STATEMENT OF ADDITIONAL INFORMATION

                         BLANCHARD CAPITAL GROWTH FUND
                           FEDERATED INVESTORS TOWER
                           PITTSBURGH, PA  15222-3779


This Statement is not a Prospectus but should be read in conjunction with the
current Prospectus dated February 29, 1996 (the "Prospectus"), pursuant to
which the Blanchard Capital Growth FUND (the "FUND") is offered. Please
retain this document for future reference.

To obtain a copy of the Prospectus or a paper copy of this Statement of
Additional Information, if you have received your Statement of Additional
Information electronically, please call the FUND at 1-800-829-3863.
   
TABLE OF CONTENTS                                      Page

General Information and History                        1
Investment Objective, Policies and Restrictions        1
Portfolio Transactions                                 13
Computation of Net Asset Value                         15
Performance Information                                16
Additional Purchase and Redemption Information         17
Tax Matters                                            17
The Management of the FUND                             22
Management Services                                    32
Administrative Services                                32
Distribution Plan                                      33
Description of the FUND                                34
Shareholder Reports                                    34
Appendix A                                             A-1
Appendix B                                             A-3
    
Manager
Virtus Capital Management, Inc.

Portfolio Adviser
The Chase Manhattan Bank, N.A.

Distributor
Federated Securities Corp.

Transfer Agent
Federated Shareholder Services Company

Independent Accountants
Price Waterhouse LLP
                                               Dated:February 29, 1996
                                            (Revised October 7, 1996)     





FEDERATED SECURITIES CORP.







                                       2

                        GENERAL INFORMATION AND HISTORY


    As described in Blanchard Capital Growth's (the "FUND") Prospectus, the FUND
is a non-diversified series of Blanchard Funds, a Massachusetts business trust
that was organized under the name "Blanchard Strategic Growth Fund" (the
"Trust"). The trustees of the Trust approved the change in the name of the Trust
on December 4, 1990.

       Effective March 31, 1996, the merger of The Chase Manhattan Corporation
with and into Chemical Banking Corporation was consummated and Chemical Banking
Corporation thereupon changed its name to The Chase Manhattan Corporation. The
Chase Manhattan Corporation is now the parent of The Chase Manhattan Bank, the
adviser to the Capital Growth Portfolio (the `Portfolio'').     


                INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS


    The FUND seeks its investment objective by investing 100% of its assets in
the Capital Growth Portfolio (the "Portfolio"). The Portfolio has an investment
objective identical to the FUND and invests in accordance with investment
policies and restrictions identical to those of the FUND.

    The investment objective of the FUND and the Portfolio may not be changed
except by a majority vote of shareholders.

    The investment policies of the FUND and the Portfolio, as described below,
are not fundamental and may be changed without shareholder approval.

                              INVESTMENT POLICIES

       The Prospectus sets forth the investment objective and various investment
policies of the Portfolio. This Statement of Additional Information supplements
and should be read in conjunction with the related sections of the Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
(``oody's''), Standard & Poor's Ratings Group (``Standard & Poor's'') Ratings
Group (``tandard & Poor's'') and Fitch Investors Service, Inc. (``Fitch''), see
Appendix B.     

     U.S. GOVERNMENT SECURITIES -    U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality.  Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government.  Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States.  Other U.S.
                                       2
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States.  These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of the
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.     



       In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of government-backed
instruments.  However, such specialized instruments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees.  While they may frequently offer attractive
yields, the limited-activity markets of many of these securities means that, if
the Portfolio were required to liquidate any of them, it might not be able to do
so advantageously; accordingly, the Portfolio investing in such securities
normally to hold such securities to maturity or pursuant to repurchase
agreements, and would treat such securities (including repurchase agreements
maturing in more than seven days) as illiquid for purposes of its limitation on
investment in illiquid securities.     

     BANK OBLIGATIONS -    Investments in bank obligations are limited to those
of U.S. banks (including their foreign branches) which have total assets at the
                                       3
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.     

        Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes.  A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis.  A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction.  The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date.  Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest.  Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party.  Fixed time deposits subject to withdrawal penalties
and with respect to which the Portfolio cannot realize the proceeds thereon
within seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities.  Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically have
original maturities ranging from eighteen months to five years.     

       Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged.  The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
                                       4
market conditions.  Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations.  Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation.  Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.     

        DEPOSITARY RECEIPTS - The Portfolio will limit its investment in
Depository Receipts not sponsored by the issuer of the underlying security to no
more than 5% of the value of its net assets (at the time of investment).  A
purchaser of an unsponsored Depositary Receipt may not have unlimited voting
rights and may not receive as much information about the issuer of the
underlying securities as with a sponsored Depositary Receipt.     

        CORPORATE REORGANIZATIONS - In general, securities that are the subject
of a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or proposal.
The increased market price of these securities may also discount what the stated
or appraised value of the security would be if the contemplated action were
approved or consummated.  These investments may be advantageous when the
discount significantly overstates the risk of the contingencies involved;
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or fails adequately to recognize the possibility that
the offer or proposal may be replaced or superseded by an offer or proposal of
greater value.  The evaluation of these contingencies requires unusually broad
knowledge and experience on the part of the advisers that must appraise not only
the value of the issuer and its component businesses as well as the assets or
                                       5
securities to be received as a result of the contemplated transaction, but also
the financial resources and business motivation of the offeror as well as the
dynamics of the business climate when the offer or proposal is in progress.
Investments in reorganization securities may tend to increase the turnover ratio
of the Portfolio and increase its brokerage and other transaction expenses.     

