BILTMORE MUNICIPAL FUNDS, 497, 1996-08-01

BILTMORE MUNICIPAL FUNDS
497, 1996-08-01

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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

===============================================================================
THE BILTMORE FUNDS AND THE BILTMORE MUNICIPAL 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
</TABLE>

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.

===============================================================================
TABLE OF CONTENTS

- -------------------------------------------------------
SUMMARY OF INVESTMENT INFORMATION 1
- -------------------------------------------------------
BILTMORE FUNDS AND BILTMORE MUNICIPAL FUNDS
SUMMARY OF FUND EXPENSES--CLASS A SHARES 2
- -------------------------------------------------------
BILTMORE FUNDS
SUMMARY OF FUND EXPENSES--CLASS B SHARES 4
- -------------------------------------------------------
GENERAL INFORMATION 8
- -------------------------------------------------------
THE BILTMORE FUNDS 8
Biltmore Equity Fund 8
Biltmore Quantitative Equity Fund
8
Biltmore Equity Index Fund 8
Biltmore Special Values Fund 9
Biltmore Emerging Markets Fund 9
Biltmore Balanced Fund 10
Biltmore Fixed Income Fund 10
Biltmore Short-Term Fixed Income Fund 10
Additional Acceptable Investments 10
- -------------------------------------------------------
THE BILTMORE MUNICIPAL FUNDS 11
Biltmore Georgia Municipal Bond Fund 11
Biltmore North Carolina Municipal Bond Fund 11
Biltmore South Carolina Municipal Bond Fund 11
Acceptable Investments 11
State Municipal Securities 11
- -------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES 12
Investment Considerations 12
Equity Investments 12
Securities of Foreign Issuers 12
Securities in Emerging Markets 12
Investments in Debt Obligations 13
Investments in Lower-Rated Debt Obligations 13
Municipal Security Investments 13
Investment Processes 14
Quantitative Equity Fund 14
Equity Index Fund 14
S&P 500 Index 15
Emerging Markets Fund 15
Fixed Income Funds 15
Portfolio Investments 16
Corporate Debt Obligations 16
Fixed Rate Corporate Debt Obligations 16
Floating Rate Corporate Debt Obligations 16
Convertible Securities 16
Put and Call Options 17
Stock Index Futures and Options 17
Forward Foreign Currency Exchange
Contracts 17
Index Participation Contracts 18
Mortgage-Backed Securities 18
Adjustable Rate Mortgage Securities 18
Collateralized Mortgage Obligations 18
Real Estate Mortgage Investment Conduits 19
Asset-Backed Securities 19
U.S. Government Obligations 19
Demand Master Notes 20
Temporary Investments 20
Restricted and Illiquid Securities 20
Repurchase Agreements 20
Demand Features 21
When-Issued and Delayed Delivery
Transactions 21
Lending of Portfolio Securities 21
Investing in Securities of Other Investment
Companies 21
Ratings 21
Municipal Leases 21
Participation Interests 21
Variable Rate Municipal Securities 22
Municipal Bond Insurance 22
Non-Diversification 22
Duration 23
- -------------------------------------------------------
INVESTMENT LIMITATIONS 23
Borrowing Money 23
Diversification 23
- -------------------------------------------------------
TRUST INFORMATION 23
Management of the Trusts 23
Board of Trustees 23
Investment Advisers 23
Sub-Adviser 24
Advisory Fees 24
Advisers' Background 24
Distribution of Shares 26
Distribution Plan 26
Administrative Arrangements 26
Shareholder Servicing Arrangements 26
Administration of the Funds 27
Expenses of the Funds and Class A Shares and
Class B Shares 27
Brokerage Transactions 27
- -------------------------------------------------------
NET ASSET VALUE 27
- -------------------------------------------------------
INVESTING IN THE FUNDS 27
Share Purchases 27
Through the Trust Divisions of the Wachovia
Banks 28
Through Wachovia Investments, Inc. 28
By Mail 28
Minimum Investment Required 28
What Shares Cost 28
Class A Shares 28
Purchases at Net Asset Value 28
Reducing the Initial Sales Charge 29
Quantity Discounts and Accumulated
Purchases 29
Letter of Intent 29
Reinvestment Privilege 29
Concurrent Purchases 29
Plan Right of Accumulation 29
Class B Shares 29
Conversion Feature 30
Sales Charge Reallowance 30
Systematic Investment Program 30
Certificates and Confirmations 30
Subaccounting Services 30
Dividends and Capital Gains 31
- -------------------------------------------------------
EXCHANGE PRIVILEGE 31
Exchange by Telephone 31
- -------------------------------------------------------
REDEEMING SHARES 32
By Telephone 32
By Mail 32
Signatures 32
Systematic Withdrawal Program 33
Accounts with Low Balances 33

- -------------------------------------------------------
SHAREHOLDER INFORMATION 33
Voting Rights 33
- -------------------------------------------------------
EFFECT OF BANKING LAWS 33
- -------------------------------------------------------
TAX INFORMATION 34
- -------------------------------------------------------
THE BILTMORE MUNICIPAL FUNDS TAX INFORMATION 34
Federal Income Taxes 34
Georgia and North Carolina Taxes 34
South Carolina Taxes 35
Other State and Local Taxes 35
- -------------------------------------------------------
OTHER CLASSES OF SHARES 35
- -------------------------------------------------------
PERFORMANCE INFORMATION 35
- -------------------------------------------------------
ADDRESSES BACK COVER
===============================================================================
SUMMARY OF INVESTMENT
INFORMATION

BILTMORE EQUITY FUND ("EQUITY FUND")--seeks to produce growth of principal and
income;

BILTMORE QUANTITATIVE EQUITY FUND ("QUANTITATIVE EQUITY FUND")--seeks to
provide growth of principal and income;

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");

BILTMORE SPECIAL VALUES FUND ("SPECIAL VALUES FUND")-- seeks to produce growth
of principal;

BILTMORE EMERGING MARKETS FUND ("EMERGING MARKETS FUND")--seeks to produce
long-term capital appreciation;

BILTMORE BALANCED FUND ("BALANCED FUND")--seeks to provide long-term growth of
principal and current income;

BILTMORE FIXED INCOME FUND ("FIXED INCOME FUND")-- seeks a high level of total
return;

BILTMORE SHORT-TERM FIXED INCOME FUND ("SHORT-TERM FIXED INCOME FUND")--seeks
to produce a high level of current income;

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;

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

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."

