus the
unrealized gain or loss on those open positions, adjusted for the

correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option. The Fund may purchase these put options as long
as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write call options on securities either held in its
portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration. As the writer of a call option, the Fund has
the obligation, upon exercise of the option during the option period, to
deliver the underlying security upon payment of the exercise price. The
call options which the Fund writes and sells must be listed on a
recognized options exchange. Writing of call options by the Fund is
intended to generate income for the Fund and thereby protect against
price movements in particular securities in the Fund's portfolio.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.

RISKS
When the Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to
market changes. In addition, the Fund's adviser could be incorrect in its
expectations about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose money on the
futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Fund's
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market. The inability to
close out these positions could have an adverse effect on the Fund's
ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of cash and
cash equivalents, equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited in a
segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use

of such futures contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the underlying
future or security, or will make deposits to collateralize the position
as discussed above.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value
of the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may
be perpetual. However, most warrants have expiration dates after which they
are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock.
DURATION
Duration is a commonly used measure of the potential volatility in the price
of a bond, or other fixed income security, or in a portfolio of fixed income
securities, prior to maturity. Volatility is the magnitude of the change in
the price of a bond relative to a given change in the market rate of interest.
A bond's price volatility depends on three primary variables: the bond's
coupon rate; maturity date; and the level of market yields of similar fixed
income securities. Generally, bonds with lower coupons or longer maturities
will be more volatile than bonds with higher coupons or shorter maturities.
Duration combines these variables into a single measure.

Duration is calculated by dividing the sum of the time-weighted values of the
cash flows of a bond or bonds, including interest and principal payments, by
the sum of the present values of the cash flows. When the Fund invests in
mortgage pass-through securities, its duration will be calculated in a manner
which requires assumptions to be made regarding future principal prepayments.
A more complete description of this calculation is available upon request from
the Fund.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by the Fund of initial or variation margin in connection with
financial futures contracts or related options transactions is not
considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objectives and policies, and except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of the value
of the Fund's total assets are outstanding.

PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge or
hypothecate assets having a market value not exceeding the lesser of the
dollar amounts borrowed or 15% of the value of total assets at the time
of the borrowing. For purposes of this limitation, the following are not
deemed to be pledges: margin deposits for the purchase and sale of
futures contracts and related options, and segregation or collateral
arrangements made in connection with options activities or the purchase
of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except to the extent that the Fund may engage
in transactions involving futures contracts and related options.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objectives, policies, and
limitations.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer

(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if, as a result,
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, and repurchase agreements
collateralized by such securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, bonds, debentures, notes,
certificates of indebtedness, or other debt securities, entering into
repurchase agreements, or engaging in other transactions where permitted
by the Fund's investment objectives, policies, and limitations.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one

investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions
involving only customary brokers' commissions. However, these limitations
are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets. While it is the
Fund's policy to waive its investment advisory fees on Fund assets
invested in securities of other open-end investment companies, it should
be noted that investment companies incur certain expenses such as
custodian and transfer agency fees, and therefore, any investment by the
Fund in shares of another investment company would be subject to such
duplicate expenses. The Fund will invest in other investment companies
primarily for the purpose of investing its short-term cash on a temporary
basis. The Fund has a present intention of investing no more than 5% of
its total assets in investment companies during the current fiscal year.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter
options, non-negotiable time deposits with maturities over seven days,
and certain securities not determined under guidelines established by the
Trustees to be liquid.

INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs or leases, except that the Fund may
purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser,
owning individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put option positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall

5% limit on investments in warrants, may be warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of deposit, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.
THE BILTMORE FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal
occupations, birthdates, and present positions. Each of the Trustees and
officers listed below holds an identical position with The Biltmore Municipal
Funds, another investment company. Except as listed below, none of the
Trustees or officers are affiliated with Wachovia Bank of North Carolina,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company, or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way

Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief Executive
Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety Company, and
Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

- --------------------------
Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA

September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Wachovia Bank of North Carolina, Winston-
Salem, North Carolina, on behalf of certain underlying accounts, owned
approximately 4,096,673 shares (21 81%).
TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one other

Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one
other
Trustee investment company in the
Fund Complex

INVESTMENT ADVISORY SERVICES

ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and1994, and for the period from
May 10, 1993 (date of initial public investment) to November 30, 1993, the
Adviser earned $957,389, $862,327, and $456,294, respectively, of which
$159,425, $143,721, and $76,055, respectively, were voluntarily waived.

STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
BROKERAGE TRANSACTIONS

analysis and economic reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The adviser and
its affiliates exercise reasonable business judgment in selecting brokers who
offfer brokerage and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. As of November 30,
1995, the Fund owned $1,074,000 and $2,032,000 of securities issued by Morgan
Stanley Group, Inc. and Merrill Lynch, Pierce, Fenner & Smith, respectively,
two of its regular broker/dealers, which derives more than 15% of its gross
revenues from securities-related activities.
Although investment decisions for the Fund are made independently frm those of
the other accounts managed by the adviser, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available to investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.

OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for a
fee as described in the prospectus. For the fiscal years ended November 30,
1995 and 1994, and for the period from May 10, 1993 (date of initial public
investment) to November 30, 1993, FAS earned $143,274, $142,981, and $93,341.
In addition, FAS reimbursed $0, $48,849, and $52,005 in other Fund operating
expenses.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and which is payable monthly. The Custodian will
also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of Federated
Investors, is transfer agent (the "Transfer Agent") for the shares of the
Fund, and dividend disbursing agent for the Fund. Federated Services Company
also provides certain accounting and recordkeeping services with respect to
the Fund's portfolio investments.

LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objectives. Securities in its portfolio will be
sold whenever the Adviser believes it is appropriate to do so in light of the
Fund's investment objectives, without regard to the length of time a
particular security may have been held. A higher rate of portfolio turnover
involves correspondingly greater transaction expenses which must be borne
directly by the Fund and, thus, indirectly by its shareholders. In addition, a
high rate of portfolio turnover may result in the realization of larger
amounts of capital gains which, when distributed to the Fund's shareholders,
are taxable to them. Nevertheless, transactions for a Fund's portfolio will be
based only upon investment considerations and will not be limited by any other
considerations when the Adviser deems it appropriate to make changes in the
Fund's portfolio.
During the fiscal years ended November 30, 1995 and1994, the Fund's portfolio
turnover rates were 155% and 148%, respectively.
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND SHAREHOLDER SERVICES PLAN (CLASS A
AND CLASS B SHARES ONLY)

These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services Company, to stimulate

distribution activities and to cause services to be provided to shareholders
by a representative who has knowledge of the shareholder's particular
circumstances and goals. These activities and services may include, but are
not limited to: marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine
client inquiries; and assisting clients in changing dividend options, account
designations, and addresses.
By adopting the Distribution Plan, the Trustees expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management
and assist the Fund in pursuing its investment objectives. By identifying
potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may include:
(1) providing personal services to shareholders; (2) investing shareholder
assets with a minimum of delay and administrative detail; (3) enhancing
shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
PURCHASING FUND SHARES

CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. The Wachovia Banks act as
the shareholders' agent in depositing checks and converting them to federal
funds.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objectives and policies of
the Fund, must have a readily ascertainable market value, must be liquid and
must not be subject to restrictions on resale. The market value of any
securities exchanged in any initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other
rights attached to the securities become the property of the Fund, along with
the securities.
If an exchange is permitted, it will be treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market values of the Fund's portfolio securities are determined as
follows:
ofor equity securities, according to the last sale price on a national
securities exchange, if available;
oin the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
ofor unlisted equity securities, the latest bid prices;
ofor bonds and other fixed income securities, as determined by an independent
pricing service;
ofor short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
ofor all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The Fund will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.

REDEEMING FUND SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.
MASSACHUSETTS BUSINESS TRUSTS

each agreement, obligation, or instrument the Trust or the Trustees enter into
or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder of the Fund for any act or obligation of the
Trust on behalf of the Fund. Therefore, financial loss resulting from
liability as a shareholder of the Fund will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from the assets of the Fund.
TAX STATUS

of cash payments. To maintain its qualification as a regulated investment
company and avoid liability of federal income taxes, the Fund will be required
to distribute income accrued with respect to zero coupon convertible
securities which it owns, and may have to sell portfolio securities (perhaps
at disadvantageous times) in order to generate cash to satisfy these
distribution requirements.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash
or additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Long-term capital gains distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders have held shares.
TOTAL RETURN

Class A Shares' average annual total returns for the one year period ended
November 30, 1995, and for the period from May 10, 1993 (date of initial
public investment) to November 30, 1995, were 11.96% and 3.91%, respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at
the beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional shares, assuming the reinvestment
of all dividends and distributions.

YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995 was
5.16%.
The yield for the Fund is determined each day by dividing the net investment
income per share (as defined by the Securities and Exchange Commission) earned
by the Fund over a thirty-day period by the maximum offering price per share
of the Fund on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by the Fund because of certain adjustments
required by the Securities and Exchange Commission and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS

The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price (i.e., net asset value plus any sales
charge) per share fluctuate daily. Both net earnings and offering price per
share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
oLEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; and publicly issued,
fixed rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds approximates
nine years. Tracked by Lehman Brothers, the index calculates total returns
for one-month, three-month, twelve-month, and ten-year periods and year-to-
date.
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in net asset value over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the
"fixed income funds" category in advertising and sales literature.
oLEHMAN BROTHERS AGGREGATE BOND INDEX is a total return index measuring both
the capital price changes and income provided by the underlying universe of

securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Lehman Brothers Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index and the Yankee Bond Index. These
indices include: U.S. Treasury obligations, including bonds and notes; U.S.
agency obligations, including those of the Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal
Home Loan Mortgage Corporation; Federal National Mortgage Association;
Government National Mortgage Association; Student Loan Marketing
Association; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the
Aggregate Bond Index has a minimum rating of BBB by S&P or Fitch Investor's
Service, Inc. ("Fitch"), or a minimum rating of Baa by Moody's.
oMERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues which must be
in the form of publicly placed, non convertible, coupon-bearing domestic
debt and must carry a term of maturity of at least one year. Par amounts
outstanding must be no less than $10 million at the start and at the close
of the performance measurement period. Corporate instruments must be rated
by S&P or by Moody's as investment -grade issues (i.e., BBB/Baa or better).
oMERRILL LYNCH DOMESTIC MASTER INDEX includes issues which must be in the
form of publicly placed, non convertible, coupon-bearing domestic debt and
must carry a term to maturity of at least one year. Par amounts outstanding
must be no less than $10 million at the start and at the close of the
performance measurement period. The Domestic Master Index is a broader index
than the Merrill Lynch Corporate and Government Index and includes, for
example, mortgage-related securities. The mortgage market is divided by
agency, type of mortgage and coupon and the amount outstanding in each
agency/type/coupon subdivision must be no less than $200 million at the

start and at the close of the performance measurement period. Corporate
instruments must be rated by S&P or by Moody's as investment-grade issues
(i.e., BBB/Baa or better).
oSALOMON BROTHERS AAA-AA CORPORATE index calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
oLEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.
oMORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in the Fund
based on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated November

30, 1995 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may be
obtained without charge by contacting The Biltmore Service Center at the
address located on the back cover of the prospectus or by calling The Biltmore
Service Center at 1-800-994-4414.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy. S&P may apply a plus
(+) or minus (-) to the above rating classifications to show relative standing
within the classifications.
S&P may apply a plus (+) or minus (-) to the above rating classifications to
show relative standing within the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various

protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "AAA "securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in "AAA' securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA" through "B" in its corporate bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable

future developments, short-term debt of these issuers is generally rated "F-
1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
NR--NR indicates that Fitch does not rate the specific issue.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-
1" repayment capacity will normally be evidenced by many of the following
characteristics:
o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.

PRIME-2- Issuers rated "PRIME-2" (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.

BILTMORE SHORT-TERM FIXED INCOME FUND
(A PORTFOLIO OF THE BILTMORE FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Short-Term Fixed Income Fund (the "Fund"), a portfolio in The

Cusip 090297854
3012917B (1/96)

Biltmore Funds (the "Trust"), dated January 31, 1996. This Statement is not
a prospectus itself. To receive a copy of the prospectus, call The Biltmore
Service Center toll-free at 1-800-994-4414.

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
DISTRIBUTOR
A SUBSIDIARY OF FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 6
THE BILTMORE FUNDS MANAGEMENT 9

Officers and Trustees 9
Fund Ownership 11
Trustees Compensation 11
Trustee Liability 11
INVESTMENT ADVISORY SERVICES 11

Adviser to the Fund 11
Advisory Fees 12
BROKERAGE TRANSACTIONS 12

OTHER SERVICES 12

Administration 12
Custodian 13
Transfer Agent 13
Legal Services 13
Independent Auditors 13
Portfolio Turnover 13
Shareholder Servicing Agent
(Class A Shares Only) 13
PURCHASING FUND SHARES 13

Conversion to Federal Funds 13

Exchanging Securities for Fund Shares 13
DETERMINING NET ASSET VALUE 14

DETERMINING MARKET VALUE OF SECURITIES 14

REDEEMING FUND SHARES 14

Redemption in Kind 14
MASSACHUSETTS BUSINESS TRUSTS 14

TAX STATUS 15

The Fund's Tax Status 15
Shareholders' Tax Status 15
Capital Gains 15
TOTAL RETURN 15

YIELD 15

PERFORMANCE COMPARISONS 16

FINANCIAL STATEMENTS 17

APPENDIX 18

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated November 19,
1991. Unless otherwise indicated, the investment policies described below may
be changed by the Board of Trustees ("Trustees" or the "Board") without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective. Capitalized terms not otherwise defined
in this Statement shall have the same meaning assigned in the prospectus.
Shares of Biltmore Short-Term Fixed Income Fund are currently offered in two
classes: Class A Shares and Class Y Shares. Prior to July 22, 1996, this Fund
offered a single class of shares, which is currently ddesignated as Class A
Shares.
INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund is to produce a high level of current
income with a minimum of principal volatility. ^The investment objective
cannot be changed without the approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in short-term, high-grade, fixed income securities.
The following discussion supplements the description of the Fund's investment
policies in the prospectus. Listed below are securities in which the Fund may
invest from time to time.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments such as:
o instruments of domestic and foreign banks and savings and loans if they have
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is federally insured;

o commercial paper rated, at the time of purchase, not less than A-1 by
Standard & Poor's Ratings Group ("S&P"), Prime-1 by Moody's Investors
Service Inc. ("Moody's") or F-1 by Fitch Investors Service, Inc. ("Fitch"),
and unrated commercial paper that is deemed by the Fund's investment adviser
to be of comparable quality to securities having such ratings;
o time and savings deposits whose accounts are insured by the Bank Insurance
Fund ("BIF") which is administered by the Federal Deposit Insurance
Corporation ("FDIC") or in institutions whose accounts are insured by the
Savings Association Insurance Fund ("SAIF"), which is also administered by
the FDIC, including certificates of deposit issued by and other time
deposits in foreign branches of BIF-insured banks; or
o bankers' acceptances.
VARIABLE RATE DEMAND NOTES
Variable rate demand notes are long-term corporate debt instruments that have
variable or floating interest rates and provide the Fund with the right to
tender the security for repurchase at its stated principal amount plus accrued
interest. Such securities typically bear interest at a rate that is intended
to cause the securities to trade at par. The interest rate may float or be
adjusted at regular intervals (ranging from daily to annually), and is
normally based on an interest rate index or a published interest rate. Many
variable rate demand notes allow the Fund to demand the repurchase of the
security on not more than seven days prior notice. Other notes only permit the
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund

sufficient to make payment for the securities to be purchased are segregated
on the Fund`s records at the trade date. These assets are marked to market
daily and are maintained until the transaction has been settled. The Fund
does not intend to engage in when-issued and delayed delivery transactions to
an extent that would cause the segregation of more than 20% of the total value
of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission staff
position set forth in the adopting release for Rule 144A (the "Rule") under
the Securities Act of 1933. The Rule is a non-exclusive, safe-harbor for
certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule. The Fund believes that the staff of the Securities and Exchange
Commission has left the question of determining the liquidity of all
restricted securities (eligible for resale under the Rule) to the Trustees.
The Trustees consider the following criteria in determining the liquidity of
certain restricted securities:
o the frequency of trades and quotes for the security;
o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security; and
o the nature of the security and the nature of the marketplace trades.

REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities subject
to repurchase agreements and these securities will be marked to market daily.
To the extent that the original seller does not repurchase the securities from
the Fund, the Fund could receive less than the repurchase price on any sale of
such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker/dealers, which are
deemed by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements under certain
circumstances. This transaction is similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument
to another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and agrees
that on a stipulated date in the future the Fund will repurchase the portfolio
instrument by remitting the original consideration plus interest at an agreed
upon rate. The use of reverse repurchase agreements may enable the Fund to
avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.

When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Fund does not always have the right to vote securities on
loan. In circumstances where the Fund does not, the Fund would terminate the
loan and regain the right to vote if that were considered important with
respect to the investment.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or variable
rates of interest. They may involve equity features such as conversion or
exchange rights, participations based on revenues, sales, or profits, or the
purchase of common stock in a unit transaction (where corporate debt
securities and common stock are offered as a unit).
Increasing rate securities, which currently do not make up a significant share
of the market in corporate debt securities, are generally offered at an
initial interest rate which is at or above prevailing market rates. Interest
rates are reset periodically (most commonly every 90 days) at different levels
on a predetermined scale. These levels of interest are ordinarily set at

progressively higher increments over time. Some increasing rate securities
may, by agreement, revert to a fixed rate status. These securities may also
contain features which allow the issuer the option to convert the increasing
rate of interest to a fixed rate under such terms, conditions, and limitations
as are described in each issuer's prospectus.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the investment
adviser's opinion, the investment characteristics of the underlying common
shares will assist the Fund in achieving its investment objective. Otherwise,
the Fund may hold or trade convertible securities. In selecting convertible
securities for the Fund, the Fund's adviser evaluates the investment
characteristics of the convertible security as a fixed income instrument, and
the investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, the Fund's adviser considers numerous factors, including
the economic and political outlook, the value of the security relative to
other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
ZERO COUPON CONVERTIBLE SECURITIES
Zero coupon convertible securities are debt securities which are issued at a
discount to their face amount and do not entitle the holder to any periodic
payments of interest prior to maturity. Rather, interest earned on zero coupon
convertible securities accretes at a stated yield until the security reaches
its face amount at maturity. Zero coupon convertible securities are
convertible into a specific number of shares of the issuer's common stock. In
addition, zero coupon convertible securities usually have put features that

provide the holder with the opportunity to put the bonds back to the issuer at
a stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES
Privately issued mortgage-related securities generally represent an ownership
interest in federal agency mortgage pass-through securities such as those
issued by Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools. The market for such mortgage-related securities has
expanded considerably since its inception. The size of the primary issuance
market and the active participation in the secondary market by securities
dealers and other investors makes government-related pools highly liquid.
RESETS OF INTEREST
The interest rates paid on the ARMS, CMOs, and REMICs in which the Fund
invests generally are readjusted at intervals of one year or less to an
increment over some predetermined interest rate index. There are two main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury Note rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury
securities, the National Median Cost of Funds, the onemonth or three-month
London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or
commercial paper rates. Some indices, such as the one-year constant maturity
Treasury Note rate, closely mirror changes in market interest rate levels.
Others tend to lag changes in market rate levels and tend to be somewhat less
volatile.

To the extent that the adjusted interest rate on a mortgage security reflects
current market rates, the market value of an adjustable rate mortgage security
will tend to be less sensitive to interest rate changes than a fixed rate debt
security of the same stated maturity. Hence, adjustable rate mortgage
securities which use indices that lag changes in market rates should
experience greater price volatility than adjustable rate mortgage securities
that closely mirror the market. Certain residual interest tranches of CMOs may
have adjustable interest rates that deviate significantly from prevailing
market rates, even after the interest rate is reset, and are subject to
correspondingly increased price volatility. In the event the Fund purchases
such residual interest mortgage securities, it will factor in the increased
interest and price volatility of such securities when determining its dollar-
weighted average duration.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS, CMOs, and REMICS in
which the Fund invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential borrower may change
up or down: (1) per reset or adjustment interval, and (2) over the life of the
loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
The value of mortgage securities in which the Fund invests may be affected if
market interest rates rise or fall faster and farther than the allowable caps
or floors on the underlying residential mortgage loans. Additionally, even
though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the

effective maturities of the mortgage securities in which the Fund invests to
be shorter than the maturities stated in the underlying mortgages.
FUTURES AND OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge its portfolio by buying and selling
financial futures contracts, buying put options on portfolio securities and
put options on financial futures contracts for portfolio securities, and
writing call options on futures contracts. The Fund also may write covered
call options on portfolio securities to attempt to increase its current
income.
The Fund will maintain its position in securities, options and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out over-the-counter or on a
nationally recognized exchange which provides a secondary market for options
of the same series. The Fund currently does not intend to invest more than 5%
of its total assets in options transactions.
FUTURES CONTRACTS
The Fund may purchase and sell financial futures contracts to hedge
against the effects of changes in the value of portfolio securities due
to anticipated changes in interest rates and market conditions without
necessarily buying or selling the securities. The Fund will not engage in
futures transactions for speculative purposes.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short"), and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
For example, in the fixed income securities market, prices generally move
inversely to interest rates. A rise in rates means a drop in price.

Conversely, a drop in rates typically means a rise in price. In order to
hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities
at a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long"
(agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that initial
margin in futures transactions does not involve the borrowing of funds by
the Fund to finance the transactions. Initial margin is in the nature of
a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund, but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract

expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund will comply with the following restrictions when purchasing and
selling futures contracts. First, the Fund will not participate in
futures transactions if the sum of its initial margin deposits on open
contracts will exceed 5% of the market value of the Fund's total assets,
after taking into account the unrealized profits and losses on those
contracts it has entered into. Second, the Fund will not enter into these
contracts for speculative purposes. Third, since the Fund does not
constitute a commodity pool, it will not market itself as such, nor serve
as a vehicle for trading in the commodities futures or commodity options
markets. Connected with this, the Fund will disclose to all prospective
investors the limitations on its futures and options transactions, and
make clear that these transactions are entered into only for bona fide
hedging purposes, or other permissible purposes pursuant to regulations
promulgated by the Commodity Futures Trading Commission ("CFTC").
Finally, because the Fund will submit to the CFTC special calls for
information, the Fund will not register as a commodities pool operator.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
The Fund would use these options solely to protect portfolio securities
against decreases in value resulting from market factors such as an
anticipated increase in rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but

does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by the Fund upon the
sale of the second option will be large enough to offset both the premium
paid by the Fund for the original option plus the decrease in value of
the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures contract
of the type underlying the option (for a price less than the strike price
of the option) and exercise the option. The Fund would then deliver the
futures contract in return for payment of the strike price. If the Fund
neither closes out nor exercises an option, the option will expire on the
date provided in the option contract, and only the premium paid for the
contract will be lost.
CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on financial futures contracts or over-the-counter
call options on future contracts to hedge its portfolio against an
increase in market interest rates. When the Fund writes a call option on
a futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price
at any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to decrease,
the Fund's obligation under a call option on a future (to sell a futures

contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can substantially offset the drop in value of the Fund's portfolio
securities.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then substantially offset the
realized decrease in value of the hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio, plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option. The Fund may purchase these put options as long

as they are listed on a recognized options exchange and the underlying
stocks are held in its portfolio.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may also write call options on securities either held in its
portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration. As the writer of a call option, the Fund has
the obligation, upon exercise of the option during the option period, to
deliver the underlying security upon payment of the exercise price. The
call options which the Fund writes and sells must be listed on a
recognized options exchange. Writing of call options by the Fund is
intended to generate income for the Fund and thereby protect against
price movements in particular securities in the Fund's portfolio.
OVER-THE-COUNTER OPTIONS
The Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
RISKS
When the Fund uses futures and options on futures as hedging devices,
there is a risk that the prices of the securities subject to the futures
contracts may not correlate perfectly with the prices of the securities
in the Fund's portfolio. This may cause the futures contract and any
related options to react differently than the portfolio securities to
market changes. In addition, the Fund's adviser could be incorrect in its
expectations about the direction or extent of market factors such as
stock price movements. In these events, the Fund may lose money on the
futures contract or option.

It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the Fund's
adviser will consider liquidity before entering into these transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures
and options positions depends on this secondary market. The inability to
close out these positions could have an adverse effect on the Fund's
ability to effectively hedge its portfolio.
To minimize risks, the Fund may not purchase or sell futures contracts or
related options if immediately thereafter the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for
related options would exceed 5% of the market value of the Fund's total
assets. When the Fund purchases futures contracts, an amount of cash and
cash equivalents, equal to the underlying commodity value of the futures
contracts (less any related margin deposits), will be deposited in a
segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and thereby insure that the use
of such futures contract is unleveraged. When the Fund sells futures
contracts, it will either own or have the right to receive the underlying
future or security, or will make deposits to collateralize the position
as discussed above.
WARRANTS
The Fund may invest in warrants. Warrants are basically options to purchase
common stock at a specific price (usually at a premium above the market value
of the optioned common stock at issuance) valid for a specific period of time.
Warrants may have a life ranging from less than a year to twenty years or may
be perpetual. However, most warrants have expiration dates after which they

are worthless. In addition, if the market price of the common stock does not
exceed the warrant's exercise price during the life of the warrant, the
warrant will expire as worthless. Warrants have no voting rights, pay no
dividends, and have no rights with respect to the assets of the corporation
issuing them. The percentage increase or decrease in the market price of the
warrant may tend to be greater than the percentage increase or decrease in the
market price of the optioned common stock.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin, other than in connection with put options on financial futures,
and put options on portfolio securities, and writing covered call
options, but may obtain such short-term credits as are necessary for
clearance of purchases and sales of securities. The deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In these cases, the Fund may mortgage,
pledge or hypothecate assets having a market value not exceeding the
lesser of the dollar amounts borrowed or 15% of the value of total assets
at the time of the borrowing. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of futures contracts and related options and segregation or
collateral arrangements made in connection with options activities or the
purchase of securities on a when-issued basis.

UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of restricted securities which the Fund may
purchase pursuant to its investment objectives, policies, and
limitations.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities, commodity contracts, or
commodity futures contracts except that the Fund may purchase and sell
futures contracts and related options.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities, the
market value of which does not exceed up to one-third of the value of the
Fund's total assets. This shall not prevent the Fund from purchasing or
holding U.S. government obligations, money market instruments, variable
rate demand notes, bonds, debentures, notes, certificates of
indebtedness, or other debt securities, entering into repurchase
agreements, or engaging in other transactions where permitted by the
Fund's investment objective, policies, and limitations.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may borrow

money and engage in reverse repurchase agreements in amounts up to one-
third of the value of its total assets, including the amounts borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any portfolio instruments while borrowings in excess of 5%
of its total assets are outstanding.
DIVERSIFICATION OF INVESTMENTS
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase securities issued by any one issuer
(other than cash, cash items or securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities) if, as a result,
more than 5% of the value of its total assets would be invested in the
securities of that issuer. Also, the Fund will not acquire more than 10%
of the outstanding voting securities of any one issuer.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry, except that the Fund may invest 25% or more of the
value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities, and repurchase agreements
collateralized by such securities.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will limit its investment in other investment companies to not
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. The Fund will purchase securities of
closed-end investment companies only in open market transactions
involving only customary brokers' commissions. However, these limitations
are not applicable if the securities are acquired in a merger,
consolidation, reorganization or acquisition of Fund assets. While it is
the Fund's policy to waive its investment advisory fees on assets
invested in securities of other open-end investment companies, it should
be noted that investment companies incur certain expenses, such as
custodian and transfer agency fees, and therefore, any investment by the
Fund in shares of another investment company would be subject to such
duplicate expenses. The Fund will invest in other investment companies
primarily for the purpose of investing its short-term cash on a temporary
basis. The Fund has a present intention of investing no more than 5% of
its total assets in investment companies during the current fiscal year.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Fund's investment adviser,
owning individually more than 1/2 of 1% of the issuer's securities,
together own more than 5% of the issuer's securities.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities unless the
securities are held in the Fund's portfolio and not more than 5% of the
value of the Fund's total assets would be invested in premiums on open
put options.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for certain restricted securities which meet the criteria for
liquidity as established by the Trustees.
PURCHASING SECURITIES TO EXERCISE CONTROL
The Fund will not purchase securities of a company for purposes of
exercising control or management.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter

options, certain restricted securities not determined by the Trustees to
be liquid, and non-negotiable time deposits with maturities over seven
days.
WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No
more than 2% of the Fund's net assets, to be included within the overall
5% limit on investments in warrants, may be warrants which are not listed
on the New York or American Stock Exchange.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings and loan, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."
The Fund does not intend to borrow money in excess of 5% of the value of its
total assets during the current fiscal year.
THE BILTMORE FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their principal
occupations, birthdates, and present positions. Each of the Trustees and
officers listed below holds an identical position with The Biltmore Municipal
Funds, another investment company. Except as listed below, none of the
Trustees or officers are affiliated with Wachovia Bank of North Carolina,
N.A., Federated Investors, Federated Securities Corp., Federated Services
Company, or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief Executive
Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety Company, and
Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee

President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
As of June 4, 1996, the following shareholder of record owned 5% or more of
the outstanding shares of the Fund: Wachovia Bank of North Carolina, Winston-
Salem, North Carolina, on behalf of certain underlying accounts, owned
approximately 7,718,461 shares (61.82%).
TRUSTEES COMPENSATION

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

James A. Hanley, $21,857 $22,725 for the Trust and one other
Trustee investment company in the Fund
Complex

Samuel E. Hudgins, $22,937 $23,850 for the Trust and one other

Trustee investment company in the Fund
Complex

J. Berkley Ingram, Jr., $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

D. Dean Kaylor, $19,483 $20,250 for the Trust and one other
Trustee investment company in the Fund
Complex

Charles S. Way, Jr., $ 0 $ 0 for the Trust and one other
Trustee investment company in the Fund
Complex

INVESTMENT ADVISORY SERVICES

ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.
For the fiscal years ended November 30, 1995 and1994, and for the period from
May 10, 1993 (date of initial public investment) to November 30, 1993, the
Adviser earned $768,294, $816,857,and $485,212 respectively, of which
$220,989, $222,781, and $132,330 respectively, were voluntarily waived.

STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
BROKERAGE TRANSACTIONS

analysis and economic reports; economic studies; industry studies; receipt of
quotations for portfolio evaluations; and similar services. Research services
provided by brokers and dealers may be used by the adviser or its affiliates
in advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses. The adviser and
its affiliates exercise reasonable business judgment in selecting brokers who
offfer brokerage and research transactions. They determine in good faith that
commissions charged by such persons are reasonable in relationship to the
value of the brokerage and research services provided. As of November 30,
1995, the Fund owned $2,481,000 of securities issued by Merrill Lynch & Co.,
one of its regular broker/dealers, which derives more than 15% of its gross
revenues from securities-related activities.
Although investment decisions for the Fund are made independently frm those of
the other accounts managed by the adviser, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available to investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.