        WARRANTS AND RIGHTS - Warrants basically are options to purchase equity
securities at a specified price for a specific period of time.  Their prices do
not necessarily move parallel to the prices of the underlying securities.
Rights are similar to warrants but normally have a shorter duration and are
distributed directly by the issuer to shareholders.  Rights and warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.     

    COMMERCIAL PAPER -    Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations.  A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.     

    REPURCHASE AGREEMENTS -    The Portfolio will enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an underlying debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Portfolio to
resell the instrument at a fixed price and time, thereby determining the yield
during the Portfolio's holding period. This procedure results in a fixed rate of
                                       6
return insulated from market fluctuations during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements are considered under the 1940 Act to be loans
collateralized by the underlying securities. All repurchase agreements entered
into by the Portfolio will be fully collateralized at all times during the
period of the agreement in that the value of the underlying security will be at
least equal to the amount of the loan, including the accrued interest thereon,
and the Portfolio or its custodian or sub-custodian will have possession of the
collateral, which the Board of Trustees believes will give it a valid, perfected
security interest in the collateral. Whether a repurchase agreement is the
purchase and sale of a security or a collateralized loan has not been
conclusively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase price.
Therefore, the Portfolio may suffer time delays and incur costs in connection
with the disposition of the collateral. The Board of Trustees believes that the
collateral underlying repurchase agreements may be more susceptible to claims of
the seller's creditors than would be the case with securities owned by the
Portfolio. Repurchase agreements maturing in more than seven days are treated as
illiquid for purposes of the Portfolio's restrictions on purchases of illiquid
securities. Repurchase agreements are also subject to the risks described below
with respect to stand-by commitments.     

      FORWARD COMMITMENTS - In order to invest the Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased.  When a commitment to purchase a security
on a forward commitment basis is made, procedures are established consistent
with the General Statement of Policy of the Securities and Exchange Commission
                                       7
concerning such purchases.  Since that policy currently recommends that an
amount of the Portfolio's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, a separate account of
the Portfolio consisting of cash, cash equivalents or high quality debt
securities equal to the amount of the Portfolio's commitments securities will be
established at the Portfolio's custodian bank.  For the purpose of determining
the adequacy of the securities in the account, the deposited securities will be
valued at market value.  If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed in
the account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.     

        Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases.  Securities purchased on a
forward commitment basis and the securities held in the Portfolio's portfolio
are subject to changes in value based upon the public's perception of the issuer
and changes, real or anticipated, in the level of interest rates.  Purchasing
securities on a forward commitment basis can involve the risk that the yields
available in the market when the delivery takes place may actually be higher or
lower than those obtained in the transaction itself.  On the settlement date of
the forward commitment transaction, the Portfolio will meet its obligations from
then available cash flow, sale of securities held in the separate account, sale
of other securities or, although it would not normally expect to do so, from
sale of the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations).  The sale of
securities to meet such obligations may result in the realization of capital
gains or losses.     

        To the extent the Portfolio engages in forward commitment transactions,
it will do so for the purpose of acquiring securities consistent with its
                                       8
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.     

        REVERSE REPURCHASE AGREEMENTS - Reverse Repurchase Agreements involve
the sale of securities held by the Portfolio with an agreement to repurchase the
securities at an agreed upon price and date.  The repurchase price is generally
equal to the original sales price plus interest.  Reverse repurchase agreements
are usually for seven days or less and cannot be repaid prior to their
expiration dates.  Reverse repurchase agreements involve the risk that the
market value of the portfolio securities transferred may decline below the price
at which the Portfolio is obliged to purchase the securities.     

        STRIPPED OBLIGATIONS - The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program.  Under the STRIPS
program, the principal and interest components are separately issued by the
United States Treasury at the request of depository financial institutions,
which then trade the component parts separately.  The interest component of
STRIPS may be more volatile than that of United States Treasury bills with
comparable maturities.     

        ILLIQUID SECURITIES - For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in accordance
with procedures established by the Board of Trustees, certain investments in
restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper").  Rule
                                       9
144A provides an exemption from the registration requirements of the Securities
Act for the resale of certain restricted securities to qualified institutional
buyers.  Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution.  Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.     

        One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities.  Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security.  The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A securities
and Section 4(2) paper.     



        STAND-BY COMMITMENTS - In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period prior
to its maturity date, and a stand-by commitment entitles the Portfolio to
same-day settlement and to receive an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
                                       10
exercise.  Stand-by commitments are subject to certain risks, which include the
inability of the issuer of the commitment to pay for the securities at the time
the commitment is exercised, the fact that the commitment is not marketable by
the Portfolio, and that the maturity of the underlying security will generally
be different from that of the commitment.     