===============================================================================
SUMMARY OF FUND EXPENSES

THE BILTMORE FUNDS

THE BILTMORE MUNICIPAL FUNDS--CLASS A SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
----- ----- ----- ----- -----
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 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
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

BALANCED
FUND
<S> <C>
-----
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
purchase price or redemption proceeds, as applicable) None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
</TABLE>

ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C>
Management Fee (after waiver if applicable) (1) 0.63% 0.62% 0.26% 0.58% 1.00%
12b-1 Fees None None None None None
Other Expenses (after waivers and reimbursement if
applicable) (2) 0.52% 0.50% 0.47% 0.89% 1.15%
Shareholder Servicing Agent Fee 0.25%
Total Class A Shares Operating Expenses (after waivers
and reimbursement if applicable) (3) 1.15% 1.12% 0.73% 1.47% 2.15%

<CAPTION>
BALANCED
FUND
<S> <C>
-----
Management Fee (after waiver if applicable) (1) 0.54%
12b-1 Fees None
Other Expenses (after waivers and reimbursement if
applicable (2) 0.47%
Shareholder Servicing Agent Fee 0.25%
Total Class A Shares Operating Expenses (after waivers
and reimbursement if applicable) (3) 1.01%
</TABLE>

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
FIXED SHORT-TERM GEORGIA NORTH CAROLINA
INCOME FIXED-INCOME MUNI BOND MUNI BOND
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
--------- ----- ----- -----
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 4.50% 2.50% 4.50% 4.50%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None None None
Exchange Fee None None None None

<CAPTION>
SOUTH CAROLINA
MUNI BOND
FUND
<S> <C>
-------------
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) 4.50%
Maximum Sales Load Imposed on Reinvested Dividend
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None
Redemption Fees (as a percentage of amount redeem
applicable) None
Exchange Fee None
</TABLE>

ANNUAL CLASS A SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C>
Management Fee (after waiver if applicable) (1) 0.50% 0.37% 0.00% 0.00%
12b-1 Fees None None None None
Other Expenses (after waivers and reimbursement if
applicable) (2) 0.49% 0.51% 1.17% 1.10%
Shareholder Servicing Agent Fee 0.25%
Total Class A Shares Operating Expenses (after
waivers and reimbursement if applicable) (3) 0.99% 0.88% 1.17% 1.10%

<CAPTION>
<S> <C>
Management Fee (after waiver if applicable) (1) 0.25%
12b-1 Fees None
Other Expenses (after waivers and reimbursement if
applicable) (2) 0.58%
Shareholder Servicing Agent Fee
Total Class A Shares Operating Expenses (after
waivers and reimbursement if applicable 0.83%
</TABLE>

(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.30% 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 be 1.01% for the SPECIAL VALUES FUND absent the
voluntary waiver by the administrator. Other expenses would be 2.37% for
the GEORGIA MUNICIPAL BOND FUND and 1.30% for the NORTH CAROLINA
MUNICIPAL BOND FUND absent the voluntary waivers by the administrator and
portfolio accountant, and reimbursement by the investment advisor. The
investment advisor, administrator and portfolio accountant can terminate
these voluntary waivers and reimbursement at any time at their sole
discretion.

(3) The Annual Class A Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1996. Total
Class A Shares expected Operating Expenses would be 1.22% for the EQUITY
FUND, 1.20% for the QUANTITATIVE EQUITY FUND, 0.77% for the EQUITY INDEX
FUND, 1.81% for the SPECIAL VALUES FUND, 1.17% for the BALANCED FUND, 1.09%
for the FIXED INCOME FUND, 1.06% for the SHORT-TERM FIXED INCOME FUND,
3.12% for the GEORGIA MUNICIPAL BOND FUND, 2.05% for the NORTH CAROLINA
MUNICIPAL BOND FUND, and 1.33% for the SOUTH CAROLINA MUNICIPAL BOND FUND
absent the voluntary waivers and reimbursement described above in Notes 1
and 2.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds will bear either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "THE BILTMORE FUNDS INFORMATION", "THE BILTMORE MUNCIPAL FUNDS INFORMATION"
and "INVESTING IN THE FUND."

EXAMPLE

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
the maximum sales load. As noted in the table above, the Fund charges no
redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS BALANCED
FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
----- ----- ----- ----- ----- -----
1 Year $ 56 $ 56 $ 52 $ 59 $ 66 $ 55
3 Years $ 80 $ 79 $ 67 $ 89 $ 109 $ 76
5 Years $105 $ 104 $ 84 $ 122 $ 155 $ 98
10 Years $178 $ 175 $ 132 $ 213 $ 282 $ 163
</TABLE>

<TABLE>
<CAPTION>
SHORT-TERM GEORGIA NORTH CAROLINA SOUTH CAROLINA
FIXED INCOME FIXED-INCOME MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C>
----- ----- ----- ----- -----
1 Year $ 55 $ 34 $ 56 $ 56 $ 53
3 Years $ 75 $ 52 $ 80 $ 78 $ 70
5 Years $ 97 $ 73 $106 $103 $ 89
10 Years $161 $131 $181 $173 $143
</TABLE>