OTHER SERVICES

ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated
Investors, provides administrative personnel and services to the Fund for a
fee as described in the prospectus. For the fiscal year ended November 30,
1994 , and for the period from May 10, 1993 (date of initial public
investment) to November 30, 1993, FAS earned $125,580, $148,458, and $108,292,
respectively. In addition, for the fiscal years ended November 30, 1995 and
1994, and for the period from May 10, 1993 (date of initial public investment)
to November 30, 1993, FAS reimbursed $0, $39,787, and $43,126, respectively,
in other Fund operating expenses.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina, is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and which is payable monthly. The Custodian will
also charge transaction fees and out-of-pocket expenses.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania a subsidiary of Federated
Investors, is transfer agent for the shares of the Fund, and dividend
disbursing agent for the Fund. Federated Services Company also provides
certain accounting and recordkeeping services with respect to the Fund's
portfolio investments.

LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors are Ernst & Young LLP, Pittsburgh, Pennsylvania.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Adviser
believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. For the fiscal years ended November 30, 1995 and 1994, the Fund's
portfolio turnover rates were 147% and 151%, respectively.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.

PURCHASING FUND SHARES

Shares of the Fund are sold at net asset value plus an applicable sales charge
on days on which the Wachovia Banks, the New York Stock Exchange and the
Federal Reserve Wire System are open for business.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. The Wachovia Banks act as
the shareholders' agent in depositing checks and converting them to federal
funds.
EXCHANGING SECURITIES FOR FUND SHARES
The Fund may accept securities in exchange for Fund shares. The Fund will
allow such exchanges only upon the prior approval of the Fund and a
determination by the Fund and the Adviser that the securities to be exchanged
are acceptable.
Any securities exchanged must meet the investment objective and policies of
the Fund, must have a readily ascertainable market value, must be liquid and
must not be subject to restrictions on resale. The market value of any
securities exchanged in any initial investment, plus any cash, must be at
least equal to the minimum investment in the Fund.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend on the net asset
value of Fund shares on the day the securities are valued. One share of the
Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other

rights attached to the securities become the property of the Fund, along with
the securities.
If an exchange is permitted, it will be treated as a sale for federal income
tax purposes. Depending upon the cost basis of the securities exchanged for
Fund shares, a gain or loss may be realized by the investor.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
DETERMINING MARKET VALUE OF SECURITIES

The market values of the Fund's portfolio securities are determined as
follows:
o for equity securities, according to the last sale price on a national
securities exchange, if available;
o in the absence of recorded sales for listed equity securities, according to
the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an independent
pricing service;
o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service; or
o for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.

The Trust will value futures contracts, options and put options on financial
futures at their market values established by the exchanges at the close of
option trading on such exchanges, unless the Trustees determine in good faith
that another method of valuing option positions is necessary.
REDEEMING FUND SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Fund intends to redeem shares in cash, it reserves the right
under certain circumstances to pay the redemption price in whole or in part by
a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving their securities and selling them before
their maturity could receive less than the redemption value of their
securities and could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940, which obligates the Fund to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period.

MASSACHUSETTS BUSINESS TRUSTS

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or the Trustees enter into
or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder of the Fund for any act or obligation of the
Trust on behalf of the Fund. Therefore, financial loss resulting from
liability as a shareholder of the Fund will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from the assets of the Fund.
TAX STATUS

o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned during
the year.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the receipt
of cash payments. To maintain its qualification as a regulated investment
company and avoid liability of federal income taxes, the Fund will be required
to distribute income accrued with respect to zero coupon convertible
securities which it owns, and may have to sell portfolio securities (perhaps
at disadvantageous times) in order to generate cash to satisfy these
distribution requirements.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends received as cash
or additional shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends, and any short-term capital gains, are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. When the
Fund realizes long-term capital gains, it will distribute them at least once
every 12 months.
TOTAL RETURN

The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at
the beginning of the period with $1,000, less any applicable sales load,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
5.07%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the
Fund over a thirty-day period by the maximum offering price per share of the
Fund on the last day of the period. This value is then annualized using semi-
annual compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a 12-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, the performance will be reduced for those shareholders paying those
fees.

PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses;
o the relative amount of Fund cash flow; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and the maximum offering price (i.e., net asset value plus any
sales charge) per share fluctuate daily. Both net earnings and offering price
per share are factors in the computation of yield and total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index
used, prevailing market conditions, portfolio compositions of other funds, and
methods used to value portfolio securities and compute offering price. The
financial publications and/or indices which the Fund uses in advertising may
include:
o MERRILL LYNCH 1-3 YEAR TREASURY INDEX is an unmanaged index tracking short-
term U.S. government securities with maturities between 1 and 2.99 years.
The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
o MERRILL LYNCH CORPORATE MASTER is an unmanaged index comprised of
approximately 4,356 corporate debt obligations rated BBB or better. These
quality parameters are based on composites of ratings assigned by S&P and
Moody's. Only bonds with a minimum maturity of one year are included.

o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in maximum offering price over a specific
period of time. From time to time, the Fund will quote its Lipper ranking in
the "short investment-grade debt funds" category in advertising and sales
literature.
o LEHMAN BROTHERS GOVERNMENT INDEX is an unmanaged index comprised of all
publicly issued, non-convertible domestic debt of the U.S. government, or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and a minimum maturity of one year are
included.
o LEHMAN BROTHERS AGGREGATE BOND INDEX is a total return index measuring both
the capital price changes and income provided by the underlying universe of
securities, weighted by market value outstanding. The Aggregate Bond Index
is comprised of the Lehman Brothers Government Bond Index, Corporate Bond
Index, Mortgage-Backed Securities Index and the Yankee Bond Index. These
indices include: U.S. Treasury obligations, including bonds and notes; U.S.
agency obligations, including those of the Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks; Federal
Home Loan Mortgage Corporation; Federal National Mortgage Association;
Government National Mortgage Association; Student Loan Marketing
Association; foreign obligations; and U.S. investment-grade corporate debt
and mortgage-backed obligations. All corporate debt included in the
Aggregate Bond Index has a minimum S&P rating of BBB, a minimum Moody's
rating of Baa, or a Fitch rating of BBB.

o MERRILL LYNCH CORPORATE AND GOVERNMENT INDEX includes issues which must be
in the form of publicly placed, non convertible, coupon-bearing domestic
debt and must carry a term of maturity of at least one year. Par amounts
outstanding must be no less than $10 million at the start and at the close
of the performance measurement period. Corporate instruments must be rated
by S&P or by Moody's as investment -grade issues (i.e., BBB/Baa or better).
o MERRILL LYNCH DOMESTIC MASTER INDEX includes issues which must be in the
form of publicly placed, non- convertible, coupon-bearing domestic debt and
must carry term to maturity of at least one year. Par amounts outstanding
must be no less than $10 million at the start and at the close of the
performance measurement period. The Domestic Master Index is a broader index
than the Merrill Lynch Corporate and Government Index and includes, for
example, mortgage-related securities. The mortgage market is divided by
agency, type of mortgage and coupon and the amount outstanding in each
agency/type/coupon subdivision must be no less than $200 million at the
start and at the close of the performance measurement period. Corporate
instruments must be rated by S&P or by Moody's as investment-grade issues
(i.e. BBB/Baa or better).
o LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.
o MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted

returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. These total returns
also represent the historic change in the value of an investment in the Fund
based on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
FINANCIAL STATEMENTS

The financial statements for the fiscal period ended November 30, 1995, are
incorporated herein by reference from the Fund's Annual Report dated November
30, 1995 (File Nos. 33-44590 and 811-6504). A copy of the Annual Report may be
obtained without charge by contacting The Biltmore Service Center at the
address located on the back cover of the prospectus or by calling The Biltmore
Service Center at 1-800-994-4414.

APPENDIX

NR--"NR" indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy. S&P may apply a plus
(+) or minus (-) to the above rating classifications to show relative standing
within the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated "AAA" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "AA" are judged to be of high quality by all
standards. Together with the "AAA" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "AAA" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in "AAA" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from "AA " through "B" in its corporate
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-

range ranking; and the modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATINGS
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-
1+."
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS
PRIME-1--Issuers rated "PRIME-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. "PRIME-
1" repayment capacity will normally be evidenced by many of the following
characteristics:

o Leading market positions in well-established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
FITCH INVESTORS SERVICE, INC. SHORT-TERM DEBT RATINGS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated "F-
1+."

BILTMORE GEORGIA MUNICIPAL BOND FUND
(A PORTFOLIO OF THE BILTMORE MUNICIPAL FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore Georgia Municipal Bond Fund (the "Fund"), a portfolio in The
Biltmore Municipal Funds (the "Trust"), dated January 31, 1996. This

Cusip 090297862
3012916B (1/96)

Statement is not a prospectus itself. To receive a copy of the prospectus,
write the Fund or call The Biltmore Service Center toll-free at 1-800-994-
4414.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 3
Repurchase Agreements 4
Lending of Portfolio Securities 4
Portfolio Turnover 5
Municipal Bond Insurance 5
INVESTMENT LIMITATIONS 9

Georgia Investment Risks 12
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT 14

Officers and Trustees 14
Fund Ownership 17
Trustees Compensation 8
Trustee Liability 18
INVESTMENT ADVISORY SERVICES 18

Adviser to the Fund 18
Advisory Fees 8
BROKERAGE TRANSACTIONS 20

OTHER SERVICES 21

Fund Administration 21
Custodian 21
Transfer Agent 9

Legal Services 22
Independent Auditors 22
Shareholder Servicing Agent (Class A Shares
Only) 23
PURCHASING SHARES 22

Distribution of Shares 23
Conversion to Federal Funds 23
DETERMINING NET ASSET VALUE 23

Valuing Municipal Bonds 23
REDEEMING SHARES 23

Redemption in Kind 23
MASSACHUSETTS BUSINESS TRUST 24

TAX STATUS 25

The Fund's Tax Status 25
Shareholders' Tax Status 25
TOTAL RETURN 12

YIELD 26

TAX-EQUIVALENT YIELD 27

Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 29

FINANCIAL STATEMENTS 31

APPENDIX 31

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated August 15,
1990. Prior to June 3, 1993, the Trust was known as "The Passageway Funds."
Capitalized terms not otherwise defined in this Statement have the same
meaning assigned to them in the prospectus.

Shares of Biltmore Georgia Municipal Bond Fund are currently offered in two
classes: Class A Shares and Class Y Shares. Prior to July 22, 1996, this Fund
offered a single class of shares, which is currently designated as Class A
Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide for its shareholders current
income which is exempt from federal regular income tax and the personal income
taxes imposed by the State of Georgia. The objective cannot be changed without
approval of shareholders.
ACCEPTABLE INVESTMENTS
If a high-rated security loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to drop the security from its
portfolio, but may consider doing so. If ratings made by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") change
because of changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution

irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal and accrued interest from the issuer of the
municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is

unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
will generate tax-exempt income.
In determining the liquidity of municipal lease securities, the Fund's
adviser, under the authority delegated by the Board of Trustees
("Trustees"), will base its determination on the following factors:
owhether the lease can be terminated by the lessee;
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation"); and
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. No fees or expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the
Fund's records at the trade date. These assets are marked to market daily and
maintained until the transaction has been settled. The Fund does not intend to
engage in when- issued and delayed delivery transactions to an extent that
would cause the segregation of more than 20% of the total value of its assets.

REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. The Fund or its custodian will take possession of the
securities subject to repurchase agreements. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities. In the
event that such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in effect
for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund may only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker.

PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Fund's
adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. It is not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover exceeding 100% under
normal market conditions. The Fund's portfolio turnover rate for the period
from December 26, 1994 (date of initial public investment) to November 30,
1995 was 14%.
MUNICIPAL BOND INSURANCE
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond issuers or from any other source. The Policies do not guarantee
payment on an accelerated basis, the payment of any redemption premium, the
value for the shares of the Fund, or payments of any tender purchase price
upon the tender of the municipal securities. The Policies also do not insure
against nonpayment of principal of or interest on the securities resulting
from the insolvency, negligence or any other act or omission of the trustee or
other paying agent for the securities. However, with respect to small issue

industrial development municipal bonds and pollution control revenue municipal
bonds covered by the Policies, the municipal bond insurers guarantee the full
and complete payments required to be made by or on behalf of an issuer of such
municipal securities if there occurs any change in the tax- exempt status of
interest on such municipal securities, including principal, interest or
premium payments, if any, as and when required to be made by or on behalf of
the issuer pursuant to the terms of such municipal securities. A when-issued
municipal security will be covered under the Policies upon the settlement date
of the issuer of such when-issued municipal securities. In determining to
insure municipal securities held by the Fund, each municipal bond insurer has
applied its own standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of municipal
securities. This insurance is intended to reduce financial risk, but the cost
thereof and compliance with investment restrictions imposed under the Policies
will reduce the yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as
long as the insured municipal securities are outstanding, such insurance may
enhance the marketability of municipal securities covered thereby, but the
exact effect, if any, on marketability cannot be estimated. The Fund generally
intends to retain any securities that are in default or subject to significant
risk of default and to place a value on the insurance, which ordinarily will
be the difference between the market value of the defaulted security and the

market value of similar securities of minimum investment grade (i.e., rated
"BBB" by S&P or "Baa" by Moody's) that are not in default. To the extent that
the Fund holds defaulted securities, it may be limited in its ability to
manage its investment and to purchase other municipal securities. Except as
described above with respect to securities that are in default or subject to
significant risk of default, the Fund will not place any value on the
insurance in valuing the municipal securities that it holds.
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated "Aaa" by Moody's
or "AAA" by S&P:
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc. MBIA, domiciled in New York, is regulated by the
New York State Insurance Department and licensed to do business in
various states. The address of MBIA is 113 King Street, Armonk, New York,
10504, and its telephone number is (914) 273-4545. As of June 1, 1995,
S&P has rated the claims-paying ability of MBIA "AAA."
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of Wisconsin,
and licensed to do business in various states. AMBAC is a wholly-owned
subsidiary of AMBAC, Inc., a financial holding company which is owned by
the public. Copies of certain statutorily required filings of AMBAC can
be obtained from AMBAC. The address of AMBAC's administrative offices is
One State Street Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212) 668-0340. As of June 1, 1995, S&P has rated the
claims-paying ability of AMBAC "AAA."

FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC
Corporation is wholly-owned by General Electric Capital Corporation.
Financial Guaranty is subject to regulation by the New York State
Insurance Department and is licensed to do business in various states.
The address of Financial Guaranty is 175 Water Street, New York, New York
10038, and its telephone number is 1-800-352-0001. As of June 1, 1995,
S&P has rated the claims-paying ability of Financial Guaranty "AAA."
CONCENTRATION OF INVESTMENTS
The ^Fund and will not generally invest more than 25% of ^its total assets in
any one industry. Governmental issuers of municipal securities are not
considered part of any "industry." However, municipal securities backed only
by the assets and revenues of nongovernmental users may, for this purpose, be
deemed to be related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It is
nonetheless possible that the^ Fund may invest more than 25% of its assets in
a broader segment of the municipal securities market, such as revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations. This would be the case
only if the Fund's investment adviser determines that the yields available
from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries,
economic, business, political and other developments generally affecting the
revenues of such users (for example, proposed legislation or pending court
decisions affecting the financing of such projects and market factors

affecting the demand for their services or products) may have a general
adverse effect on all municipal securities in such a market segment.
INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amounts borrowed. The Fund will not borrow money for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while borrowings in excess of 5% of
its total assets are outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.

INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
municipal bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities. The
Fund may, however, acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase agreements in
accordance with its investment objective, policies, and limitations and
its Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in
industrial development bonds or other securities, the interest upon which
is paid from revenues of similar type projects. The Fund may invest 25%
or more of the value of its total assets in cash, cash items, or
securities issued or guaranteed by the government of the United States or
its agencies, or instrumentalities and repurchase agreement
collateralized by such U.S. government securities. Concentrating
investments in one industry may subject the Fund to more risk than if it
did not concentrate.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.

INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under the Securities Act
of 1933, except for restricted securities determined to be liquid under
criteria established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN OPTIONS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs, or leases.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own more than 3% of the total outstanding voting stock
of any investment company, invest more than 5% of its total assets in any
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only

customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuers if the
Officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings association, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."
The Fund does not expect to borrow money or pledge securities in excess of 5%
of the value of its net assets in the coming fiscal year.
In order to comply with certain state restrictions, the Fund will not invest
in real estate limited partnerships or oil, or other mineral leases.
GEORGIA INVESTMENT RISKS
Georgia's economy is based on manufacturing (textiles, food products, paper
products, electronic equipment and aircraft), trade and a growing service
sector. Atlanta, with a service-oriented economy, is a trade, service and
transportation center for the Southeast region and is the focus of economic
growth in the State. In most other cities in Georgia, manufacturing
predominates. The State economy was only mildly affected by the early 1980's

recession and grew rapidly for most of the decade, with employment and
personal income growth in excess of comparable national rates. Despite
continued population growth, personal income per capita has steadily gained
relative to the nation. The economy began to slow in 1989, with less vigorous
job growth evident and the State's relative per capita income position
slipping.
Throughout the 1980's the State's expanding economy fostered strong income and
sales tax growth. This enabled the State to record fairly strong fiscal
operations from fiscal years 1984-1989.
The State experienced an economic downturn in the early 1990's, as operating
deficits were recorded in fiscal years 1990-1992. However, in fiscal years
1993 and 1994, the State ended with operating surpluses due to strong revenue
growth which will be used to augment reserves. The State's debt rating was
affirmed as "Aaa" by Moody's in July, 1994. Preparations for the 1996 Summer
Olympics have helped propel Georgia's economy. Businesses and local
governments have created a total of 400,000 jobs over the last three years and
the unemployment rate has dropped to just 4.9%.
The Fund's investment adviser believes that the information summarized above
describes some of the more significant matters relating to the Fund. The
sources of the information are the official statements of issuers located in
Georgia, other publicly available documents, and oral statements from various
State agencies. The Fund's investment adviser has not independently verified
any of the information contained in the official statement, other publicly
available documents, or oral statements from various State agencies.

THE BILTMORE MUNICIPAL FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, birthdates, principal
occupations during the past five years and their present positions. Each of
the Trustees and officers listed below holds an identical position with The
Biltmore Funds, another investment company which is advised by Wachovia Bank
of North Carolina, N.A. Except as listed below, none of the Trustees or
Officers are affiliated with Wachovia Bank of Georgia, N.A., Wachovia Bank of
North Carolina, N.A., Federated Investors, Federated Securities Corp.,
Federated Services Company or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931
Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929
Trustee

President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief Executive
Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety Company, and
Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924
Trustee
Real estate investor and partner; Director, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930
Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way , Jr.

200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937
Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investor Tower
Pittsburgh, PA
October 26, 1938
President and Treasurer
President and Chief Executive Officer, Federated Investors Management Company;
Executive Vice President, Secretary, General Counsel, and Trustee, Federated
Investors; Trustee, Federated Advisers, Federated Management, Federated
Research, and Federated Services Company; and Director, Federated Securities
Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960
Vice President and Assistant Treasurer
Senior Vice President, Federated Services Company; Director o f Proprietary
Client Services and member of the Office of the President, Federated

Administrative Services; formerly Corporate Counsel, Federated Investors; Vice
President and Assistant Treasurer for certain investment companies for which
Federated Securities Corp. is the principal distributor.

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959
Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.

TRUSTEES COMPENSATION

NAME AND AGGREGATE TOTAL COMPENSATION
POSITION WITH THE COMPENSATION FROM PAID FROM THE
TRUST THE TRUST*# FUND COMPLEX+

James A. Hanley, $868 $22,725 for the Trust and
Trustee one other investment company

in the Fund Complex
Samuel E. Hudgins, $913 $23,850 for the Trust and

Trustee one other investment company
in the Fund Complex
J. Berkley Ingram, Jr., $767 $20,250 for the Trust and
Trustee one other investment company
in the Fund Complex
D. Dean Kaylor, $767 $20,250 for the Trust and
Trustee one other investment company
in the Fund Complex
Charles S. Way, Jr., $0 $0 for the Trust and
Trustee one other investment company
in the Fund Complex

* Information is furnished for the fiscal year ended November 30, 1995.
# The aggregate compensation is provided for the Trust, which is comprised of
three portfolios.
+ The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Biltmore Municipal Funds' Declaration of Trust provides that the Trustees
are not liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Bank of Georgia, N.A. (the
"Adviser").

The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, lending, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
Because of the internal controls maintained by Wachovia Banks to restrict the
flow of non-public information, Fund investments are typically made without
any knowledge of Wachovia Banks' or their affiliates' lending relationship
with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the period from December 26, 1994
(date of initial public investment ) to November 30, 1995, the Adviser earned
$49,436 of which $40,609 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will

be limited, in any single fiscal year, by the amount of the investment
advisory fee.
BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship
to the value of the brokerage and research services provided. For the period
from December 26, 1994 (date of initial public investment) to November 30,
1995, no brokerage commissions were paid by the Fund.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the adviser, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser

to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the period from December 26, 1994 (date of
initial public investment) to November 30, 1995, the Fund incurred costs for
administrative services of $50,000 of which, $44,142 was voluntarily waived.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and payable monthly.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania, serves as transfer agent
and dividend disbursing agent for the Fund. The fee is based on the size,
type, and number of accounts and transactions made by shareholders. Federated
Services Company also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio investments. The fee is based on the

level of the Fund's average net assets for the period plus out-of-pocket
expenses.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
PURCHASING SHARES

DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. The Wachovia Banks act as the shareholders' agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value
is calculated by the Fund are described in the prospectus.
VALUING MUNICIPAL BONDS
The Trustees use an independent pricing service to value municipal bonds. The
independent pricing service takes into consideration yield, stability, risk,
quality, coupon rate, maturity, type of issue, trading characteristics,
special circumstances of a security or trading market, and any other factors
or market data it considers relevant in determining valuations for normal
institutional size trading units of debt securities, and does not rely
exclusively on quoted prices.
REDEEMING SHARES

by a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as cash redemption. If redemption is make
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company
Act of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. Any redemption beyond this amount will
also be in cash unless the Trustees determine that payments should be in kind.
MASSACHUSETTS BUSINESS TRUST

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust on behalf of the Fund.
To protect shareholders, the Trust has filed legal documents with
Massachusetts that expressly disclaim the liability of shareholders for such
acts or obligations of the Trust. These documents require notice of this
disclaimer to be given in each agreement, obligation, or instrument the Trust
or its Trustees enter into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any

judgment against a shareholder for any act or obligation of the Trust on
behalf of the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from
assets of the Fund.
TAX STATUS

THE FUND'S TAX STATUS
The Fund expects to pay no federal income tax because it intends to meet
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, the Fund must,
among other requirements:
o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;
o derive less than 30% of its gross income from the sale of securities held
less than three months;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the
dividends received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
othe availability of higher relative yields;

odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares.
TOTAL RETURN

Class A Shares' cumulative total return for the period from December 26, 1994
(date of initial public investment) to November 30, 1995, was 8.82%.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales charge. The Fund's total return is representative of only eleven
months investment activity since the Fund's effective date.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at
the beginning of the period with $1,000, less applicable sales charge,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
4.18%.

The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the
Fund over a thirty-day period by the maximum offering price per share on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a twelve-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD

Class A Shares' tax-equivalent yield for the thirty-day period ended November
30, 1995 was 6.63%, assuming a 31% tax bracket.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn
to equal its actual yield, assuming that income is 100% tax-exempt.

TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's portfolio
generally remains free from federal regular income tax*, and is often free
from state and local taxes as well. As the table below indicates, a "tax-free"

investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF GEORGIA

TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED
FEDERAL
AND STATE:21.00% 34.00% 37.00% 42.00% 45.60%

JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750

SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750

Tax-Exempt
Yield Taxable Yield Equivalent

1.50% 1.90% 2.27% 2.38% 2.59% 2.76%
2.00% 2.53% 3.03% 3.17% 3.45% 3.68%
2.50% 3.16% 3.79% 3.97% 4.31% 4.60%
3.00% 3.80% 4.55% 4.76% 5.17% 5.51%

3.50% 4.43% 5.30% 5.56% 6.03% 6.43%
4.00% 5.06% 6.06% 6.35% 6.90% 7.35%
4.50% 5.70% 6.82% 7.14% 7.76% 8.27%
5.00% 6.33% 7.58% 7.94% 8.62% 9.19%
5.50% 6.96% 8.33% 8.73% 9.48% 10.11%
6.00% 7.59% 9.09% 9.52% 10.34% 11.03%
6.50% 8.23% 9.85% 10.32% 11.21% 11.95%
7.00% 8.86% 10.61% 11.11% 12.07% 12.87%

Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS

share fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain financial publications and/or compare its
performance to certain indices. Investors may use financial publications
and/or indices to obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all relevant factors, such as
the composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities
and compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
O LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in net asset value over a
specific period of time. From time to time, the Fund will quote its
Lipper ranking in the general municipal bond funds category in
advertising and sales literature.
O MORNINGSTAR INC., an independent rating service is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ- listed mutual funds of all types, according to their risk-
adjusted returns. The maximum rating is five stars, and ratings are
effective for two weeks.
O LEHMAN BROTHERS STATE GENERAL OBLIGATIONS INDEX is an index comprised of
all state general obligation debt issues and is compiled without regard
to maturities. These bonds are rated A or better and represent a variety
of coupon ranges. Index figures are total returns calculated for one,

three, and twelve month periods as well as year-to-date. Total returns
are also calculated as of the index inception, December 31, 1979.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in the Fund based
on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of a sales charge.
FINANCIAL STATEMENTS

The financial statements for Biltmore Georgia Municipal Bond Fund for the
period from December 26, 1994 (date of initial public investment) to November
30, 1995, are incorporated herein by reference to the Annual Report to
Shareholders of Biltmore Georgia Municipal Bond Fund dated November 30, 1995
(File Nos. 33-37525 and 811-6201). A copy of the Annual Report may be obtained
without charge by contacting the Fund at the address located on the back cover
of the prospectus.

APPENDIX

BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated "BB," "B," "CCC" and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB" indicates
the lowest degree of speculation and "CC" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these outweighed by large uncertainties of major risk exposure to adverse
conditions.
C--The rating "C" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
STANDARD & POOR'S RATINGS GROUP MUNICIPAL NOTE RATING DEFINITIONS
SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest.
SP-3--Speculative capacity to pay principal and interest.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS

A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or

fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear somewhat larger
than in "Aaa" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3--Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level

of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3--Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in

the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
MOODY'S INVESTORS SERVICE, INC. SHORT TERM LOAN RATING DEFINITIONS
MIG 1/VMIG 1--This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3--This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

Cusip 090313206

BILTMORE NORTH CAROLINA MUNICIPAL BOND FUND
(A PORTFOLIO OF THE BILTMORE MUNICIPAL FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the prospectus
of Biltmore North Carolina Municipal Bond Fund (the "Fund"), a portfolio in
The Biltmore Municipal Funds (the "Trust"), dated January 31,
1996 . This Statement is not a prospectus itself. To receive a copy of the
prospectus write the Fund or call The Biltmore Service Center toll-free at
1-800-994-4414.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES 1

Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 3
Repurchase Agreements 3
Lending of Portfolio Securities 4
Portfolio Turnover 4
Municipal Bond Insurance 5
INVESTMENT LIMITATIONS 9

North Carolina Investment Risks 12
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT
14

Officers and Trustees 14
Fund Ownership 17
Trustees Compensation 18
Trustee Liability 19
INVESTMENT ADVISORY SERVICES 19

Adviser to the Fund 19
Advisory Fees 19
BROKERAGE TRANSACTIONS 20

OTHER SERVICES 21

Fund Administration 21
Custodian 21

Transfer Agent 22
Legal Services 22
Independent Auditors 22
Shareholder Servicing Agent (Class A
Shares Only) 22
PURCHASING SHARES 23

Distribution of Shares 23
Conversion to Federal Funds 23
DETERMINING NET ASSET VALUE 23

Valuing Municipal Bonds 23
REDEEMING SHARES 24

Redemption in Kind 24
MASSACHUSETTS BUSINESS TRUST 24

TAX STATUS 25

The Fund's Tax Status 25
Shareholders' Tax Status 26
TOTAL RETURN 26

YIELD 27

TAX-EQUIVALENT YIELD 27

Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 29

FINANCIAL STATEMENTS 31

APPENDIX 31

GENERAL INFORMATION ABOUT THE FUND

The Fund's investment objective is to provide for its shareholders current
income which is exempt from federal regular income tax and the income taxes
imposed by the State of North Carolina. The objective cannot be changed
without approval of shareholders.
ACCEPTABLE INVESTMENTS
If a high-rated security loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to drop the security from its
portfolio, but may consider doing so. If ratings made by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") change
because of changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right

to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal and accrued interest from the issuer of the
municipal obligations, the issuer of the participation interests, or a
guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable

substitute source of payment or that the substitute source of payment
will generate tax-exempt income.
In determining the liquidity of municipal lease securities, the Fund's
adviser, under the authority delegated by the Board of Trustees
("Trustees"), will base its determination on the following factors:
owhether the lease can be terminated by the lessee;
othe potential recovery, if any, from a sale of the leased property upon
termination of the lease;
othe lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
othe likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation"); and
oany credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. No fees or expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund sufficient
to make payment for the securities to be purchased are segregated on the
Fund's records at the trade date. These assets are marked to market daily and
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that
would cause the segregation of more than 20% of the total value of its assets.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or

certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. The Fund or its custodian will take possession of the
securities subject to repurchase agreements. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities. In the
event that such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in effect
for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund may only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
PORTFOLIO TURNOVER
Although the Fund does not intend to invest for the purpose of seeking short-
term profits, securities in its portfolio will be sold whenever the Fund's

adviser believes it is appropriate to do so in light of the Fund's investment
objective, without regard to the length of time a particular security may have
been held. It is not anticipated that the portfolio trading engaged in by the
Fund will result in its annual rate of portfolio turnover exceeding 100% under
normal market conditions. The Fund's portfolio turnover rate for the period
from December 26, 1994 (date of initial public investment) to November 30,
1995 was 19%.
MUNICIPAL BOND INSURANCE
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond issuers or from any other source. The Policies do not guarantee
payment on an accelerated basis, the payment of any redemption premium, the
value for the shares of the Fund, or payments of any tender purchase price
upon the tender of the municipal securities. The Policies also do not insure
against nonpayment of principal of or interest on the securities resulting
from the insolvency, negligence or any other act or omission of the trustee or
other paying agent for the securities. However, with respect to small issue
industrial development municipal bonds and pollution control revenue municipal
bonds covered by the Policies, the municipal bond insurers guarantee the full
and complete payments required to be made by or on behalf of an issuer of such

municipal securities if there occurs any change in the tax- exempt status of
interest on such municipal securities, including principal, interest or
premium payments, if any, as and when required to be made by or on behalf of
the issuer pursuant to the terms of such municipal securities. A when-issued
municipal security will be covered under the Policies upon the settlement date
of the issuer of such when-issued municipal securities. In determining to
insure municipal securities held by the Fund, each municipal bond insurer has
applied its own standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of municipal
securities. This insurance is intended to reduce financial risk, but the cost
thereof and compliance with investment restrictions imposed under the Policies
will reduce the yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as
long as the insured municipal securities are outstanding, such insurance may
enhance the marketability of municipal securities covered thereby, but the
exact effect, if any, on marketability cannot be estimated. The Fund generally
intends to retain any securities that are in default or subject to significant
risk of default and to place a value on the insurance, which ordinarily will
be the difference between the market value of the defaulted security and the
market value of similar securities of minimum investment grade (i.e., rated
"BBB" by S&P or "Baa" by Moody's) that are not in default. To the extent that
the Fund holds defaulted securities, it may be limited in its ability to

manage its investment and to purchase other municipal securities. Except as
described above with respect to securities that are in default or subject to
significant risk of default, the Fund will not place any value on the
insurance in valuing the municipal securities that it holds.
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated "Aaa" by Moody's
or "AAA" by S&P:
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc. MBIA, domiciled in New York, is regulated by the
New York State Insurance Department and licensed to do business in
various states. The address of MBIA is 113 King Street, Armonk, New York,
10504, and its telephone number is (914) 273-4545. As of June 1, 1995,
S&P has rated the claims-paying ability of MBIA "AAA."
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of Wisconsin,
and licensed to do business in various states. AMBAC is a wholly-owned
subsidiary of AMBAC, Inc., a financial holding company which is owned by
the public. Copies of certain statutorily required filings of AMBAC can
be obtained from AMBAC. The address of AMBAC's administrative offices is
One State Street Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212) 668-0340. As of June 1, 1995, S&P has rated the
claims-paying ability of AMBAC "AAA."
FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC
Corporation is wholly-owned by General Electric Capital Corporation.