        SECURITIES LOANS - To the extent specified in the Prospectus, the
Portfolio is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income.  Such loans of
portfolio securities may not exceed 30% of the value of the Portfolio's total
assets.  In connection with such loans, the Portfolio will receive collateral
consisting of cash, cash equivalents, U.S. Government securities or irrevocable
letters of credit issued by financial institutions.  Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value plus accrued interest of the securities loaned.  The Portfolio can
increase its income through the investment of such collateral.  The Portfolio
continues to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, to receive interest on
the amount of the loan.  However, the receipt of any dividend-equivalent
payments by the Portfolio on a loaned security from the borrower will not
qualify for the dividends-received deduction.  Such loans will be terminable at
any time upon specified notice.  The Portfolio might experience risk of loss if
the institutions with which it has engaged in portfolio loan transactions breach
their agreements with the Portfolio.  The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower experience financial
difficulty.  Loans will be made only to firms deemed by the advisers to be of
good standing and will not be made unless, in the judgment of the advisers, the
consideration to be earned from such loans justifies the risk.     

                                       11
       ADDITIONAL POLICIES REGARDING DERIVATIVES AND RELATED TRANSACTIONS

INTRODUCTION

     As explained more fully below, the Portfolio may employ derivative and
related instruments as tools in the management of portfolio assets. Put briefly,
a `derivative'' instrument may be considered a security or other instrument
which derives its value from the value or performance of other instruments or
assets, interest or currency exchange rates, or indexes. For instance,
derivatives include futures, options, forward contracts, structured notes and
various over-the-counter instruments.

        Like other investment tools or techniques, the impact of using
derivatives strategies or related instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for the Portfolio.     

     The Portfolio may invest its assets in derivative and related instruments
subject only to the Portfolio's investment objective and policies and the
requirement that the Portfolio maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with

                                       12
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Portfolio.

        The value of some derivative or related instruments in which the
Portfolio may invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of the Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers
inaccurately forecast such factors and have taken positions in derivative or
similar instruments contrary to prevailing market trends, the Portfolio could be
exposed to the risk of a loss. The Portfolio might not employ any or all of the
strategies described herein, and no assurance can be given that any strategy
used will succeed.     

     Set forth below is an explanation of the various derivatives strategies and
related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Prospectus as well as provide useful information to prospective investors.

RISK FACTORS

     As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the use
of derivatives and related instruments:

       There can be no guarantee that there will be a correlation between price
       movements in a hedging vehicle and in the portfolio assets being hedged.
       As incorrect correlation could result in a loss on both the hedged
       assets in the Portfolio and the hedging vehicle so that the portfolio

                                       13
       return might have been greater had hedging not been attempted. This risk
       is particularly acute in the case of ``cross-hedges'' between currencies.

          The advisers may incorrectly forecast interest rates, market values
       or other economic factors in utilizing a derivatives strategy. In such a
       case, the Portfolio may have been in a better position had it not
       entered into such strategy.     

       Hedging strategies, while reducing risk of loss, can also reduce the
       opportunity for gain. In other words, hedging usually limits both
       potential losses as well as potential gains.

       Strategies not involving hedging may increase the risk to the Portfolio.
       Certain strategies, such as yield enhancement, can have speculative
       characteristics and may result in more risk to the Portfolio than
       hedging strategies using the same instruments.

       There can be no assurance that a liquid market will exist at a time when
       the Portfolio seeks to close out an option, futures contract or other
       derivative or related position. Many exchanges and boards of trade limit
       the amount of fluctuation permitted in option or futures contract prices
       during a single day; once the daily limit has been reached on particular
       contract, no trades may be made that day at a price beyond that limit.
       In addition, certain instruments are relatively new and without a
       significant trading history. As a result, there is no assurance that an
       active secondary market will develop or continue to exist. Finally,
       over-the-counter instruments typically do not have a liquid market. Lack
       of a liquid market for any reason may prevent the Portfolio from
       liquidating an unfavorable position.


                                       14
       Activities of large traders in the futures and securities markets
       involving arbitrage, ``program trading,'' and other investment strategies
       may cause price distortions in these markets.

          In certain instances, particularly those involving over-the-counter
       transactions or forward contracts, there is a greater potential that a
       counterparty or broker may default or be unable to perform on its
       commitments. In the event of such a default, the Portfolio may
       experience a loss.     

       In transactions involving currencies, the value of the currency
       underlying an instrument may fluctuate due to many factors, including
       economic conditions, interest rates, governmental policies and market
       forces.



SPECIFIC USES AND STRATEGIES

        Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.     

     OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on:

          securities;
       securities indexes; and
       debt instruments.     

     Although in most cases these options will be exchange-traded, the Portfolio
may also purchase, sell or exercise over-the-counter options. Over-the-counter
                                       15
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such, over-
the-counter options generally have much less market liquidity and carry the risk
of default or nonperformance by the other party.

        One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. The Portfolio may
also use combinations of options to minimize costs, gain exposure to markets or
take advantage of price disparities or market movements. For example, the
Portfolio may sell put or call options it has previously purchased or purchase
put or call options it has previously sold. These transactions may result in a
net gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to earn the
related premium from such transactions. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of a related option.
The Portfolio will not write uncovered options.     

     In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, the
Portfolio writing a covered call (i.e., where the underlying securities are held
by the Portfolio) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect

                                       16
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price.