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

===============================================================================
SUMMARY OF FUND EXPENSES

THE BILTMORE FUNDS

THE BILTMORE FUNDS--CLASS B SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY
FUND FUND
<S> <C> <C> <C>
----------------------- -----------------------
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) (1) 5% during the first 5% during the first
year, year,
4% during the second 4% during the second
year, year,
3% during the third 3% during the third
year, year,
3% during the fourth 3% during the fourth
year, year,
2% during the fifth 2% during the fifth
year, year,
1% during the sixth 1% during the sixth
year, year,
0% after the seventh 0% after the seventh
year, year,
Redemption Fees (as a percentage of amount redeemed, if applicable) None None
Exchange Fee None None
</TABLE>

ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C>
Management Fee (after waiver if applicable) (2) 0.63% 0.62%
12b-1 Fees 0.75% 0.75%
Other Expenses (after waivers if applicable) 0.52% 0.50%
Shareholder Servicing Agent Fee 0.25%
Total Class B Shares Operating Expenses (after waivers
if applicable) (3) 1.90% 1.87%
</TABLE>

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
BLANCED FIXED INCOME
FUND FUND
<S> <C> <C> <C>
----------------------- -----------------------
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) (1) 5% during the first year, 5% during the first year,
4% during the second year, 4% during the second year,
3% during the third year, 3% during the third year,
3% during the fourth year, 3% during the fourth year,
2% during the fifth year, 2% during the fifth year,
1% during the sixth year, 1% during the sixth year,
0% after the seventh year, 0% after the seventh year,
Redemption Fees (as a percentage of amount redeemed, if applicable) None None
Exchange Fee None None
</TABLE>

ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C>
Management Fee (after waiver if applicable) (2) 0.54% 0.50%
12b-1 Fees 0.75% 0.75%
Other Expenses (after waivers if applicable) 0.47% 0.49%
Shareholder Servicing Agent Fee 0.25%
Total Class B Shares Operating Expenses (after waivers if
applicable) (3) 1.76% 1.74%
</TABLE>

(1) No contingent deferred sales charge will be imposed on: (a) the portion of
redemption proceeds attributable to increases in the value of the account
due to increases in the net asset value per Share, (b) Shares acquired
through reinvestment of dividends and capital gains, (c) Shares held for
more than seven years after the end of the calendar month of acquisition,
(d) accounts following the death or disability of a shareholder, or (e)
minimum required distributions to a shareholder over the age of 70-1/2 from
an IRA or other retirement plan.

(2) 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 0.70% for the
EQUITY FUND, QUANTITATIVE EQUITY FUND and the BALANCED FUND, and 0.60% for
the FIXED INCOME FUND.

(3) The Annual Class B Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1996. Total
Class B Shares expected Operating Expenses would be 1.97% for the EQUITY
FUND, 1.95% for the QUANTITATIVE EQUITY FUND, 1.92% for the BALANCED FUND,
and 1.84% for the FIXED INCOME FUND.

Long-term shareholders may pay more than the economic equivalent of the maximum
sales charge permitted under the rules of the National Association of Securities
Dealers, Inc.

EXAMPLE

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY BALANCED FIXED INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
----- ----- ----- -----
1 Year $ 71 $ 71 $ 70 $ 69
3 Years $ 93 $ 92 $ 88 $ 88
</TABLE>

You would pay the following on the same investment, assuming no redemptions:
<TABLE>
<CAPTION>
QUANTITATIVE
EQUITY EQUITY BALANCED FIXED INCOME
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
----- ----- ----- -----
1 Year $ 19 $ 19 $ 18 $ 18
3 Years $ 60 $ 59 $ 55 $ 55
</TABLE>

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

================================================================================

FINANCIAL HIGHLIGHTS

THE BILTMORE FUNDS

THE BILTMORE MUNICIPAL FUNDS

(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 Funds'
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>
NET REALIZED
AND
NET ASSET UNREALIZED DISTRIBUTIONS DISTRIBUTIONS
PERIOD VALUE, NET GAIN (LOSS) TOTAL FROM FROM NET FROM NET
ENDED BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED GAIN
NOVEMBER 30, OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME ON INVESTMENT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------

<CAPTION>
BILTMORE EQUITY FUND
<S> <C> <C> <C> <C> <C> <C>
1993(a) $ 10.00 0.12 0.25 0.37 (0.09) --
1994 $ 10.28 0.20 0.12 0.32 (0.20) (0.08)
1995 $ 10.32 0.23 2.64 2.87 (0.25) (0.23)
<CAPTION>
BILTMORE QUANTITATIVE EQUITY FUND
<S> <C> <C> <C> <C> <C> <C>
1994(a) $ 10.00 0.12 (0.43) (0.31) (0.09)
1995 $ 9.60 0.22 3.51 3.73 (0.22)
BILTMORE EQUITY INDEX
FUND
1993(a) $ 10.00 0.15 0.43 0.58 (0.11) --
1994 $ 10.47 0.25 (0.19) 0.06 (0.24) (0.02)
1995 $ 10.27 0.28 3.37 3.65 (0.27) (0.23)
<CAPTION>
BILTMORE SPECIAL VALUES FUND
<S> <C> <C> <C> <C> <C> <C>
1993(a) $ 10.00 (0.002) 0.242 0.24 -- --
1994 $ 10.24 0.06 (0.22) (0.16) (0.05) (0.28)
1995 $ 9.75 0.09 2.42 2.51 (0.02) (0.06)
BILTMORE EMERGING MARKETS FUND
1995(a) $ 10.00 0.05 0.36 0.41
BILTMORE BALANCED FUND
1993(a) $ 10.00 0.19 0.29 0.48 (0.15) 0.00
1994 $ 10.33 0.35 (0.38) (0.03) (0.33) (0.04)
1995 $ 9.93 0.40 2.13 2.53 (0.38) (0.16)
BILTMORE FIXED INCOME FUND
1993(a) $ 10.00 0.31 (0.01) 0.30 (0.30) --
1994 $ 10.00 0.56 (0.98) (0.42) (0.55) (0.06)
1995 $ 8.97 0.58 0.92 1.50 (0.57) --
BILTMORE SHORT-TERM FIXED INCOME FUND
1993(a) $ 10.00 0.27 (0.10) 0.17 (0.26)
1994 $ 9.91 0.45 (0.33) 0.12 (0.45)
1995 $ 9.58 0.59 0.24 0.83 (0.52)
BILTMORE GEORGIA MUNICIPAL BOND FUND
1995(a) $ 10.00 0.41 0.96 1.37 (0.41)
BILTMORE NORTH CAROLINA MUNICIPAL BOND
FUND
1995(a) $ 10.00 0.43 0.99 1.42 (0.43)
BILTMORE SOUTH CAROLINA MUNICIPAL BOND FUND
9/30/91* $ 10.00 0.43 0.17 0.60 (0.43) 0.00
9/30/92 $ 10.17 0.60 0.36 0.96 (0.60) 0.00
9/30/93 $ 10.53 0.59 0.74 1.33 (0.59) 0.00
11/30/93** $ 11.27 0.10 (0.15) (0.05) (0.10) 0.00
11/30/94 $ 11.12 0.56 (1.04) (0.48) (0.56) (0.03)
11/30/95 $ 10.05 0.56 1.10 1.66 (0.56) (0.10)
</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.