Financial Guaranty is subject to regulation by the New York State
Insurance Department and is licensed to do business in various states.
The address of Financial Guaranty is 175 Water Street, New York, New York
10038, and its telephone number is 1-800-352-0001. As of June 1, 1995,
S&P has rated the claims-paying ability of Financial Guaranty "AAA."
CONCENTRATION OF INVESTMENTS
The ^Fund and will not generally invest more than 25% of ^its total assets in
any one industry. Governmental issuers of municipal securities are not
considered part of any "industry." However, municipal securities backed only
by the assets and revenues of nongovernmental users may, for this purpose, be
deemed to be related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It is
nonetheless possible that the^ Fund may invest more than 25% of its assets in
a broader segment of the municipal securities market, such as revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations. This would be the case
only if the Fund's investment adviser determines that the yields available
from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries,
economic, business, political and other developments generally affecting the
revenues of such users (for example, proposed legislation or pending court
decisions affecting the financing of such projects and market factors
affecting the demand for their services or products) may have a general
adverse effect on all municipal securities in such a market segment.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money in amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Fund will not borrow money for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
municipal bonds secured by real estate or interests in real estate.

INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities. The
Fund may, however, acquire publicly or non-publicly issued municipal
bonds or temporary investments or enter into repurchase agreements in
accordance with its investment objective, policies, and limitations and
its Declaration of Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in
industrial development bonds or other securities, the interest upon which
is paid from revenues of similar type projects. The Fund may invest 25%
or more of the value of its total assets in cash, cash items, or
securities issued or guaranteed by the government of the United States or
its agencies, or instrumentalities and repurchase agreement
collateralized by such U.S. government securities. Concentrating
investments in one industry may subject the Fund to more risk than if it
did not concentrate.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its total assets
in securities subject to restrictions on resale under the Securities Act

of 1933, except for restricted securities determined to be liquid under
criteria established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN OPTIONS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
INVESTING IN MINERALS
The Fund will not purchase or sell oil, gas, or other mineral exploration
or development programs, or leases.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own more than 3% of the total outstanding voting stock
of any investment company, invest more than 5% of its total assets in any
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuers if the
Officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings association, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."
The Fund does not expect to borrow money or pledge securities in excess of 5%
of the value of its net assets in the coming fiscal year.
In order to comply with certain state restrictions, the Fund will not invest
in real estate limited partnerships or oil, gas, or other mineral leases.
NORTH CAROLINA INVESTMENT RISKS
The State of North Carolina's credit strength is derived from a diversified
economy, relatively low unemployment rates, strong financial management, and a
low debt burden. In recent years, the State's economy has become less
dependent on agriculture (primarily tobacco) and manufacturing (textiles and
furniture) and has experienced increased activity in financial services,
research, high technology manufacturing, and tourism. North Carolina did not
escape the effects of the economic slowdown; however, the State is now
experiencing an increase in economic development. North Carolina ranks among
the top ten states in terms of economic growth, as measured by job and

personal income growth. Long-term personal income trends indicate gains;
however, wealth levels still continue to lag the national average. State
unemployment rates consistently fall below the national average. For November
1995, North Carolina reported an unemployment rate of 4.2% versus the national
average of 5.6%.
North Carolina is a very conservative debt issuer and has maintained debt
levels that are low due to constitutional debt limitations. Conservative
policies also dominate the State's financial operations. The State's
administration continually demonstrates its ability and willingness to adjust
financial planning and budgeting to preserve financial balance. The State's
finances, which enjoyed surpluses and adequate reserves throughout the 1980's,
began reflecting the economic downturn in fiscal 1990. To close the shortfalls
that emerged because of weakening revenues, the State increased its sales and
corporate tax rates and implemented expenditure reductions and restrictions.
Management's actions resulted in a budget surplus for fiscal 1992, 1993 and in
1994. Available unreserved balances and budget stabilization reserves are
projected to $359 million for 1995. The financials of many North Carolina
municipalities are also strong, and over 25% of all "Aaa" rated tax-exempt
bonds issued by local municipalities throughout the country are issued by
cities and towns located in the State.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the State or its
municipalities to meet their obligations will depend on the availability of
tax and other revenues; economic, political, and demographic conditions within
the State; and the underlying fiscal condition of the State, its counties, and
its municipalities.

The Fund's investment adviser believes that the information summarized above
describes some of the more significant matters relating to the Fund. The
sources of the information are the official statements of issuers located in
North Carolina, other publicly available documents, and oral statements from
various State agencies. The Fund's investment adviser has not independently
verified any of the information contained in the official statement, other
publicly available documents, or oral statements from various State agencies.
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, birthdates, principal
occupations during the past five years, and their present positions. Each of
the Trustees and officers listed below holds an identical position with The
Biltmore Funds, another investment company which is advised by Wachovia Bank
of North Carolina, N.A. Except as listed below, none of the Trustees or
Officers are affiliated with Wachovia Bank of North Carolina, N.A., Federated
Investors, Federated Securities Corp., Federated Services Company or Federated
Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931
Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929
Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief Executive
Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety Company, and
Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924
Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive

Fenton, MI
June 29, 1930
Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee
President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chairman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

Research, and Federated Services Company; and Director, Federated Securities
Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.

As of January 10, 1996, the following shareholder of record owned 5% or more
of the outstanding shares of the Fund: Wachovia Securities Inc., for the
benefit of 1007900119, Winston-Salem, North Carolina, owned approximately
101,200 shares (5.54%).
TRUSTEES COMPENSATION

NAME AND AGGREGATE TOTAL COMPENSATION
POSITION WITH THE COMPENSATION FROM PAID FROM THE
TRUST THE TRUST*# FUND COMPLEX+

James A. Hanley, $868 $22,725 for the Trust and
Trustee one other investment company

in the Fund Complex
Samuel E. Hudgins, $913 $23,850 for the Trust and
Trustee one other investment company
in the Fund Complex
J. Berkley Ingram, Jr., $767 $20,250 for the Trust and
Trustee one other investment company
in the Fund Complex
D. Dean Kaylor, $767 $20,250 for the Trust and
Trustee one other investment company
in the Fund Complex
Charles S. Way, Jr., $0 $0 for the Trust and
Trustee one other investment company
in the Fund Complex

* Information is furnished for the fiscal year ended November 30, 1995
# The aggregate compensation is provided for the Trust, which is comprised of
three portfolios.
+ The information is provided for the last calendar year.
TRUSTEE LIABILITY
The Biltmore Municipal Funds' Declaration of Trust provides that the Trustees
are not liable for errors of judgment or mistakes of fact or law. However,
they are not protected against any liability to which they would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Bank of North Carolina, N.A. (the
"Adviser"). The Adviser shall not be liable to the Fund or any shareholder for
any losses that may be sustained in the purchase, holding, lending, or sale of
any security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. For the period from December 26, 1994
(date of initial public investment) to November 30, 1995, the adviser earned
$77,710, of which $63,053, was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are

registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
BROKERAGE TRANSACTIONS

research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship
to the value of the brokerage and research services provided. For the period
from December 26, 1994 (date of initial public investment) to November 30,
1995, no brokerage commissions were paid by the Fund.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the adviser, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect
the price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. For the period from December 26, 1994 (date of
initial public investment) to November 30, 1995, the Fund incurred costs for
administrative services of $50,000, of which, $40,270 was voluntarily waived.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in

safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and payable monthly.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania, serves as transfer agent
and dividend disbursing agent for the Fund. The fee is based on the size,
type, and number of accounts and transactions made by shareholders.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. The fee is based on
the level of the Fund's average net assets for the period plus out-of-pocket
expenses.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash

balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
PURCHASING SHARES

Except under certain circumstances described in the prospectus, shares are
sold at their net asset value plus a sales charge on days the New York Stock
Exchange, the Wachovia Banks and the Federal Reserve Wire System are open for
business. The procedure for purchasing shares of the Fund is explained in the
prospectus under "Investing in the Fund."
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for shares of the
Fund.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. The Wachovia Banks act as the shareholders' agent in
depositing checks and converting them to federal funds.
DETERMINING NET ASSET VALUE

institutional size trading units of debt securities, and does not rely
exclusively on quoted prices.
REDEEMING SHARES

The Fund redeems shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem shares in cash, it reserves the right,
under certain circumstances, to pay the redemption price in whole or in part
by a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company
Act of 1940 under which the Trust is obligated to redeem shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the Fund's net
asset value during any 90-day period. Any redemption beyond this amount will
also be in cash unless the Trustees determine that payments should be in kind.
MASSACHUSETTS BUSINESS TRUST

Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust on behalf of the Fund.

To protect shareholders, the Trust has filed legal documents with
Massachusetts that expressly disclaim the liability of shareholders for such
acts or obligations of the Trust. These documents require notice of this
disclaimer to be given in each agreement, obligation, or instrument the Trust
or its Trustees enter into or sign on behalf of the Fund.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations on behalf of the Fund, the Trust is required by its Declaration of
Trust to use the property of the Fund to protect or compensate the
shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust on
behalf of the Fund. Therefore, financial loss resulting from liability as a
shareholder of the Fund will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from
assets of the Fund.
TAX STATUS

o distribute to its shareholders at least 90% of its net income earned
during the year.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the
dividends received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
othe availability of higher relative yields;
odifferentials in market values;
onew investment opportunities;
ochanges in creditworthiness of an issuer; or
oan attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the shares.
TOTAL RETURN

Class A Shares' cumulative total return for the period from December 26, 1994
(date of initial public investment) to November 30, 1995, was 9.26%.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales charge. The Fund's total return is representative of only
eleven months investment activity since the Fund's effective date.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is

computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at
the beginning of the period with $1,000, less any applicable sales charge,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995, was
4.07%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the
Fund over a thirty-day period by the maximum offering price per share on the
last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a twelve-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD

Class A Shares' tax-equivalent yield for the thirty-day period ended November
30, 1995 was 6.64%, assuming a 31% tax bracket.

The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn
to equal its actual yield, assuming that income is 100% tax-exempt.

TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax*, and is
often free from state and local taxes as well. As the table below indicates,
a "tax-free" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF NORTH CAROLINA

TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 36.00% 39.60%
COMBINED
FEDERAL
AND STATE 22.00% 35.00% 38.75% 43.75% 47.35%

JOINT $1- $40,101- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750

SINGLE $1- $24,001- $58,151- $121,301- OVER

RETURN 24,000 58,150 121,300 263,750 $263,750

Tax-Exempt
Yield Taxable Yield Equivalent

3.50% 4.49% 5.38% 5.71% 6.22% 6.65%
4.00% 5.13% 6.15% 6.53% 7.11% 7.60%
4.50% 5.77% 6.92% 7.35% 8.00% 8.55%
5.00% 6.41% 7.69% 8.16% 8.89% 9.50%
5.50% 7.05% 8.46% 9.98% 9.78% 10.45%
6.00% 7.69% 9.23% 9.80% 10.67% 11.40%
6.50% 8.33% 10.00% 10.61% 11.56% 12.35%
7.00% 8.97% 10.77% 11.43% 12.44% 13.30%
7.50% 9.62% 11.54% 12.24% 13.33% 14.25%
8.00% 10.26% 12.31% 13.06% 14.22% 15.19%

Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
PERFORMANCE COMPARISONS

The Fund's performance depends upon such variables as:

o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the Fund's expenses; and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price (i.e., net asset value plus any sales charge) per
share fluctuate daily. Both net earnings and offering price per share are
factors in the computation of yield and total return.
From time to time, the Fund may advertise its performance compared to similar
funds or portfolios using certain financial publications and/or compare its
performance to certain indices. Investors may use financial publications
and/or indices to obtain a more complete view of the Fund's performance. When
comparing performance, investors should consider all relevant factors, such as
the composition of any index used, prevailing market conditions, portfolio
compositions of other funds, and methods used to value portfolio securities
and compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
O LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in net asset value over a
specific period of time. From time to time, the Fund will quote its
Lipper ranking in the general municipal bond funds category in
advertising and sales literature.
O MORNINGSTAR INC., an independent rating service is the publisher of the
bi- weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000

NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for
two weeks.
O LEHMAN BROTHERS STATE GENERAL OBLIGATIONS INDEX is an index comprised of
all state general obligation debt issues and is compiled without regard
to maturities. These bonds are rated A or better and represent a variety
of coupon ranges. Index figures are total returns calculated for one,
three, and twelve month periods as well as year-to-date. Total returns
are also calculated as of the index inception, December 31, 1979.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in the Fund based
on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of a sales charge.
FINANCIAL STATEMENTS

The financial statements for Biltmore North Carolina Municipal Bond Fund for
the period from December 26, 1994 (date of initial public investment) to
November 30, 1995, are incorporated herein by reference to the Annual Report
to Shareholders of Biltmore North Carolina Municipal Bond Fund dated November
30, 1995 (File Nos. 33-37525 and 811-6201). A copy of the Annual Report may be
obtained without charge by contacting the Fund at the address located on the
back cover of the prospectus.

APPENDIX

STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS

AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated "BB," "B," "CCC" and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB" indicates
the lowest degree of speculation and "CC" the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these outweighed by large uncertainties of major risk exposure to adverse
conditions.
C--The rating "C" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
STANDARD & POOR'S RATINGS GROUP MUNICIPAL NOTE RATING DEFINITIONS

SP-1--Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus sign (+) designation.
SP-2--Satisfactory capacity to pay principal and interest. SP-3--Speculative
capacity to pay principal and interest.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3--Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various

protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long term risks appear somewhat larger
than in "Aaa" securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
BAA--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated "Ca" represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM DEBT RATING DEFINITIONS
PRIME -1--Issuers rated PRIME -1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME -1
repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME -2--Issuers rated PRIME -2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,

may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME -3--Issuers rated PRIME -3 (or related supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained. NOT PRIME --Issuers
rated NOT PRIME do not fall within any of the Prime rating categories.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME -1--Issuers rated PRIME -1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME -1
repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well established industries;
o High rates of return on funds employed;
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection;
o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,

may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME -3--Issuers rated PRIME -3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME --Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
MOODY'S INVESTORS SERVICE, INC. SHORT TERM LOAN RATING DEFINITIONS
MIG 1/VMIG 1--This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3--This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.