     If a put or call option purchased by the Portfolio is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, the Portfolio will
lose its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when the Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Portfolio may be unable to close out a position.

     FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase or sell:

          interest-rate futures contracts;
       futures contracts on specified instruments or indices; and
       options on these futures contracts (``futures options'').     

        The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).     

        Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
the Portfolio may sell a futures contract -- or buy a futures option -- to
                                       17
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where the Portfolio intends to
acquire an instrument or enter into a position. For example, the Portfolio may
purchase a futures contract -- or buy a futures option -- to gain immediate
exposure in a market or otherwise offset increases in the purchase price of
securities or currencies to be acquired in the future. Futures options may also
be written to earn the related premiums.     

     When writing or purchasing options, the Portfolio may simultaneously enter
into other transactions involving futures contracts or futures options in order
to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolio may engage in cross-hedging by purchasing or
selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.

        Investments in futures contracts and options thereon involve risks
related to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options or futures contracts
which are standardized and traded on a U.S. or foreign exchange or board of
trade, or similar entity, or quoted on an automated quotation system.     

     FORWARD CONTRACTS. The Portfolio may use foreign currency and interest-rate
forward contracts for various purposes as described below.

        Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. The Portfolio that
                                       18
may invest in securities denominated in foreign currencies may, in addition to
buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, the Portfolio ``ocks in''
the exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, the Portfolio reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Portfolio is similar to selling securities
denominated in one currency and purchasing securities denominated in another.
Transactions that use two foreign currencies are sometimes referred to as
``ross-hedges.''     

     The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. The
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.

     The Portfolio may also use forward contracts to hedge against changes in
interest-rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.


                                       19
        INTEREST RATE AND CURRENCY TRANSACTIONS.  The Portfolio may employ
currency and interest rate management techniques, including transactions in
options (including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps.  The aggregate amount of the Portfolio's net currency
exposure will not exceed the total net asset value of its portfolio.  However,
to the extent that the Portfolio is fully invested while also maintaining
currency positions, it may be exposed to greater combined risk.     

        The Portfolio will only enter into interest rate and currency swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments.  Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency swaps
is limited to the net amount of interest or currency payments that the Portfolio
is contractually obligated to make.  If the other party to an interest rate or
currency swap defaults, the Portfolio's risk of loss consists of the net amount
of interest or currency payments that the Portfolio is contractually entitled to
receive.  Since interest rate and currency swaps are individually negotiated,
the Portfolio expects to achieve an acceptable degree of correlation between
their portfolio investments and their interest rate or currency swap positions.
    

        The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.     

        The Portfolio may purchase or sell without limitation as to a percentage
of its assets forward foreign currency exchange contracts when the advisers
                                       20
anticipate that the foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities and are not held by the Portfolio.  In addition, the Portfolio may
enter into forward foreign currency exchange contracts in order to protect
against adverse changes in future foreign currency exchange rates.  The
Portfolio may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
different currency if its advisers believe that there is a pattern of
correlation between the two currencies.  Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
Dollar and foreign currencies.  Unanticipated changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts.  The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject the Portfolio
to certain risks.     

        The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise.  In
addition, the Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices, and this will limit the Portfolio's
ability to use such contract to hedge or cross-hedge its assets.  Also, with
regard to the Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue.  Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Portfolio's cross-hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio's assets that are the subject
of such cross-hedges are denominated.     
                                       21

        The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law.  The Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio.
Interest rate swaps involve the exchange by the Portfolio with another party of
their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments.  Currency swaps involve the
exchange of their respective rights to make or receive payments in specified
currencies.     

     STRUCTURED PRODUCTS.    The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain other investments.  This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities (``tructured products'')
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments.  The Portfolio may invest in structured products which represent
derived investment positions based on relationships among different markets of
asset classes.     

        The Portfolio may also invest in other types of structured products,
including among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
                                       22
determined through a dutch auction or a remarketing agent or by reference to
another security) (the `reference rate'').  As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index.  Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate.  A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities. When
the Portfolio invests in notes linked to the price of an underlying instrument,
the price of the underlying security is determined by a multiple (based on a
formula) of the price of such underlying security.  A structured product may be
considered to be leveraged to the extent its interest rate varies by a magnitude
that exceeds the magnitude of the change in the index rate of interest.  Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security.  Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument.  Because certain structured products of the type
in which the Portfolio may invest may involve no credit enhancement, the credit
risk of those structured products generally would be equivalent to that of the
underlying instruments.  The Portfolio may invest in a class of structured
products that is either subordinated or unsubordinated to the right of payment
of another class.  Subordinated structured products typically have higher yields
and present greater risks than unsubordinated structured products.  Although the
Portfolio's purchase of subordinated structured products would have similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the Portfolio's
fundamental investment limitation related to borrowing and leverage.     
                                       23

        Certain issuers of structured products may be deemed to be, "investment
companies" as defined in the 1940 Act.  As a result, the Portfolio's investments
in these structured products may be limited by the restrictions contained in the
1940 Act.  Structured products are typically sold in private placement
transactions and there currently is no action trading market for structured
products.  As a result, certain structured  products in which the Portfolio
invests may be deemed illiquid and subject to its limitation on illiquid
investments.     

     Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.

      ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS    

        The Portfolio is not a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the CFTC and futures contracts and futures
options will be purchased, sold or entered into only for bona fide hedging
purposes, provided that the Portfolio may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open contracts and options would
not exceed 5% of the liquidation value of the Portfolio's portfolio, provided,
further, that, in the case of an option that is in-the-money, the in-the-money
amount may be excluded in calculating the 5% limitation.     

    When the Portfolio purchases a futures contract, an amount of cash or cash
equivalents or high quality debt securities will be deposited in a segregated
                                       24
account with the Portfolio's custodian so that the amount so segregated, plus
the initial deposit and variation margin held in the account of its broker, will
at all times equal the value of the futures contract, thereby insuring that the
use of such futures is unleveraged.

    The Portfolio's ability to engage in the transactions described herein may
be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.

                            INVESTMENT RESTRICTIONS

       The Portfolio has adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares" of the
Portfolio which, as used in this Statement of Additional Information, means the
vote of the lesser of (i) 67% or more of the total beneficial interests of a
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding total beneficial interests of a Portfolio are present or represented
by proxy, or (ii) more than 50% of the outstanding total beneficial interests of
a Portfolio.     

    The Portfolio may not:

                 (1)  borrow money, except that the Portfolio may
         borrow money for temporary or emergency purposes, or by
         engaging in reverse repurchase transactions, in an amount not
         exceeding 33-1/3% of the value of its total assets at the time
         when the loan is made and may pledge, mortgage or hypothecate
         no more than 1/3 of its net assets to secure such borrowings.
         Any borrowing representing more than 5% of the Portfolio's

                                       25
         total assets must be repaid before the Portfolio may make
         additional investments;     

                 (2)  make loans, except that the Portfolio may:  (i)
         purchase and hold debt instruments (including without
         limitation, bonds, notes, debentures or other obligations and
         certificates of deposit, bankers' acceptances and fixed time
         deposits) in accordance with its investment objectives and
         policies; (ii) enter into repurchase agreements with respect
         to portfolio securities; and (iii) lend portfolio securities
         with a value not in excess of one-third of the value of its
         total assets;     

                 (3)  purchase the securities of any issuer (other than
         securities issued or guaranteed by the U.S. government or any
         of its agencies or instrumentalities, or repurchase agreements
         secured thereby) if, as a result, more than 25% of the
         Portfolio's total assets would be invested in the securities
         of companies whose principal business activities are in the
         same industry. Notwithstanding the foregoing, with respect to
         the Portfolio's permissible futures and options transactions
         in U.S. government securities, positions in such options and
         futures shall not be subject to this restriction;     

                 (4)  purchase or sell physical commodities unless
         acquired as a result of ownership of securities or other
         instruments but this shall not prevent the Portfolio from (i)
         purchasing or selling options and futures contracts or from
         investing in securities or other instruments backed by
         physical commodities or (ii) engaging in forward purchase or
         sales of foreign currencies or securities;     
                                       26



                 (5)  purchase or sell real estate unless acquired as a
         result of ownership of securities or other instruments (but
         this shall not prevent the Portfolio from investing in
         securities or other instruments backed by real estate or
         securities of companies engaged in the real estate business).
         Investments by the Portfolio in securities backed by mortgages
         on real estate or in marketable securities of companies
         engaged in such activities are not hereby precluded;     

                 (6)  issue any senior security (as defined in the 1940
         Act), except that (a) the Portfolio may engage in transactions
         that may result in the issuance of senior securities to the
         extent permitted under applicable regulations and
         interpretation of the 1940 Act or an exemptive order; (b) the
         Portfolio may acquire other securities, the acquisition of
         which may result in the issuance of a senior security, to the
         extent permitted under applicable regulations or
         interpretations of the 1940 Act; and (c) subject to the
         restrictions set forth above, the Portfolio may borrow money
         as authorized by the 1940 Act. For purposes of this
         restriction, collateral arrangements with respect to
         permissible options and futures transactions, including
         deposits of initial and variation margin, are not considered
         to be the issuance of a senior security; or     

                 (7)  underwrite securities backed by other persons
         except insofar as the Portfolio may technically be deemed to

                                       27
         be an underwriter under the Securities Act of 1933 in selling
         a portfolio security.     

       For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships.  For purposes of investment restriction (3)
above, industrial development bonds, where the payment of principal and interest
is the ultimate responsibility of companies within the same industry, are
grouped together as an "industry."  Supranational organizations are collectively
considered to be members of a single ``ndustry'' for purposes of restriction
(3) above.     

       In addition, the Portfolio is subject to the following non-fundamental
restrictions which may be changed without shareholder approval:     

       (1)  The Portfolio may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of an issuer.     

       (2)  The Portfolio may not make short sales of securities, other than
short sales `against the box,'' or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transaction, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Portfolio.     

       (3)  The Portfolio may not purchase or sell interests in oil, gas or
mineral leases.     

       (4)  The Portfolio may not invest more than 15% of its net assets in
illiquid securities.     


                                       28
       (5)  The Portfolio may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities; (ii) the writing,
purchasing or selling of puts, calls or combinations thereof with respect to
portfolio securities or (iii) with respect to the Portfolio's permissible
futures and options transactions, the writing, purchasing, ownership, holding or
selling of futures and options positions or of puts, calls or combinations
thereof with respect to futures.     