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.

===============================================================================
<TABLE>
<CAPTION>
NET ASSETS,
RATIOS TO AVERAGE NET ASSETS END
NET ASSET NET EXPENSE OF PERIOD
TOTAL VALUE, END TOTAL INVESTMENT WAIVER/ (000 PORTFOLIO
DISTRIBUTIONS OF PERIOD RETURN(B) EXPENSES INCOME REIMBURSEMENT(C) OMITTED) TURNOVER
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------

===============================================================================

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:

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;
convertible securities;
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
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:

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;
time and savings deposits (including certificates of deposit) in domestic,
commercial and savings banks; and
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:

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;
domestic issues of corporate debt obligations (including convertible bonds);
securities of foreign issuers; and
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:

preferred stocks of foreign companies;
convertible securities and warrants of foreign companies;
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;
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
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:

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;
convertible securities;
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.");
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;
mortgage-backed and asset-backed securities;
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
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:

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;
convertible securities;
mortgage-backed and asset-backed securities;
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
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:

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;
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
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:

insured by a municipal bond insurance company which is rated AAA by S&P or Aaa
by Moody's;
secured by an irrevocable escrow of direct obligations of the U.S. government;
or 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.

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.

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.

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:

direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;
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;
Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Federal
National Mortgage Corporation; Government National Mortgage Association; and
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:

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:

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
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 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.

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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:

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
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.

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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:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS
ADMINISTRATIVE AND THE BILTMORE MUNICIPAL
FEE FUNDS
<S> <C>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
on assets in excess of $750
.075 of 1% million
</TABLE>

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:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
<S> <C> <C>
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 $750,000 2.00% 2.04%
$750,000 but less
than $1 million 1.00% 1.01%
$1 million or more 0.25% 0.25%
</TABLE>

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:
<TABLE>
<CAPTION>
SALES LOAD AS SALES LOAD AS
A PERCENTAGE OF A PERCENTAGE OF
PUBLIC OFFERING NET AMOUNT
AMOUNT OF TRANSACTION PRICE INVESTED
<S> <C> <C>
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 $750,000 0.75% 0.76%
$750,000 but less
than $1 million 0.50% 0.50%
$1 million or more 0.25% 0.25%
</TABLE>

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:

quantity discounts and accumulated purchases;
signing a 13-month letter of intent; using the reinvestment privilege; or
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:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
Seventh and thereafter 0%
</TABLE>

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:

a trust company or commercial bank whose deposits are insured by the BIF;
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
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.

BILTMORE EQUITY FUND
BILTMORE QUANTITATIVE EQUITY FUND
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
(THE BILTMORE FUNDS)
(NORTH CAROLINA MUNICIPAL BOND FUND)

INVESTMENT ADVISER
(GEORGIA MUNICIPAL BOND FUND)

INVESTMENT ADVISER
(SOUTH CAROLINA MUNICIPAL BOND FUND)

COUNSEL TO THE BILTMORE FUNDS AND
THE BILTMORE MUNICIPAL FUNDS

COUNSEL TO THE INDEPENDENT TRUSTEES

THE BILTMORE SERVICE CENTER

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

WACHOVIA ASSET MANAGEMENT
100 NORTH MAIN STREET
WINSTON-SALEM, NORTH CAROLINA 27101

WACHOVIA BANK OF GEORGIA, N.A.
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303

WACHOVIA BANK OF SOUTH CAROLINA, N.A.
1426 MAIN STREET
COLUMBIA, SOUTH CAROLINA 29226

KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036-1800

PIPER & MARBURY L.L.P.
1200 NINETEENTH STREET, N.W.
WASHINGTON, D.C. 20036-2430

101 GREYSTONE BOULEVARD
SC-9215
COLUMBIA, SOUTH CAROLINA 29226

JULY 22, 1996

G01513-01 (7/96)
822-27 (7/96)

THE BILTMORE FUNDS AND
THE BILTMORE MUNICIPAL FUNDS
CLASS Y SHARES

PROSPECTUS
JULY 22, 1996

WACHOVIA INVESTMENTS

MAKE YOURSELF COMFORTABLE /SM/

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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"):
<TABLE>
- ------------------------------------------------------ ------------------------------------------------------
- ------------------------------------------------------ ------------------------------------------------------
<S> <C>
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
</TABLE>

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.