Cusip 090313305
G00648-04(1/96)

BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
(A PORTFOLIO OF THE BILTMORE MUNICIPAL FUNDS)
CLASS A SHARES
CLASS Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Biltmore South Carolina Municipal Bond Fund (the "Fund"), a
portfolio in The Biltmore Municipal Funds (the "Trust"), dated January 31,
1996. This Statement is not a prospectus itself. To receive a copy of the
prospectus, write the Fund or call The Biltmore Service Center toll-free
at 1800-994-4414.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Statement dated January 31, 1996
FEDERATED SECURITIES CORP.
Distributor
A subsidiary of FEDERATED INVESTORS

GENERAL INFORMATION ABOUT THE FUND 1

INVESTMENT OBJECTIVE AND POLICIES1

ACCEPTABLE INVESTMENTS 1
WHEN-ISSUED AND DELAYED DELIVERY
TRANSACTIONS 3
REPURCHASE AGREEMENTS 4
LENDING OF PORTFOLIO SECURITIES 4
PORTFOLIO TURNOVER 5
MUNICIPAL BOND INSURANCE 5
INVESTMENT LIMITATIONS 9

SOUTH CAROLINA INVESTMENT RISKS12
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT
14

OFFICERS AND TRUSTEES 14
FUND OWNERSHIP 18
TRUSTEES COMPENSATION 18
TRUSTEE LIABILITY 19
INVESTMENT ADVISORY SERVICES 19

ADVISER TO THE FUND 19
ADVISORY FEES 20
BROKERAGE TRANSACTIONS 21

OTHER SERVICES 22

FUND ADMINISTRATION 22
CUSTODIAN 22

TRANSFER AGENT 22
LEGAL SERVICES 23
INDEPENDENT AUDITORS 23
SHAREHOLDER SERVICING AGENT (CLASS A
SHARES ONLY) 23
PURCHASING SHARES 23

DISTRIBUTION OF SHARES 24
CONVERSION TO FEDERAL FUNDS 24
DETERMINING NET ASSET VALUE 24

VALUING MUNICIPAL BONDS 24
REDEEMING SHARES 24

REDEMPTION IN KIND 24
MASSACHUSETTS BUSINESS TRUST 25

TAX STATUS 26

THE FUND'S TAX STATUS 26
SHAREHOLDERS' TAX STATUS 26
TOTAL RETURN 27

YIELD 27

TAX-EQUIVALENT YIELD 28

TAX-EQUIVALENCY TABLE 28
PERFORMANCE COMPARISONS 30

FINANCIAL STATEMENTS 32

APPENDIX 32

GENERAL INFORMATION ABOUT THE FUND

The Fund is a portfolio in the Trust. The Trust was established as a
Massachusetts business trust under a Declaration of Trust dated August 15,
1990. Prior to June 3, 1993, the Trust was known as "The Passageway Funds."
Prior to December 30, 1994, the Fund was known as "South Carolina Municipal
Bond Fund." Capitalized terms not otherwise defined in this Statement have
the same meaning assigned to them in the prospectus.
Shares of Biltmore South Carolina Municipal Bond Fund are currently offered in
two classes: Class A Shares and Class Y Shares. Prior to July 22, 1996, this
Fund offered a single class of shares, which are currently designated as Class
A Shares.
INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide for its shareholders current
income which is exempt from federal regular income tax and South Carolina
state income taxes. The objective cannot be changed without approval of
shareholders.
ACCEPTABLE INVESTMENTS
If a high-rated security loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to drop the security from its
portfolio, but may consider doing so. If ratings made by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P") change
because of changes in those organizations or in their rating systems, the Fund
will try to use comparable ratings as standards in accordance with the
investment policies described in the Fund's prospectus.
PARTICIPATION INTERESTS
The financial institutions from which the Fund purchases participation
interests frequently provide or secure from another financial institution

unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
will generate tax-exempt income.
In determining the liquidity of municipal lease securities, the Fund's
adviser, under the authority delegated the Board of Trustees ("Trustees")
will base its determination of the following factors:
o whether the lease can be terminated by the lessee;
o the potential recovery , if any, from a sale of the leased property
upon termination of the lease;
o the lessee's general credit strength (e.g., its debt, administrative,
economic and financial characteristics and prospects);
o the likelihood that the lessee will discontinue appropriating funding
for the leased property because the property is no longer deemed
essential to its operations (e.g., the potential for an "event of non-
appropriation"); and
o any credit enhancement or legal recourse provided upon an event of non-
appropriation or other termination of the lease.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Fund
sufficient to make payment for the securities to be purchased are segregated
on the Fund`s records at the trade date. These assets are marked to market
daily and are maintained until the transaction has been settled. The Fund
does not intend to engage in when-issued and delayed delivery transactions to
an extent that would cause the segregation of more than 20% of the total value
of its assets.

REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price within one year from
the date of acquisition. The Fund or its custodian will take possession of the
securities subject to repurchase agreements. To the extent that the original
seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on any sale of such securities. In the
event that such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in effect
for custody of the Fund's portfolio securities subject to repurchase
agreements, a court of competent jurisdiction would rule in favor of the Fund
and allow retention or disposition of such securities. The Fund may only enter
into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are found by the Fund's adviser to
be creditworthy.
From time to time, such as when suitable South Carolina municipal securities
are not available, the Fund may invest a portion of its assets in cash. Any
portion of the Fund's assets maintained in cash will reduce the amount of
assets in South Carolina municipal securities and thereby reduce the Fund's
yield.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or

interest paid on such securities. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate, since any
turnover would be incidental to transactions undertaken in an attempt to
achieve the Fund's investment objectives. For the fiscal years ended November
30, 1995 and 1994, the portfolio turnover rates were 15%, and 23%,
respectively.
MUNICIPAL BOND INSURANCE
Under the Policies, municipal bond insurers unconditionally guarantee to the
Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of mandatory sinking fund payments), default or
otherwise, the payments guaranteed will be made in such amounts and at such
times as payments of principal would have been due had there not been such
acceleration. The municipal bond insurers will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond issuers or from any other source. The Policies do not guarantee
payment on an accelerated basis, the payment of any redemption premium, the
value for the shares of the Fund, or payments of any tender purchase price
upon the tender of the municipal securities. The Policies also do not insure
against nonpayment of principal of or interest on the securities resulting
from the insolvency, negligence or any other act or omission of the trustee or

other paying agent for the securities. However, with respect to small issue
industrial development municipal bonds and pollution control revenue municipal
bonds covered by the Policies, the municipal bond insurers guarantee the full
and complete payments required to be made by or on behalf of an issuer of such
municipal securities if there occurs any change in the tax-exempt status of
interest on such municipal securities, including principal, interest or
premium payments, if any, as and when required to be made by or on behalf of
the issuer pursuant to the terms of such municipal securities. A when-issued
municipal security will be covered under the Policies upon the settlement date
of the issuer of such when-issued municipal securities. In determining to
insure municipal securities held by the Fund, each municipal bond insurer has
applied its own standard, which corresponds generally to the standards it has
established for determining the insurability of new issues of municipal
securities. This insurance is intended to reduce financial risk, but the cost
thereof and compliance with investment restrictions imposed under the Policies
will reduce the yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the date
of sale, in which event municipal bond insurers will be liable only for those
payments of principal and interest that are then due and owing, the provision
for insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as
long as the insured municipal securities are outstanding, such insurance may
enhance the marketability of municipal securities covered thereby, but the
exact effect, if any, on marketability cannot be estimated. The Fund generally
intends to retain any securities that are in default or subject to significant
risk of default and to place a value on the insurance, which ordinarily will

be the difference between the market value of the defaulted security and the
market value of similar securities of minimum investment grade (i.e., rated
"BBB" by S&P or "Baa" by Moody's) that are not in default. To the extent that
the Fund holds defaulted securities, it may be limited in its ability to
manage its investment and to purchase other municipal securities. Except as
described above with respect to securities that are in default or subject to
significant risk of default, the Fund will not place any value on the
insurance in valuing the municipal securities that it holds.
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated "Aaa" by Moody's
or "AAA" by S&P:
MUNICIPAL BOND INVESTORS ASSURANCE CORP.
Municipal Bond Investors Assurance Corp. ("MBIA") is a wholly-owned
subsidiary of MBIA, Inc. MBIA, domiciled in New York, is regulated by the
New York State Insurance Department and licensed to do business in
various states. The address of MBIA is 113 King Street, Armonk, New York,
10504, and its telephone number is (914) 273-4545. As of June 1, 1995,
S&P has rated the claims-paying ability of MBIA "AAA."
AMBAC INDEMNITY CORPORATION
AMBAC Indemnity Corporation ("AMBAC") is a Wisconsin-domiciled stock
insurance company, regulated by the Insurance Department of Wisconsin,
and licensed to do business in various states. AMBAC is a wholly-owned
subsidiary of AMBAC, Inc., a financial holding company which is owned by
the public. Copies of certain statutorily required filings of AMBAC can
be obtained from AMBAC. The address of AMBAC's administrative offices is
One State Street Plaza, 17th Floor, New York, New York 10004, and its
telephone number is (212) 668-0340. As of June 1, 1995, S&P has rated
the claims-paying ability of AMBAC "AAA."

FINANCIAL GUARANTY INSURANCE COMPANY
Financial Guaranty Insurance Company ("Financial Guaranty") is a wholly-
owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC
Corporation is wholly-owned by General Electric Capital Corporation.
Financial Guaranty is subject to regulation by the New York State
Insurance Department and is licensed to do business in various states.
The address of Financial Guaranty is 175, Water Street, New York, New
York 10038, and its telephone number is 1-800-352-0001. As if June 1,
1995, S&P has rated the claims-paying ability of Financial Guaranty
"AAA."
CONCENTRATION OF INVESTMENTS
The ^Fund and will not generally invest more than 25% of ^its total assets in
any one industry. Governmental issuers of municipal securities are not
considered part of any "industry." However, municipal securities backed only
by the assets and revenues of nongovernmental users may, for this purpose, be
deemed to be related to the industry in which such nongovernmental users
engage, and the 25% limitation would apply to such obligations. It is
nonetheless possible that the^ Fund may invest more than 25% of its assets in
a broader segment of the municipal securities market, such as revenue
obligations of hospitals and other health care facilities, housing agency
revenue obligations, or airport revenue obligations. This would be the case
only if the Fund's investment adviser determines that the yields available
from obligations in a particular segment of the market justified the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users or by
the credit of nongovernmental users engaged in a number of industries,
economic, business, political and other developments generally affecting the
revenues of such users (for example, proposed legislation or pending court

decisions affecting the financing of such projects and market factors
affecting the demand for their services or products) may have a general
adverse effect on all municipal securities in such a market segment.
INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money in amounts up to one-third of the value of its total assets,
including the amounts borrowed.
The Fund will not borrow money for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will not purchase any
securities while borrowings in excess of 5% of its total assets are
outstanding.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. In those cases, it may mortgage, pledge, or
hypothecate assets having a market value not exceeding 10% of the value
of its total assets at the time of the pledge.
UNDERWRITING
The Fund will not underwrite any issue of securities except as it may be
deemed to be an underwriter under the Securities Act of 1933 in

connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, although it may invest in
municipal bonds secured by real estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not buy or sell commodities, commodity contracts, or
commodities futures contracts.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale, under the Securities Act of
1933.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Trust's
Declaration of Trust.
DEALING IN PUTS AND CALLS
The Fund will not buy or sell puts, calls, straddles, spreads, or any
combination of these.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
The Fund may invest as temporary investments more than 25% of the value

of its assets in cash or cash items, securities issued or guaranteed by
the U.S. government, its agencies, or instrumentalities, or instruments
secured by these money market instruments, such as repurchase agreements.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the Trustees
without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN MINERALS
The Fund will not purchase or sell, oil, gas, or other mineral
exploration or development programs, or leases.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will not own more than 3% of the total outstanding voting stock
of any investment company, invest more than 5% of its total assets in any
investment company, or invest more than 10% of its total assets in
investment companies in general. The Fund will purchase securities of
investment companies only in open-market transactions involving only
customary broker's commissions. However, these limitations are not

applicable if the securities are acquired in a merger, consolidation, or
acquisition of assets.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuers if the
Officers and Trustees of the Trust or its investment adviser, owning
individually more the 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered
to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a
violation of such restriction.
For purposes of its policies and limitations, the Fund considers certificates
of deposit and demand and time deposits issued by a U.S. branch of a domestic
bank or savings assosiation, having capital, surplus, and undivided profits in
excess of $100,000,000 at the time of investment, to be "cash items."
The Fund does not expect to borrow money or pledge securities in excess of 5%
of the value of its net assets and has no present intent to do so in the
coming fiscal year.
In order to comply with certain state restrictions, the Fund will not invest
in real estate limited partnerships or oil, or other mineral leases.
SOUTH CAROLINA INVESTMENT RISKS
The State of South Carolina has an economy dominated from the early 1920's to
the present by the textile industry, with over one of every three
manufacturing jobs directly or indirectly related to the textile industry.
However, since 1950 the economic bases of the State have become more
diversified, as the trade and service sectors and durable goods manufacturing
industries have developed. Currently, Moody's rated South Carolina general

obligation bonds "Aaa" and S&P rates such bonds "AA+." There can be no
assurance that the economic conditions on which those ratings are based will
continue or that particular bond issues may not be adversely affected by
changes in economic or political conditions.
The South Carolina State Constitution mandates a balanced budget. If a deficit
occurs, the General Assembly must account for it in the succeeding fiscal
year. In addition, if a deficit appears likely, the State Budget and Control
Board (the "State Board") may reduce appropriations during the current fiscal
year as necessary to prevent the deficit. The State Constitution limits annual
increases in State employees' wages to the average growth rate of the economy
of the State and annual increases in the number of State employees to the
average growth of the population of the State.
The State Constitution requires a General Reserve Fund ("General Fund") that
equals three percent of General Fund revenue for the latest fiscal year. When
deficits have occurred, the State has funded them out of the General Fund. The
State Constitution also requires a Capital Reserve Fund ("Capital Fund") equal
to two percent of General Fund revenue. Before March 1st of each year, the
Capital Fund must be used to offset mid-year budget reductions before
mandating cuts in operating appropriations. After March 1st, the Capital Fund
may be appropriated by a special vote of the General Assembly to finance
previously authorized capital improvement bond projects, to retire bond
principal or pay interest on bonds previously issued, and to pay for capital
improvements or other nonrecurring purposes. Monies in the Capital Fund not
appropriated or any appropriation for a particular project or item that has
been reduced due to application of the monies to a year-end deficit must go
back to the General Fund.
The shutdown of the Charleston Naval Base exacted a heavy toll in North
Charleston. In addition, contractors at the Savannah River Site nuclear

complex laid off more than 4,000 workers. However, plant expansions and
openings by companies such as BMW, Michelin, AMP, and Fuji Photo have helped
to mitigate these negative economic developments.
The Fund's concentration in securities issued by the State or its subdivisions
provides a greater level of risk than an investment company which is
diversified across a larger geographic area. For example, the passage of the
North American Free Trade Agreement could result in increased competition for
the State's textile industry due to the availability of less-expensive foreign
labor.
Presently, South Carolina subjects bonds issued by other states to its income
tax. If this tax was declared unconstitutional, the value of bonds in the Fund
could decline a small but measurable amount. Also, the Fund could become
slightly less attractive to potential future investors.
The Fund's investment adviser believes that the information summarized above
describes some of the more significant matters relating to the Fund. The
sources of the information are the official statements of issuers located in
South Carolina, other publicly available documents, and oral statements from
various State agencies. The Fund's investment adviser has not independently
verified any of the information contained in the official statement, other
publicly available documents, or oral statements from various State agencies.
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT

OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, birthdates, principal
occupations, and present positions. Each of the Trustees and officers listed
below holds an identical position with The Biltmore Funds, another investment
company. Except as listed below, none of the Trustees or officers are
affiliated with Wachovia Bank of South Carolina, N.A., Wachovia Bank of North

Carolina, N.A., Federated Investors, Federated Securities Corp., Federated
Services Company or Federated Administrative Services.