       (6)  The Portfolio may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies.     
        It is the Portfolio's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Portfolio has been
advised that the staff of the Securities and Exchange Commission's Division of
Investment Management does not consider these to be United States Government
securities, as defined under the Investment Company Act of 1940, as amended.
    

        For purposes of the Portfolio's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
    

       In order to permit the sale of its beneficial interests in certain
states, the Portfolio may make commitments more restrictive than the investment
policies and limitations described above and in the Prospectus.  Should the
Portfolio determine that any such commitment is no longer in its best interests,
it will revoke the commitment by terminating sales of its beneficial interests
                                       29
in the state involved.  In order to comply with certain federal and state
statutes and regulatory policies, as a matter of operating policy, the Portfolio
will not:  (i)  invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation,
(ii) invest in warrants valued at the lower of cost or market, in excess of 5%
of the value of its net assets, and no more than 2% of such value may be
warrants which are not listed on the New York or American Stock Exchanges, or
(iii)  purchase or retain in its portfolio any securities issued by an issuer
any of whose officers, directors, trustees or security holders is an officer or
trustee of the Trust or Portfolio, or is an officer or director of the Adviser,
if after the purchase of the securities of such issuer by the Portfolio one or
more of such persons owns beneficially more than 1/2 of 1% of the shares or
securities, or both, all taken at market value, of such issuer, and such persons
owning more than 1/2 of 1% of such shares or securities together own
beneficially more than 5% of such shares or securities, or both, all taken at
market value.     

       If a percentage or rating restriction on investment or use of assets set
forth herein or in the Prospectus is adhered to at the time a transaction is
effected later changes in percentage resulting from any cause other than actions
by the Portfolio will not be considered a violation.  If the value of the
Portfolio's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.     


                             PORTFOLIO TRANSACTIONS



                                       30
    Specific decisions to purchase or sell securities for the Portfolio are made
by a portfolio manager who is an employee of the Portfolio Adviser and who is
appointed and supervised by senior officers of the Portfolio Adviser. Changes in
the Portfolio's investments are reviewed by the Board of Trustees. The
Portfolio's portfolio manager may serve other clients of the Portfolio Adviser
in a similar capacity.

    The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the Portfolio Adviser will weigh the added costs of
short-term investment against anticipated gains.

       The Portfolio Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, high portfolio turnover may result
in high transaction costs to the Portfolio. For the fiscal year ended October
31, 1995, the portfolio turnover rate for the Portfolio was 86%.    

    The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Portfolio Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the level of
their brokerage commissions. Debt securities are traded principally in the over-
the-counter market through dealers acting on their own account and not as
brokers. In the case of securities traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Portfolio Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
                                       31
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Portfolio Adviser on the tender of the Portfolio's portfolio securities in so-
called tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for the Portfolios by the Portfolio Adviser. At present, no other
recapture arrangements are in effect.

    Under Section 28(e) of the Securities Exchange Act of 1934, the Portfolio
Adviser may cause the Portfolio to pay a broker-dealer which provides brokerage
and research services to the Adviser an amount of commission for effecting a
securities transaction for the Portfolio in excess of the amount other broker-
dealers would have charged for the transaction if the Portfolio Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Portfolio Adviser's overall responsibilities to the Portfolio or to its clients.
Not all of such services are useful or of value in advising the Portfolio.

    The term "brokerage and research services" includes advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.

    Although commissions paid on every transaction will, in the judgment of the
Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
                                       32
behalf of the Portfolio and the Portfolio Adviser's other clients as part of
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.

    Broker-dealers may be willing to furnish statistical, research and other
factual information or services ("Research") to the Portfolio Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided Research to the Portfolio
Adviser.

    The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Portfolio Adviser as a consideration in the selection of
brokers to execute portfolio transactions. However, the Portfolio Adviser would
be unable to quantify the amount of commissions which are paid as a result of
such Research because a substantial number of transactions are effected through
brokers which provide Research but which are selected principally because of
their execution capabilities.

    The advisory fees that the FUND pays to the Portfolio Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Portfolio Adviser in carrying out its obligations to the
                                       33
Portfolio. While such services are not expected to reduce the expenses of the
Portfolio Adviser, the Portfolio Adviser would, through use of the services,
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.



    In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When the Portfolio or the
Portfolio Adviser's other clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will generally
produce better executions for the Portfolio.


                         COMPUTATION OF NET ASSET VALUE


                                       34
    The net asset value of the FUND is determined at 4:15 P.M. New York Time, on
each day that the New York Stock Exchange is open for business and on such other
days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.

    The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees of the
Portfolio. Portfolio securities which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:15 P.M. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
                                       35
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the Portfolio.

    Money market instruments with less than sixty days remaining to maturity
when acquired by the Portfolio will be valued on an amortized cost basis by the
Portfolio, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the Portfolio acquires a
money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Trustees of the Portfolio determine during such 60-day period that
this amortized cost value does not represent fair market value.

    All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.