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

- -------------------------------------------------------
SUMMARY OF INVESTMENT INFORMATION 1
- -------------------------------------------------------
BILTMORE FUNDS AND BILTMORE MUNICIPAL FUNDS
SUMMARY OF FUND EXPENSES--CLASS Y SHARES 2
- -------------------------------------------------------
GENERAL INFORMATION 4
- -------------------------------------------------------
THE BILTMORE FUNDS 4
Biltmore Equity Fund 4
Biltmore Quantitative Equity Fund 4
Biltmore Equity Index Fund 5
Biltmore Special Values Fund 5
Biltmore Emerging Markets Fund 5
Biltmore Balanced Fund 6
Biltmore Fixed Income Fund 6
Biltmore Short-Term Fixed Income Fund 6
Additional Acceptable Investments 7
- -------------------------------------------------------
THE BILTMORE MUNICIPAL FUNDS 7
Biltmore Georgia Municipal Bond Fund 7
Biltmore North Carolina Municipal Bond Fund 7
Biltmore South Carolina Municipal Bond Fund 7
Acceptable Investments 7
State Municipal Securities 7
- -------------------------------------------------------
PORTFOLIO INVESTMENTS AND STRATEGIES 8
Investment Considerations 8
Equity Investments 8
Securities of Foreign Issuers 8
Securities in Emerging Markets 8
Investments in Debt Obligations 9
Investments in Lower-Rated Debt Obligations 9
Municipal Security Investments 10
Investment Processes 10
Quantitative Equity Fund 10
Equity Index Fund 11
S&P 500 Index 11
Emerging Markets Fund 11
Fixed Income Funds 12
Portfolio Investments 12
Corporate Debt Obligations 12
Fixed Rate Corporate Debt Obligations 12
Floating Rate Corporate Debt Obligations 12
Convertible Securities 13
Put and Call Options 13
Stock Index Futures and Options 14
Forward Foreign Currency Exchange
Contracts 14
Index Participation Contracts 14
Mortgage-Backed Securities 15
Adjustable Rate Mortgage Securities 15
Collateralized Mortgage Obligations 15
Real Estate Mortgage Investment Conduits 15
Asset-Backed Securities 15
U.S. Government Obligations 16
Demand Master Notes 16
Temporary Investments 16
Restricted and Illiquid Securities 17
Repurchase Agreements 17
Demand Features 17
When-Issued and Delayed Delivery
Transactions 17
Lending of Portfolio Securities 18
Investing in Securities of Other Investment
Companies 18
Ratings 18
Municipal Leases 18
Participation Interests 18
Variable Rate Municipal Securities 18
Municipal Bond Insurance 18
Non-Diversification 19
Duration 19
- -------------------------------------------------------
INVESTMENT LIMITATIONS 20
Borrowing Money 20
Diversification 20
- -------------------------------------------------------
TRUST INFORMATION 20
Management of the Trusts 20
Board of Trustees 20
Investment Advisers 20
Sub-Adviser 20
Advisory Fees 21
Advisers' Background 21
Distribution of Shares 23
Administrative Arrangements 23
Administration of the Funds 23
Expenses of the Funds and Class Y Shares 23
Brokerage Transactions 23
- -------------------------------------------------------
NET ASSET VALUE 23
- -------------------------------------------------------
INVESTING IN THE FUNDS 24
Share Purchases 24
Minimum Investment Required 24
Systematic Investment Program 24
Certificates and Confirmations 24
Subaccounting Services 24
Dividends and Capital Gains 24
- -------------------------------------------------------
EXCHANGE PRIVILEGE 25
Exchange by Telephone 25
- -------------------------------------------------------
REDEEMING SHARES 25
By Telephone 25
By Mail 26
Signatures 26
Systematic Withdrawal Program 26
Accounts with Low Balances 26
- -------------------------------------------------------
SHAREHOLDER INFORMATION 26
Voting Rights 26
- -------------------------------------------------------
EFFECT OF BANKING LAWS 26
- -------------------------------------------------------
TAX INFORMATION 27

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS (CONT'D)

- -------------------------------------------------------
THE BILTMORE MUNICIPAL FUNDS TAX INFORMATION 27
Federal Income Taxes 27
Georgia and North Carolina Taxes 28
South Carolina Taxes 28
Other State and Local Taxes 28
- -------------------------------------------------------
OTHER CLASSES OF SHARES 28
- -------------------------------------------------------
PERFORMANCE INFORMATION 29
- -------------------------------------------------------
ADDRESSES BACK COVER

- ------------------------------------------------------
- ------------------------------------------------------
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:
BILTMORE EQUITY FUND ("EQUITY FUND")--seeks to produce growth of principal and
income;
BILTMORE QUANTITATIVE EQUITY FUND ("QUANTITATIVE EQUITY FUND")--seeks to
provide growth of principal and income;
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");
BILTMORE SPECIAL VALUES FUND ("SPECIAL VALUES FUND")--seeks to produce growth
of principal;
BILTMORE EMERGING MARKETS FUND ("EMERGING MARKETS FUND")--seeks to produce
long-term capital appreciation;
BILTMORE BALANCED FUND ("BALANCED FUND")--seeks to provide long-term growth of
principal and current income;
BILTMORE FIXED INCOME FUND ("FIXED INCOME FUND")--seeks a high level of total
return;
BILTMORE SHORT-TERM FIXED INCOME FUND ("SHORT-TERM FIXED INCOME FUND")--seeks
to produce a high level of current income;
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;
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
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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUMMARY OF FUND EXPENSES

THE BILTMORE FUNDS

THE BILTMORE MUNICIPAL FUNDS--CLASS Y SHARES

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS
FUND FUND FUND FUND FUND
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None None None None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None None
Contingent Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) None None None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None None None None
Exchange Fee None None None None None