James A. Hanley
4272 Sanctuary Way
Bonita Springs, FL
August 13, 1931

Trustee
Retired; Vice President and Treasurer, Abbott Laboratories (health care
products) (until 1992).

Samuel E. Hudgins
3100 Cumberland Circle
Suite 1525
Atlanta, GA
March 4, 1929

Trustee
President, Percival Hudgins & Company, LLC (investment bankers/financial
consultants); Director, Atlantic American Corporation (insurance holding
company); Director, Bankers Fidelity Life Insurance Company; Director and Vice
Chairman, Leath Furniture, Inc. (retail furniture); President, Atlantic
American Corporation (until 1988); Director, Vice Chairman and Chief Executive
Officer, Rhodes, Inc. (retail furniture) (until 1988); Chairman and Director,
Atlantic American Life Insurance Co., Georgia Casualty & Surety Company, and
Bankers Fidelity Life Insurance (until 1988).

J. Berkley Ingram, Jr.
114-L Reynolda Village
Winston-Salem, NC
April 17, 1924

Trustee
Real estate investor and partner; formerly, Vice Chairman, Massachusetts
Mutual Life Insurance Company.

D. Dean Kaylor
7301 Parkwood Drive
Fenton, MI
June 29, 1930

Trustee
Retired; Executive Vice President and Chief Financial Officer, NBD Bank, N.A.
and NBD Bancorp, Inc. (bank and bank holding company) (until 1990).

Charles S. Way, Jr.
200 Meeting Street
Suite 401
Charleston, S.C.
December 18, 1937

Trustee

President and CEO, The Beach Company and its various affiliated companies and
partnerships; Chariman of the Executive Committee, Kiawah Resort Associates,
L.P.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
October 26, 1938

President and Treasurer
President and Chief Executive Officer, Federated Investors Management
Company; Executive Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Trustee, Federated Advisers, Federated Management,
Federated Research, and Federated Services Company; and Director, Federated
Securities Corp.

Ronald M. Petnuch
Federated Investors Tower
Pittsburgh, PA
February 27, 1960

Peter J. Germain
Federated Investors Tower
Pittsburgh, PA
September 3, 1959

Secretary
Senior Corporate Counsel, Federated Investors.

FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares.
TRUSTEES COMPENSATION

NAME AND AGGREGATE TOTAL COMPENSATION
POSITION WITH THE COMPENSATION FROM PAID FROM THE
TRUST THE TRUST*# FUND COMPLEX+

James A. Hanley, $868 $22,725 for the Trust and
Trustee one other investment company

in the Fund Complex
D. Dean Kaylor, $767 $20,250 for the Trust and
Trustee one other investment company
in the Fund Complex
Charles S. Way, Jr., $0 $0 for the Trust and
Trustee one other investment company
in the Fund Complex

ADVISER TO THE FUND
The Fund's investment adviser is Wachovia Bank of South Carolina, N.A. (the
"Adviser") (formerly known as The South Carolina National Bank).
The Adviser shall not be liable to the Fund or any shareholder for any losses
that may be sustained in the purchase, holding, lending, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.

Because of the internal controls maintained by Wachovia Banks to restrict the
flow of non-public information, Fund investments are typically made without
any knowledge of Wachovia Banks' or their affiliates' lending relationship
with an issuer.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus. During the fiscal years ended November 30,
1995, 1994, the two months ended November 30, 1993, and the fiscal year ended
September 30, 1993, the Adviser earned $639,686, $624,986, $103,802, and
$531,849, respectively, of which $469,407, $488,215, $83,041, and $438,960,
respectively, was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will waive its fee
or reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the Adviser looks for prompt execution of the order at
a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except
when a better price and execution of the order can be obtained elsewhere. The
Adviser makes decisions on portfolio transactions and selects brokers and
dealers subject to review by the Trustees. The Adviser may select brokers and
dealers who offer brokerage and research services. These services may be
furnished directly to the Fund or to the Adviser and may include: advice as to
the advisability of investing in securities; security analysis and reports;
economic studies; industry studies; receipt of quotations for portfolio
evaluations; and similar services. The Adviser and its affiliates exercise
reasonable business judgment in selecting brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship
to the value of the brokerage and research services provided. For the fiscal
years ended November 30, 1995, 1994, the two months ended November
30, 1993, and the fiscal year ended September 30, 1993, no
brokerage commissions were paid by the Fund.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the adviser, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the adviser are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by the adviser
to be equitable to each. In some cases, this procedure may adversely affect

the price paid or received by the Fund or the size of the position obtained or
disposed of by the Fund. In other cases, however, it is believed that
coordination and the ability to participate in volume transactions will be to
the benefit of the Fund.
OTHER SERVICES

FUND ADMINISTRATION
Federated Administrative Services, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for the fees set
forth in the prospectus. During the fiscal years ended November 30, 1995,
1994, the two months ended November 30, 1993, and the fiscal year ended
September 30, 1993, the Fund's administrator earned $76,587, $101,152, $20,760
and $106,370 respectively, of which $3,488 was voluntarily waived during the
fiscal year ended November 30, 1994.
CUSTODIAN
Wachovia Bank of North Carolina, N.A., Winston-Salem, North Carolina is
custodian (the "Custodian") for the securities and cash of the Fund. Under the
Custodian Agreement, the Custodian holds the Fund's portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. For the services to be provided to the Trust pursuant to the Custodian
Agreement, the Trust pays the Custodian an annual fee based upon the average
daily net assets of the Fund and payable monthly.
TRANSFER AGENT
Federated Services Company, Pittsburgh, Pennsylvania, serves as transfer agent
and dividend disbursing agent for the Fund. The fee is based on the size,
type, and number of accounts and transactions made by shareholders. Federated
Services Company also provides certain accounting and recordkeeping services
with respect to the Fund's portfolio investments. The fee is based on the

level of the Fund's average net assets for the period plus out-of-pocket
expenses.
LEGAL SERVICES
Legal services for the Fund are provided by Kirkpatrick & Lockhart LLP,
Washington, D.C. Piper & Marbury L.L.P., Washington, D.C., serves as counsel
to the independent Trustees. Special South Carolina tax counsel to the Fund is
Sinkler & Boyd, P.A., Columbia, South Carolina.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.
SHAREHOLDER SERVICING AGENT (CLASS A SHARES ONLY)
Under a Shareholder Servicing Plan, the Fund may pay a fee to Federated
Shareholder Services Company, as shareholder servicing agent, for services
provided which are necessary for the maintenance of shareholder accounts.
These activities and services may include, but are not limited to: providing
office space, equipment, telephone facilities, and various clerical,
supervisory, computer, and other personnel as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase
and redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries; and assisting clients in
changing dividend options, account designations, and addresses.
PURCHASING SHARES

a distribution of securities from the Fund's portfolio. To the extent
available, such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed
in determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
Redemption in kind is not as liquid as cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company
Act of 1940, which obligates the Fund to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of the Fund's net asset value
during any 90-day period. Any redemption beyond this amount will also be in
cash unless the Trustees determine that payments should be in kind.
MASSACHUSETTS BUSINESS TRUST

Class A Shares' average annual total returns for the one-year period ended
November 30, 1995, and for the period from January 11, 1991 (start of
performance) to November 30, 1995, were 11.75% and 7.12% , respectively.
The average annual total return for the Fund is the average compounded rate of
return for a given period that would equate a $1,000 initial investment to the
ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of shares owned at the end of the period by
the net asset value per share at the end of the period. The number of shares
owned at the end of the period is based on the number of shares purchased at
the beginning of the period with $1,000, less any applicable sales charge,
adjusted over the period by any additional shares, assuming the monthly
reinvestment of all dividends and distributions.
YIELD

Class A Shares' yield for the thirty-day period ended November 30, 1995 ,was
4.34%.
The yield for the Fund is determined by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by the
Fund over a thirty-day period by the maximum offering price per share on the
last day of the period. This value is then annualized using semi-annual

compounding. This means that the amount of income generated during the thirty-
day period is assumed to be generated each month over a twelve-month period
and is reinvested every six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain adjustments required by
the Securities and Exchange Commission and, therefore, may not correlate to
the dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in the
Fund, performance will be reduced for those shareholders paying those fees.
TAX-EQUIVALENT YIELD

Class A Shares' tax-equivalent yield for the thirty-day period ended November
30, 1995 was 7.00%, assuming a 31% tax bracket.
The tax-equivalent yield of the Fund is calculated similarly to the yield, but
is adjusted to reflect the taxable yield that the Fund would have had to earn
to equal its actual yield, assuming that income is 100% tax-exempt.

TAX-EQUIVALENCY TABLE
The Fund may also use a tax-equivalency table in advertising and sales
literature. The interest earned by the municipal bonds in the Fund's portfolio
generally remains free from federal regular income tax,* and is often free
from state and local taxes as well. As the table below indicates, a "tax-free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1996
STATE OF SOUTH CAROLINA

COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
22.00% 35.00% 38.00% 43.00% 46.60%

JOINT $1- $40,401- $96,901- $147,701- OVER
RETURN 40,100 96,900 147,700 263,750 $263,750

SINGLE $1- $24,001- $58,151- $121,301- OVER
RETURN 24,000 58,150 121,300 263,750 $263,750

Tax-Exempt
Yield Taxable Yield Equivalent

2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00% 3.85% 4.62% 4.84% 5.26% 5.62%
3.50% 4.49% 5.38% 5.65% 6.14% 6.55%
4.00% 5.13% 6.15% 6.45% 7.02% 7.49%
4.50% 5.77% 6.92% 7.26% 7.89% 8.43%
5.00% 6.41% 7.69% 8.06% 8.77% 9.36%
5.50% 7.05% 8.46% 8.87% 9.65% 10.30%
6.00% 7.69% 9.23% 9.68% 10.53% 11.24%
6.50% 8.33% 10.00% 10.48% 11.40% 12.17%
7.00% 8.97% 10.77% 11.29% 12.28% 13.11%

Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of the Fund.
* Some portion of the Fund's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS

and compute offering price. The financial publications and/or indices which
the Fund uses in advertising may include:
oLIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and
takes into account any change in net asset value over a specific period of
time. From time to time, the Fund will quote its Lipper ranking in the
"general municipal bond funds" category in advertising and sales literature.
oMORNINGSTAR INC., an independent rating service, is the publisher of the bi-
weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000 NASDAQ-
listed mutual funds of all types, according to their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two weeks.
oLEHMAN BROTHERS FIVE-YEAR STATE GENERAL OBLIGATIONS BONDS is an index
comprised of all state general obligation debt issues with maturities
between four and six years. These bonds are rated A or better and represent
a variety of coupon ranges. Index figures are total returns calculated for
one, three, and twelve month periods as well as year-to-date. Total returns
are also calculated as of the index inception, December 31, 1979.
oLEHMAN BROTHERS THREE-YEAR STATE GENERAL OBLIGATIONS BONDS is an index
comprised of the same issues noted above except that the maturities range
between two and four years. Index figures are total returns calculated for
the same periods as listed above.
Advertisements and other sales literature for the Fund may quote total returns
which are calculated on non-standardized base periods. The total returns
represent the historic change in the value of an investment in the Fund based
on monthly reinvestment of dividends over a specified period of time.
Advertisements may quote performance information which does not reflect the
effect of the sales charge.

FINANCIAL STATEMENTS

The financial statements for Biltmore South Carolina Municipal Bond Fund for
the fiscal year ended November 30, 1995, are incorporated herein by
reference to the Annual Report to Shareholders of Biltmore South Carolina
Municipal Bond Fund dated November 30, 1995 (File Nos. 33-37525 and 811-6201).
A copy of the Annual Report may be obtained without charge by contacting the
Fund at the address located on the back cover of the prospectus.

APPENDIX

STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB" indicates
the lowest degree of speculation and "CC" the highest degree of speculation.

While such debt will likely have some quality and protective characteristics,
these outweighed by large uncertainties of major risk exposure to adverse
conditions.
C--The rating "C" is reversed for income bonds on which no interest is being
paid.
D--Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.

BAA--Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA--Bonds which are BA are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from AA through B in its corporate or municipal bond rating
system. The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and

the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

PART C. OTHER INFORMATION.

Item 24. Financial Statements and Exhibits:

(a).. The Financial Statements for the fiscal year ended November
30, 1995 are incorporated herein by reference to each Fund's
Annual Report dated November 30, 1995. (File Nos. 33-37525 and
811-6201)
(1) Conformed Copy of Declaration of Trust of the Registrant (1.);
(i) Conformed copies of Amendment Nos. 1 through 4 to the
Declaration of Trust dated August 15, 1990 (8.);
(ii) Conformed Copy of Amendment No. 6 to the Declaration of
Trust dated August 15, 1990 (9.);
(2) Copy of By-Laws of the Registrant (1.);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial Interest
of the Registrant (2.);
(5) (i) Conformed Copy of Investment Advisory Contract of the
Registrant and Exhibit A thereto (to file the executed
version of the Investment advisory Contract between the
Trust and Wachovia Bank of South Carolina, N.A. on behalf
of South Carolina Municipal Bond Fund) (8.);

Cusip 090313107
0120501B (1/96)

(ii) Conformed copy of Investment Advisory Contract of the
Registrant between the Trust and Wachovia Bank of Georgia,
N.A. on behalf of Biltmore Georgia Municipal Bond Fund
(9.);
(iii) Conformed copy of Investment Advisory Contract
of the Registrant between the Trust and Wachovia Bank of
North Carolina, N.A. on behalf of Biltmore North Carolina
Municipal Bond Fund (9.);
(6) (i) Conformed Copy of Distributor's Contract of the
Registrant and Exhibit A thereto (8.);
(ii) Conformed Copy of Exhibit B to the Distributor's
Contract (9.);
(7) Not applicable;
(8) (i) ...............Conformed copy of new Custodian Agreement
of the
Registrant and Exhibits A-C thereto (8.);

+ All exhibits have been filed electronically.

1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed October 29, 1990. (File Nos.
33-37525 and 811-6201)
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed November 30, 1990. (File Nos. 33-
37525 and 811-6201)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed October 6, 1994. (File Nos. 33-37525
and 811-6201)

9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed January 27, 1995. (File Nos. 33-37525
and 811-6201)

(9) Conformed copy of Transfer Agency and Service Agreement of the
Registrant (5);
(i) Conformed copy of new Portfolio Accounting and
Shareholder Recordkeeping Agreement of Registrant and
Schedule F thereto (8.);
(ii) Copy of Schedule G to new Portfolio Accounting and
Recordkeeping Agreement (8.);
(iii) Conformed Copy of Administrative Services Agreement(8.);
(iv) Conformed copy of Amendment No. 1 to the Administrative
Services Agreemtnt+;
(10) Conformed copy of Opinion and Consent of Counsel as to legality
of shares being registered (2.);
(11) (i) Conformed Copy of Consent of Independent Auditors;+
(ii) Conformed copy of Opinion and Consent of Special Tax
Counsel for South Carolina Municipal Bond Fund (4.);
(12) Not Applicable;
(13) Conformed copy of Initial Capital Understanding (2.);
(14) Not Applicable;
(15) Not Applicable;
(16) (i) Schedule for Computation of Fund Performance Data, Biltmore
South Carolina Municipal Bond Fund (3.);
(ii) Schedule for Computation of Fund Performance Data,
Biltmore Georgia Municipal Bond Fund (10.);

(iii) Schedule for Computation of Fund Performance Data,
Biltmore North Carolina Municipal Bond Fund (10.);
(17) Copy of Financial Data Schedules; +
(18) Not Applicable;
(19) Conformed Copy of Power of Attorney;+

Item 25. Persons Controlled by or Under Common Control with Registrant

None

+ All exhibits have been filed electronically.