    Orders to purchase or redeem shares of the FUND received by dealers prior to
4:00 P.M. (Eastern Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options exchanges
(normally 4:15 P.M. New York Time), provided the order is received by the FUND's
Transfer Agent prior to 4:00 P.M. on that day. It is the responsibility of the
dealer to insure that all orders are transmitted timely to the FUND. Orders
received by dealers after 4:00 P.M. will be confirmed at the next computed
offering or redemption price.


                            PERFORMANCE INFORMATION
                                       36


    For purposes of quoting and comparing the performance of the FUND to that of
other mutual funds and to stock or other relevant indices in advertisements or
in reports to Shareholders, performance will be stated both in terms of total
return and in terms of yield. The total return basis combines principal and
dividend income changes for the periods shown. Principal changes are based on
the difference between the beginning and closing net asset values for the period
and assumes reinvestment of dividends and distributions paid by the FUND.
Dividends and distributions are comprised of net investment income and net
realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:

                                P(1 + T)n = ERV

     Where P = a hypothetical initial payment of $1,000

         T =  average annual total return
         n =  number of years (1, 5 or 10)

      ERV =   ending redeemable value of a hypothetical $1,000 payment made at
              the beginning of the 1, 5 or 10 year periods or at the end of the
              1, 5 or 10 year periods (or fractional portion thereof)

    Under the foregoing formula the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
                                       37
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
Prospectus on the reinvestment dates during the period. Total return, or "T" in
the formula above, is computed by finding the average annual compounded rates of
return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

    The FUND's cumulative total return for the fiscal year ended October 31,
              1995 was 9.43% and the
Portfolio's cumulative total return from inception through October 31, 1995 was
              348.38%.

    The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee from the initial value invested. THE FUND WILL, HOWEVER,
DISCLOSE THE PRO RATA SHARE OF THE ACCOUNT OPENING FEE, WHICH WAS IN EFFECT
UNTIL DECEMBER 1994, AND WILL DISCLOSE THAT THE PERFORMANCE DATA DOES NOT
REFLECT SUCH NON-RECURRING CHARGE AND THAT INCLUSION OF SUCH CHARGE WOULD REDUCE
THE PERFORMANCE QUOTED. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.

                                       38

                 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION


    The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.

    The FUND has elected to be governed by Rule 18f-1 of the 1940 Act, under
which the FUND is obligated to redeem the shares of any shareholder solely in
cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.


                                  TAX MATTERS


    The following is only a summary of certain additional tax considerations
generally affecting the FUND and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
                                       39
treatment of the FUND or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.

Qualification as a Regulated Investment Company

    The FUND has elected to be taxed as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a RIC, the FUND is not subject to federal income tax on the portion
of its net investment income (i.e., taxable interest, dividends and other
taxable ordinary income, net of expenses) and capital gain net income (i.e., the
excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net short-
term capital gain over net long-term capital loss) for the taxable year (the
"Distribution Requirement"), and satisfies certain other requirements of the
Code that are described below. Distributions by the FUND made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement. Because the
FUND invests all of its assets in the Portfolio, which is classified as a
partnership for federal income tax purposes, the FUND will be deemed to own a
proportionate share of the assets and income of the Portfolio for purposes of
determining whether the FUND satisfies the requirements (described more fully
below) necessary to qualify as a regulated investment company.

    In addition to satisfying the Distribution Requirement, a RIC must:  (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
currency gains are directly related to the company's principal business of
investing in stock or securities) and other income (including gains from
                                       40
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "Income Requirement");
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). Because of the Short-
Short Gain Test, the FUND may have to limit the sale of appreciated securities
that it held for less than three months. However, foreign currency gains that
are directly related to the company's investment in stock or securities are not
treated as short-short gains. Similarly, the Short-Short Gain Test will not
prevent the FUND from disposing of investments at a loss, since losses are
disregarded for this purpose. Interest (including original issue discount)
received by the FUND at maturity or upon the disposition of a security held for
less than three months is not treated as gross income derived from the sale or
other disposition of a security within the meaning of the Short-Short Gain Test.
However, income attributable to realized market appreciation will be so treated
for this purpose.

    In general, gain or loss recognized by the Portfolio on the disposition of
an asset (and allocated to the FUND) will be a capital gain or loss. However,
gain recognized on the disposition of a debt obligation purchased at a market
discount will be treated as ordinary income to the extent of the portion of the
discount that accrued while the Portfolio held the obligation. In addition,
under the rules of Code Section 988, a portion of gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto, and (with certain exceptions) gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, will generally
be treated as ordinary income or loss.

                                       41
    In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a "short sale" (which may include the acquisition of
a put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Portfolio as part of a "straddle" (as defined) or
(3) the asset is stock and the Portfolio grants an in-the-money qualified
covered call option with respect thereto. In addition, the FUND may be required
to defer the recognition of a loss on a disposition of an asset held as part of
a straddle to the extent of any unrecognized gain on the offsetting position.

    Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option written by
the Portfolio will be treated as a short-term capital gain or loss. For purposes
of the Short-Short Gain Test, the holding period of such an option will commence
on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, the Portfolio may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.