BALANCED
FUND
<S> <C>
-----
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of
purchase price or redemption proceeds, as applicable) None
Redemption Fees (as a percentage of amount redeemed,
applicable) None
Exchange Fee None
</TABLE>

ANNUAL CLASS Y SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C> <C>
Management Fee (after waiver if applicable) (1) 0.63% 0.62% 0.26% 0.58% 1.00%
12b-1 Fees None None None None None
Other Expenses (after waivers and reimbursement if applicable)
(2) 0.27% 0.25% 0.22% 0.64% 0.90%
Total Class Y Shares Operating Expenses
(after waivers and reimbursement if applicable) (3) 0.90% 0.87% 0.48% 1.22% 1.90%

<CAPTION>
<S> <C>
Management Fee (after waiver if applicable) (1) 0.54%
12b-1 Fees None
Other Expenses (after waivers and reimbursement if applicable)
(2) 0.22%
Total Class Y Shares Operating Expenses
(after waivers and reimbursement if applicable) (3) 0.76%
</TABLE>

SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
FIXED SHORT-TERM GEORGIA NORTH CAROLINA
INCOME FIXED-INCOME MUNI BOND MUNI BOND
FUND FUND FUND FUND
--------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None None None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None None None
Exchange Fee None None None None

<CAPTION>
SOUTH CAROLINA
MUNI BOND
FUND
<S> <C>
-----
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption proceeds, as
applicable) None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
</TABLE>

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
<TABLE>
<S> <C> <C> <C> <C>
Management Fee (after waiver if applicable) (1) 0.50% 0.37% 0.00% 0.00%
12b-1 Fees None None None None
Other Expenses (after waivers and reimbursement if
applicable) (2) 0.24% 0.26% 0.92% 0.85%
Total Class Y Shares Operating Expenses
(after waivers and reimbursement, if applicable) (3) 0.74% 0.63% 0.92% 0.85%

<CAPTION>
<S> <C>
Management Fee (after waiver if applicable) (1) 0.25%
12b-1 Fees None
Other Expenses (after waivers and reimbursement if
applicable) (2) 0.33%
Total Class Y Shares Operating Expenses
(after waivers and reimbursement, if
applicable) (3) 0.58%
</TABLE>

(2) Other expenses would have been 0.76% for the SPECIAL VALUES FUND absent the
voluntary waiver by the administrator. Other expenses would be 2.12% for
the GEORGIA MUNICIPAL BOND FUND and 1.05% for the NORTH CAROLINA MUNICIPAL
BOND FUND absent the voluntary waivers by the administrator and portfolio
accountant, and reimbursement by the investment advisor. The investment
advisor, administrator and portfolio accountant can terminate these
voluntary waivers and reimbursement at any time at their sole discretion.

(3) The Annual Class Y Shares Operating Expenses in the table above are based
on expenses expected during the fiscal year ending November 30, 1996. Total
Class Y Shares expected Operating Expenses would be 0.97% for the EQUITY
FUND, 0.95% for the QUANTITATIVE EQUITY FUND, 0.52% for the EQUITY INDEX
FUND, 1.56% for the SPECIAL VALUES FUND, 0.92% for the BALANCED FUND, 0.84%
for the FIXED INCOME FUND, 0.81% for the SHORT-TERM FIXED INCOME FUND,
2.87% for the GEORGIA MUNICIPAL BOND FUND, 1.80% for the NORTH CAROLINA
MUNICIPAL BOND FUND, and 1.08% for the SOUTH CAROLINA MUNICIPAL BOND FUND
absent the voluntary waivers and reimbursement described above in Notes 1
and 2.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds will bear either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "THE BILTMORE FUNDS INFORMATION", "THE BILTMORE MUNICIPAL FUNDS INFORMATION"
and "INVESTING IN THE FUND."

EXAMPLE

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return; (2) redemption at the end of each time period; and (3) payment of
the maximum sales load. As noted in the table above, the Fund charges no sales
loads or redemption fees.
<TABLE>
<CAPTION>
QUANTITATIVE EQUITY SPECIAL EMERGING
EQUITY EQUITY INDEX VALUES MARKETS BALANCED
FUND FUND FUND FUND FUND FUND
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 9 $ 9 $ 5 $ 12 $ 19 $ 8
3 Years $ 29 $ 28 $ 15 $ 39 $ 60 $ 24
</TABLE>

<TABLE>
<CAPTION>
SHORT-TERM GEORGIA NORTH CAROLINA SOUTH CAROLINA
FIXED INCOME FIXED-INCOME MUNI BOND MUNI BOND MUNI BOND
FUND FUND FUND FUND FUND
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1 Year $ 8 $ 6 $ 9 $ 9 $ 6
3 Years $ 24 $ 20 $ 29 $ 27 $ 19
</TABLE>

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

- ------------------------------------------------------
- ------------------------------------------------------
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.

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:

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:

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;
time and savings deposits (including certificates of deposit) in domestic,
commercial and savings banks; and
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:

In addition, the Fund may invest in high yield corporate bonds (commonly known
as junk bonds) and speculative grade preferred stocks.

Acceptable investments may also include, but will not be limited to:

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;
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
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.

Acceptable investments include but are not limited to:

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:

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;
convertible securities;
mortgage- and asset-backed securities;
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
time and savings deposits (including certificates of deposit) in commercial or
savings banks.

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.

- ------------------------------------------------------
- ------------------------------------------------------
THE BILTMORE MUNICIPAL FUNDS

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:
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;
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
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.

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.

insured by a municipal bond insurance company which is rated AAA by S&P or Aaa
by Moody's;
secured by an irrevocable escrow of direct obligations of the U.S. government;
or
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

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.

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.

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.