2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed November 30, 1990. (File Nos. 33-
37525 and 811-6201)
3. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed May 28, 1991. (File Nos. 33-37525 and
811-6201)
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed November 27, 1991. (File Nos. 33-
37525 and 811-6201)
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed November 23, 1992. (File Nos. 33-37525
and 811-6201)

8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed October 6, 1994. (File Nos. 33-37525
and 811-6201)
10. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 9 on Form N-1A filed June 30, 1995. (File Nos. 33-37525
and 811-6201)

Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of June 4, 1996

Shares of beneficial interest
no par value

Biltmore South Carolina Municipal Bond Fund 2,430
(Class A Shares)
Biltmore North Carolina Municipal Bond Fund 507
(Class A Shares)
Biltmore Georgia Municipal Bond Fund 338
(Class A Shares)

Item 27. Indemnification: (1.)

Item 28. Business and Other Connections of Investment Adviser:

(a)For a description of the other business of the investment
advisers, see the section entitled "The Biltmore Municipal

Funds Information - Management of The Biltmore Municipal Funds"
in Part A for each of the Funds.

The Officers of Wachovia Bank of South Carolina, N.A. are: Will
B. Spence, President and Chief Executive Officer; Charles T.
Cole, Jr., Executive Vice President; David Q. Soutter, Executive
Vice President; David H. Parker, Regional Executive Officer; and
G. Joseph Prendergast, Chairman. The business address of each
of the Officers of Wachovia Bank of South Carolina, N.A. is 1401
Main Street, Columbia, South Carolina, 29226.

The Officers of Wachovia Bank of North Carolina, N.A. are:
Chairman of the Board, L. M. Baker, Jr.; President and Chief
Executive Officer, J. Walter McDowell; Executive Vice President,
Robert S. McCoy, Jr.; Executive Vice President, Robert L.
Alphin; Executive Vice President, Robert G. Brookby; Executive
Vice President, Hugh M. Durden; Executive Vice President, Mickey
W. Dry; Executive Vice President, Walter E. Leonard, Jr.;
Executive Vice President, Richard B. Roberts; and Executive Vice
President, Robert G. Brookly. The business address of each of
the Officers of Wachovia Bank of North Carolina, N.A. is 100
North Main Street, Winston-Salem, N.C. 27101.

1. Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed October 29, 1990. (File Nos.
33-37525 and 811-6201)

The Officers of Wachovia Bank of Georgia, N.A. are: Chairman, G.
Joseph Prendergast; President and Chief Executive Officer, D.
Gary Thompson; and Executive Vice Presidents: George W.P.
Atkins; Donald P. Carson; John M. Chalk; William T. Deyo, Jr.;
Thomas D. Hills; Eric L. Stone; and David C. Swann. The
business address of each of the Officers of Wachovia Bank of
Georgia, N.A. is 191 Peachtree Street, NE, Atlanta, Georgia,
30303.

The Directors of Wachovia Bank of South Carolina, N.A. are: L.M.
Baker, Jr, President and Chief Executive Officer, Wachovia
Corporation; Charles J. Bradshaw, President, Bradshaw
Investments, Inc.; Frank W. Brumley, President, The Brumley
Company; W.T. Cassels, Jr, Chairman, Southeastern Freight Lines
Inc.; Thomas C. Coxe, III, Executive Vice President, Sonoco
Products Company; Frederick B. Dent, Jr., President, Mayfair
Mills, Inc.; James G. Lindley, Chairman Emeritus, South Carolina
National Corporation; Joe A. Padgett; G. Joseph Prendergast,
Chairman, Wachovia Bank of South Carolina, N.A.; W.M. Self,
President and Chief Executive Officer, Greenwood Mills, Inc.;
Robert S. Small, Jr., President, AVTEX Commercial Properties,
Inc.; Will B. Spence, President and Chief Executive Officer,
Wachovia Bank of South Carolina, N.A.; J. Guy Steenrod,
President, Roche Carolina Inc.; William G. Taylor, President,
The Springs Company; and Beatrice R. Thompson, Coordinator of
Psychological Services, Anderson County School District.

The Directors of Wachovia Bank of North Carolina, N.A. are:
L.M. Baker, Jr., Chairman of the Board, Wachovia Bank of NC,
N.A.; Thomas M. Belk, Jr., Senior Vice-President, Belk Stores
Services, Inc.; Howard C. Bissell, Chairman of the Board, The
Bissell Companies, Inc.; Felton J. Capel, Chairman and
President, Century Associates of North Carolina; William
Cavanaugh, III, President and Chief Operating Officer; Bert
Collins, President and Chief Executive Officer, N.C. Mutual Life
Insurance Company; Richard L. Daugherty, Retired Vice President
and Consultant, IBM Corporation; George W. Henderson, President
and Chief Executive Officer, Burlington Industries, Inc.; Estell
C. Lee, Chairman and President, The Lee Company; J. Walter
McDowell, III, President and Chief Executive Officer, Wachovia
Bank of NC, N.A.; G. Joseph Prendergast, Executive Vice
President, Wachovia Corporation; Andrew J. Schindler, President
and Chief Executive Officer, R.J. Reynolds Tobacco Company;
Robert L. Tillman, Chief Operating Officer, Lowe's Companies,
Inc.; John F. Ward, Senior Vice President, Sara Lee Corporation;
Anderson D. Warlick, President and Chief Operating Officer,
Parkdale Mills, Inc.; David J. Whihard, II, The Daily Reflector;
and John C. Whitaker, Jr., Chairman of the Board and Chief
Executive Officer, Inmar Enterprises, Inc.

The Directors of Wachovia Bank of Georgia, N.A. are:
F. Duane Ackerman, Vice Chairman and Chief Operating
Officer,BellSouth Corporation; L.M. Baker, Jr., President and

Chief Executive Officer, Wachovia Corporation; Carl E. Bolch,
Jr., Chairman and Chief Executive Officer, Race Track Petroleum,
Inc.; James E. Bostic, Jr., Senior Vice President,
Environmental, Government Affairs and Communiciaton, Georgia-
Pacific Corporation; Dan T. Cathy, President, Chick-Fil-A
International; Michael C. Carlos, Chairman and Chief Executive
Officer, National Distributing Co., Inc.; G. Stephen Felker,
Chairman and Chief Executive Officer, Avondale Mills, Inc.;
Bryan D. Langton, Chairman and Chief Executive Officer, Holiday
Inn Worldwide; Bernard Marcus, Chairman and Chief Executive
Officer, The Home Depot, Inc.; James F. McDonald, President and
Chief Executive Officer, Scientific-Atlanta, Inc.; Daniel W.
McGlaughlin, President and Chief Operating Officer, Equifax
Inc.; G. Joseph Prendergast, Chairman of the Board, Wachovia
Bank of Georgia, N.A.; D. Raymond Riddle, Chairman of the Board
and Chief Executive Officer, National Service Industries, Inc.;
S. Stephen Selig, III, Chairman of the Board and President,
Selig Enterprises, Inc.; Alana S. Shepherd, Secretary of the
Board, Shepherd Spinal Center; and D. Gary Thompson, President
and Chief Executive Officer, Wachovia Bank of Georgia, N.A..

Item 29. Principal Underwriters:

(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; BayFunds; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG

Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated
Adjustable Rate U.S. Government Fund, Inc.; Federated American Leaders Fund,
Inc.; Federated ARMs Fund; Federated Equity Funds; Federated Equity Income
Fund, Inc.; Federated Fund for U.S. Government Securities, Inc.; Federated
GNMA Trust; Federated Government Income Securities, Inc.; Federated Government
Trust; Federated High Income Bond Fund, Inc.; Federated High Yield Trust;
Federated Income Securities Trust; Federated Income Trust; Federated Index
Trust; Federated Institutional Trust; Federated Insurance Series;Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated
Municipal Securities Fund, Inc.; Federated Municipal Trust; Federated Short-
Term Municipal Trust; Federated Short-Term U.S. Government Trust; Federated
Stock and Bond Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust;
Federated Total Return Series, Inc.; Federated U.S. Government Bond Fund;
Federated U.S. Government Securities Fund: 1-3 Years; Federated U.S.
Government Securities Fund: 2-5 Years; Federated U.S. Government Securities
Fund: 5-10 Years; Federated Utility Fund, Inc.; First Priority Funds; Fixed
Income Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty
U.S. Government Money Market Trust; Liquid Cash Trust; Managed Series Trust;
Marshall Funds, Inc.; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint Funds;
Peachtree Funds; RIMCO Monument Funds; SouthTrust Vulcan Funds; Star Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Biltmore Funds; The
Biltmore Municipal Funds; The Monitor Funds; The Planters Funds; The Starburst
Funds; The Starburst Funds II; The Virtus Funds; Tower Mutual Funds; Trust for
Financial Institutions; Trust for Government Cash Reserves; Trust for Short-

Term U.S. Government Securities; Trust for U.S. Treasury Obligations; Vision
Group of Funds, Inc.; andWorld Investment Series, Inc.

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President,Secretary
Pittsburgh, PA 15222-3779 and Treasurer

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Assistant Secretary,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Item 30. Location of Accounts and Records:

The Biltmore Municipal Funds Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Services Company Federated Investors Tower
("Transfer Agent, Dividend Pittsburgh, PA 15222-3779
Disbursing Agent and Portfolio
Recordkeeper")

Federated Administrative Services Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779

Wachovia Bank of North Carolina, N.A. 301 North Main Street
("Investment Adviser" to North Winston-Salem, NC 21750
Carolina Municipal Bond Fund)

Wachovia Bank of Georgia, N.A. 191 Peachtree Street, N.E.
("Investment Adviser" to Atlanta, Georgia 30303
Georgia Municipal Bond Fund)

Wachovia Bank of South Carolina, N.A. 1426 Main Street

("Investment Adviser" to South Columbia, South Carolina 29226
Carolina Municipal Bond Fund)

Wachovia Bank of North Carolina, N.A. Wachovia Trust Operations
("Custodian") 301 North Main Street
Winston-Salem, NC 21750

Item 31. Management Services: Not applicable.

Item 32. Undertakings:

Registrant hereby undertakes to comply with the provisions of Section
16(c) of the l940 Act with respect to the removal of Trustees and the
calling of special shareholder meetings by shareholders on behalf of
each of its portfolios.

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, THE BILTMORE MUNICIPAL FUNDS,
certifies that it meets all of the requirements for effectiveness of this

Amendment to its Registration Statement pursuant to Rule 485(b) of the
Securities Act of 1933 and has duly caused this Amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Pittsburgh and Commonwealth of Pennsylvania, on
the 21st day of June, 1996.

THE BILTMORE MUNICIPAL FUNDS

BY: /s/Peter J. Germain
Peter J. Germain, Secretary
Attorney in Fact for John W. McGonigle
June 21, 1996

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:

NAME TITLE DATE

By:/s/Peter J. Germain Attorney In Fact June 21, 1996
Peter J. Germain For the Persons
SECRETARY Listed Below

NAME TITLE

John W. McGonigle* President and Treasurer

(Chief Executive Officer
and Principal Financial and
Accounting Officer)

James A. Hanley* Trustee

Samuel E. Hudgins* Trustee

J. Berkley Ingram, Jr.* Trustee

D. Dean Kaylor* Trustee

Charles S. Way, Jr.* Trustee

</TABLE>

Exhibit (11) under N-1A
Exhibit 23 under Item 601/Reg SK

CONSENT OF INDEPENDENT AUDITORS

We consent to the references to our firm under the captions "Financial
Highlights" and "Independent Auditors" in Post-Effective Amendment Number 11 to
the Registration Statement (Form N-1A Number 33-37525) and the related
Prospectuses of The Biltmore Municipal Funds, (Biltmore North Carolina Municipal
Bond Fund, Biltmore Georgia Municipal Bond Fund, and Biltmore South Carolina
Municipal Bond Fund).

By:ERNST & YOUNG LLP
Pittsburgh, Pennsylvania

Exhibit 9(iv) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
Amendment No. 1
to
Administrative Services Agreement

This Amendment No. 1 to Administrative Services Agreement is made and
entered into as of March 7, 1996 by and between The Biltmore Municipal Funds, a
Massachusetts business trust (the "Trust"), and Federated Administrative
Services, a Delaware business trust ("FAS").

WHEREAS, the Trust and FAS entered into an Administrative Services
Agreement dated as of April 1, 1994; and

WHEREAS, the Trust and FAS desire to amend the Agreement in certain
respects;

NOW THEREFORE, the parties, intending to be legally bound, agree as
follows:

1. Effective as of June 1, 1994, the last sub-paragraph of Paragraph 4 is
amended by deleting the sub-paragraph in its entirety and inserting in lieu
thereof the following:

However, in no event shall the administrative fee received during any
year of this Agreement be less than, or be paid at a rate less than
would aggregate $75,000 per Portfolio.

2. Paragraph 6 is hereby amended by deleting the paragraph in its entirety and
inserting in lieu thereof the following:

6. Duration and Term.

(a) This agreement shall commence on the date hereof and continue
through November 30, 1997.

(b) Thereafter, this Agreement shall be automatically renewed each
year for an additional term of one year, provided that either party
may terminate this Agreement at any time after November 30, 1997 by at
least six months written notice to the other without regard to such
one-year term.

3. The Trust and FAS hereby ratify and confirm all the terms, conditions and
provisions of the Administrative Services Agreement, as herein amended, as
remaining in full force and effect.

WITNESS the above due execution hereof as of the day and year first written
above.

THE BILTMORE MUNICIPAL FUNDS

By:/s/ John W. McGonigle
Its: President

FEDERATED ADMINISTRATIVE
SERVICES

By:/s/ James J. Dolan

Exhibit 17 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of The Biltmore Funds and the
Assistant General Counsel of Federated Investors, and each of them, their
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and
stead, in any and all capacities, to sign any and all documents to be filed
with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, by means of the Securities and Exchange Commission's electronic
disclosure system known as EDGAR; and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to sign and perform each and every
act and thing requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as each of them might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.

SIGNATURES TITLE DATE

/s/John W. McGonigle President and Trustee March 11, 1996
John W. Mcgonigle (Chief Executive Officer,
Principal Financial and
Accounting Officer)

/s/James A. Hanley Trustee March 11, 1996
James A. Hanley

/s/Samuel E. Hudgins Trustee March 11, 1996

/s/J. Berkley Ingram, Jr. Trustee March 11, 1996
J. Berkley Ingram, Jr.

/s/D. Dean Kaylor Trustee March 11, 1996
D. Dean Kaylor

/s/Charles S. Way, Jr.Trustee March 11, 1996

Sworn to and subscribed before me this 11th day of March, 1996.
/s/Marie M. Hamm
Notary Public
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission expires Sept. 16, 1996

Sworn to and subscribed before me this day of , 199 .
---- --------- -

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 03
<NAME> Biltmore Municipal Funds
Biltmore Georgia Municipal Bond Fund

<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
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<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> The Biltmore Municipal Funds
Biltmore North Carolina Municipal Bond Fund

<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Nov-30-1995
<PERIOD-END> Nov-30-1995
<INVESTMENTS-AT-COST> 17,512,744
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<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> The Biltmore Municipal Funds
Biltmore South Carolina Municipal Bond Fund

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</TABLE>