INVESTMENT PROCESSES

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
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.

of comparable quality as determined by the Funds' investment adviser.

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.

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.

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.

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.

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.

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INVESTMENT LIMITATIONS

In addition to the above limitations, The SOUTH CAROLINA MUNICIPAL BOND FUND
will not:

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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.

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%
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.

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.

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.

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:
<TABLE>
<CAPTION>
AVERAGE AGGREGATE DAILY NET
MAXIMUM ASSETS OF THE BILTMORE FUNDS
ADMINISTRATIVE AND THE BILTMORE MUNICIPAL
FEE FUNDS
<S> <C>
.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
</TABLE>

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.

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.

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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.

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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.

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.

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.

Capital gains, when realized by a Fund, will be distributed at least once every
12 months.

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EXCHANGE PRIVILEGE

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- ------------------------------------------------------
REDEEMING SHARES

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.

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.

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SHAREHOLDER INFORMATION

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EFFECT OF BANKING LAWS

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.

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TAX INFORMATION

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.

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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.

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.

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.

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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.

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PERFORMANCE INFORMATION

From time to time, the Funds advertise their total return, yield, and if
applicable, tax-equivalent yield.

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.

INVESTMENT ADVISER
(THE BILTMORE FUNDS)
(NORTH CAROLINA MUNICIPAL BOND FUND)

INVESTMENT ADVISER
(GEORGIA MUNICIPAL BOND FUND)
INVESTMENT ADVISER
(SOUTH CAROLINA MUNICIPAL BOND FUND)

COUNSEL TO THE BILTMORE FUNDS AND
THE BILTMORE MUNICIPAL FUNDS

COUNSEL TO THE INDEPENDENT TRUSTEES

THE BILTMORE SERVICE CENTER

FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

WACHOVIA ASSET MANAGEMENT
100 NORTH MAIN STREET
WINSTON-SALEM, NORTH CAROLINA 27101

WACHOVIA BANK OF GEORGIA, N.A.
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303

WACHOVIA BANK OF SOUTH CAROLINA, N.A.
1426 MAIN STREET
COLUMBIA, SOUTH CAROLINA 29226

KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
WASHINGTON, D.C. 20036-1800
PIPER & MARBURY L.L.P.
1200 NINETEENTH STREET, N.W.
WASHINGTON, D.C. 20036-2430

101 GREYSTONE BOULEVARD
SC-9215
COLUMBIA, SOUTH CAROLINA 29226

THE BILTMORE FUNDS
THE BILTMORE MUNICIPAL FUNDS

JULY 22, 1996

G01689-01-IS (7/96)
822-28 (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 SECURITIES13

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.

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 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 July 1, 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 903,032 shares (7.74%), and Wachovia Bank of Georgia,
Winston-Salem, North Carolina, on behalf of certain underlying accounts,
owned approximately 1,314,666 shares (11.27%).

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

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)

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:
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. 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

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
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

Cusip 09090297839
3012914B (7/96)

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 10
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) 12

PURCHASING FUND SHARES 13

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

DETERMINING MARKET VALUE OF SECURITIES14

REDEEMING FUND SHARES 14

Redemption in Kind 14
MASSACHUSETTS BUSINESS TRUSTS 14

TAX STATUS 14

The Fund's Tax Status 14
Shareholders' Tax Status 14
Capital Gains 15
TOTAL RETURN 15

YIELD 15

PERFORMANCE COMPARISONS 15

STANDARD & POOR'S CORPORATION 17

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.
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 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 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

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

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.

owned approximately 5,154,667 shares (48.77%), and Wachovia Bank of South
Carolina, Winston-Salem, North Carolina, on behalf of certain underlying
accounts, owned approximately 701,910 shares (6.64%).
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 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

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 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)

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

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

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 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

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

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 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+.''

Cusip090297813

3101206B(7/96)

BILTMORE EQUITY INDEX 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 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 15

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

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

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 July 1, 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 7,231,175 shares (52.53%).

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 ("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

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

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

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
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

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.
STANDARD & POOR'S CORPORATION

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
3012919B (7/96)

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 SECURITIES13

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.

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

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

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 July 1, 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 455,427 shares (45.49 %).

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

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

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 $75,000, $75,000, and $75,000,
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

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

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

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

Cusip 090297870
3012918B (7/96)

prospectus of Biltmore Emerging Markets Fund (the "Fund") 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 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 24

Officers and Trustees 24
Fund Ownership 28
Trustees Compensation 12
Trustee Liability 30
INVESTMENT ADVISORY SERVICES 30

Adviser to the Fund 30
Advisory Fees 30
BROKERAGE TRANSACTIONS 31

OTHER SERVICES 32

Administration 13
Custodian 13
Transfer Agent 13
Legal Services 33
Independent Auditors 33
Portfolio Turnover 14
Shareholder Servicing Agent
(Class A Shares Only) 14
PURCHASING FUND SHARES 34

Conversion to Federal Funds 35
DETERMINING NET ASSET VALUE 35

DETERMINING MARKET VALUE OF SECURITIES35

REDEEMING FUND SHARES 36

Redemption in Kind 36
MASSACHUSETTS BUSINESS TRUSTS 37

TAX STATUS 38

The Fund's Tax Status 38
Shareholders' Tax Status 38
Capital Gains 39
TOTAL RETURN 39

YIELD 39

PERFORMANCE COMPARISONS 40

FINANCIAL STATEMENTS 42

APPENDIX 43

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

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 July 1, 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 (11.91%).

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

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.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment
advisory fee as described in the prospectus.
For the perod from December 26, 1994 (date of initial public investment) to
November 30, 1995, the Adviser earned $371,458, of which $60,903 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

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

(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.

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.
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 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

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

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.
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 (7/96)

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 16

TAX STATUS 16

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

YIELD 17

PERFORMANCE COMPARISONS 17

FINANCIAL STATEMENTS 20

APPENDIX 21

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

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

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 July 1, 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 4,404,658 shares (23.57%).

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

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

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.
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
Fund's investment 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 102% and 74%,
respectively.
DISTRIBUTION PLAN (CLASS B SHARES ONLY) AND SHAREHOLDER SERVICES PLAN
(CLASS A AND CLASS B SHARES ONLY)

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

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

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

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

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

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 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 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 "balanced funds" category in advertising and
sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of approximately 24
issues of intermediate-term U.S. government and U.S. Treasury securities
with maturities between 3 and 4.99 years and coupon rates above 4.25%.
Index returns are calculated as total returns for periods of one, three,
six and twelve months as well as year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an unmanaged index
comprised of the most recently issued 3-year U.S. Treasury notes. Index
returns are calculated as total returns for periods of one, three, six,
and twelve months as well as year-to-date.

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

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

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 7
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) 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 16
Capital Gains 16
TOTAL RETURN 16

YIELD 16

PERFORMANCE COMPARISONS 16

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. 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 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.
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.
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

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 July 1, 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 4,083,255 shares (21 78%).
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
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 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

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. 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

$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)

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 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

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

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

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.
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
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

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

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

Cusip 090297854
3012917B (7/96)

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 OBJECTIVE AND POLICIES 1

Types of Investments 1
Investment Limitations 7
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 SECURITIES14

REDEEMING FUND SHARES 14

Redemption in Kind 14
MASSACHUSETTS BUSINESS TRUSTS 15

TAX STATUS 15

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

YIELD 16

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

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 July 1, 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 6,646,919 shares (58.46%).
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
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.

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

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

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

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

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 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

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 6.05% and 9.22%,
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 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 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

APPENDIX

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

Cusip 090297862
3012916B (7/96)

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 4
Lending of Portfolio Securities 4
Portfolio Turnover 5
Municipal Bond Insurance 5
INVESTMENT LIMITATIONS 9

Georgia Investment Risks 13
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT 14

Officers and Trustees 14
Fund Ownership 18
Trustees Compensation 8
Trustee Liability 19
INVESTMENT ADVISORY SERVICES 19

Adviser to the Fund 19
Advisory Fees 8
BROKERAGE TRANSACTIONS 21

OTHER SERVICES 22

Fund Administration 22
Custodian 22
Transfer Agent 9
Legal Services 23

Independent Auditors 23
Shareholder Servicing Agent (Class A Shares Only)24
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 25
MASSACHUSETTS BUSINESS TRUST 25

TAX STATUS 26

The Fund's Tax Status 26
Shareholders' Tax Status 27
TOTAL RETURN 12

YIELD 28

TAX-EQUIVALENT YIELD 29

Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 31

FINANCIAL STATEMENTS 33

APPENDIX 33

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

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

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

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

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
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

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

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%

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 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

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.

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

Cusip 090313206
G00648-06 (7/96 )

"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

North Carolina Investment Risks 13
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT 15

Officers and Trustees 15
Fund Ownership 18
Trustees Compensation 19
Trustee Liability 20
INVESTMENT ADVISORY SERVICES 20

Adviser to the Fund 20
Advisory Fees 20
BROKERAGE TRANSACTIONS 21

OTHER SERVICES 22

Fund Administration 22
Custodian 22
Transfer Agent 23
Legal Services 23

Independent Auditors 23
Shareholder Servicing Agent (Class A Shares Only) 23
PURCHASING SHARES 24

Distribution of Shares 24
Conversion to Federal Funds 24
DETERMINING NET ASSET VALUE 24

Valuing Municipal Bonds 24
REDEEMING SHARES 25

Redemption in Kind 25
MASSACHUSETTS BUSINESS TRUST 26

TAX STATUS 26

The Fund's Tax Status 26
Shareholders' Tax Status 27
TOTAL RETURN 27

YIELD 28

TAX-EQUIVALENT YIELD 29

Tax-Equivalency Table 13
PERFORMANCE COMPARISONS 31

FINANCIAL STATEMENTS 33

APPENDIX 33

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 North 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 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 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

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.

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 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

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

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

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

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 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 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.

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

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(7/96)

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 RISKS13
THE BILTMORE MUNICIPAL FUNDS MANAGEMENT 15

OFFICERS AND TRUSTEES 15
FUND OWNERSHIP 18
TRUSTEES COMPENSATION 18
TRUSTEE LIABILITY 20
INVESTMENT ADVISORY SERVICES 20

ADVISER TO THE FUND 20
ADVISORY FEES 20
BROKERAGE TRANSACTIONS 21

OTHER SERVICES 22

FUND ADMINISTRATION 22
CUSTODIAN 23
TRANSFER AGENT 23
LEGAL SERVICES 23

INDEPENDENT AUDITORS 24
SHAREHOLDER SERVICING AGENT (CLASS A SHARES
ONLY) 24
PURCHASING SHARES 24

DISTRIBUTION OF SHARES 24
CONVERSION TO FEDERAL FUNDS 24
DETERMINING NET ASSET VALUE 25

VALUING MUNICIPAL BONDS 25
REDEEMING SHARES 25

REDEMPTION IN KIND 25
MASSACHUSETTS BUSINESS TRUST 26

TAX STATUS 27

THE FUND'S TAX STATUS 27
SHAREHOLDERS' TAX STATUS 27
TOTAL RETURN 28

YIELD 28

TAX-EQUIVALENT YIELD 29

TAX-EQUIVALENCY TABLE 29
PERFORMANCE COMPARISONS 31

FINANCIAL STATEMENTS 33

APPENDIX 33

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 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 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

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

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

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 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.

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

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

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

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

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

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' 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

The Fund's performance depends upon such variables as:
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; 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.
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:

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.

Cusip 090313107