    Regulated futures contracts, certain foreign currency contracts, and options
on stock indexes and futures contracts are subject to special tax treatment as
"Section 1256 contracts." Such contracts are treated as if they are sold for
their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated as of such date. Gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any gain or loss recognized upon the actual
termination of such contracts during the year. The combined capital gain or loss
for the year with respect to Section 1256 contracts is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. (The
                                       42
Portfolio may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a "mixed straddle" with other investments that are
not Section 1256 contracts.) The IRS has held in private rulings that
constructive gains arising from deemed year-end dispositions of Section 1256
contracts will not be taken into account for purposes of the Short-Short Gain
Test.

    Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it were incurred in the succeeding year.

    In addition to the requirements described above, the FUND must satisfy an
asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the RIC has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which it does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the RIC controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security and not
the issuer of the option.


                                       43
    If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the FUND's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.

Excise Tax on Regulated Investment Companies

    A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to 98% of its ordinary taxable income for
the calendar year and 98% of its capital gain net income for the one-year period
ended on October 31 of the year. The balance of such income must be distributed
during the next calendar year.

    The FUND intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. The FUND may in certain
circumstances have to liquidate portfolio investments in order to effect such
distributions.

FUND Distributions

    The FUND intends to distribute substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.


                                       44
    The FUND may either retain or distribute to shareholders its net capital
gain for each taxable year. The FUND currently intends to distribute such gains
annually. Net capital gain distributed and designated as a capital gain dividend
is taxable to shareholders as long-term capital gain, regardless of the
shareholder's holding period in his shares and the time when such gain was
recognized by the Portfolio.

    If the FUND elects to retain its net capital gain, it will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if each
received a distribution of his pro rata share of the gain, with the result that
each would be required to report his pro rata share of such gain on his tax
return as a long-term capital gain, would receive a refundable tax credit for
his pro rata share of the tax paid by the FUND on the gain, and would increase
the tax basis for his shares by an amount equal to the deemed distribution less
the credit.

    Ordinary income dividends distributed by the FUND will qualify for the 70%
dividends-received deduction generally available to corporations (other than
corporations, such as S corporations, which are not eligible for the deduction)
to the extent of the portion of the distribution attributed to "qualifying
dividends" received by the Portfolio during the taxable year from domestic
corporations. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it was received with respect to stock that the
Portfolio held for less than 46 days (91 days in the case of certain preferred
stock), subject to the limitations of Code Sections 246(c)(3) and (4) and 246A.
Moreover, the dividends-received deduction for a corporate shareholder will also
be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its FUND shares or the FUND fails to satisfy them
with respect to its interest in the Portfolio.
                                       45

       Investment income that may be received by the Portfolio from foreign
sources may be subject to foreign taxes withheld at the source. The United
States has entered into tax treaties with a number of foreign countries, which
entitle the Portfolio to reduced rates of, or exemptions from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the future mix of the Portfolio's investments in various countries
is not known.     

    Distributions by the FUND that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholders' tax basis in their shares; any excess
will be treated as gain from a sale of the shares, as discussed more fully
below.

    Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the FUND (or
of another fund). In addition, if a shareholder's cost for his shares already
reflects undistributed (realized or unrealized) income or gain, a subsequent
distribution of such amounts will be taxable to the shareholder in the manner
described above, although economically it constitutes a return of capital.

    Ordinarily, shareholders are required to take distributions into account in
the year in which they are made. However, dividends declared by the FUND in
October, November or December of any calendar year and payable to shareholders
of record on a specified date in such a month will be deemed to have been
received by the shareholders (and made by the FUND) on December 31 of such year
if such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.

                                       46
    The FUND will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of dividends and the proceeds of redemption paid to any shareholder
(1) who has provided either an incorrect tax identification number or no number
at all to the FUND, (2) who is subject to backup withholding pursuant to a
notice from the IRS for failure to report interest or dividend income properly,
or (3) who has not otherwise certified to the FUND that it is not subject to
backup withholding.

Sale or Redemption of Shares

    A shareholder will recognize gain or loss on the sale or redemption of his
shares in an amount equal to the difference between the amount realized on the
shares and his adjusted tax basis in them. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
FUND within 30 days before or after the disposition. In general, gain or loss
arising from a sale or redemption of FUND shares will constitute capital gain or
loss, and will be long-term capital gain or loss if the shares were held longer
than one year. However, a capital loss arising from a disposition of shares held
for six months or less will be treated as a long-term capital loss to the extent
of any amount of capital gain dividends received on the shares. For this
purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(alluded to above in connection with the dividends-received deduction for
corporations) will generally apply. Capital losses in any year are deductible
only to the extent of capital gains plus, in the case of noncorporate taxpayers,
$3,000 of ordinary income.



Foreign Shareholders


                                       47
    Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether the income received from
the FUND is "effectively connected" with a U.S. trade or business carried on by
the shareholder.

    If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or a lower treaty rate, if one applies) of
the gross amount of the dividend. Such a shareholder would generally be exempt
from U.S. federal income tax on gains realized on a sale of FUND shares and
capital gain dividends.

    If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and gain realized upon the sale of FUND shares will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.

    In the case of foreign noncorporate shareholders, the FUND may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless they furnish the FUND with proper notification of their exempt status.

    The tax consequences to foreign shareholders entitled to claim the benefits
of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the FUND, including the
applicability of any foreign taxes.

Effect of Future Legislation; Local Tax Considerations
                                       48

    The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly alter the conclusions expressed
herein, perhaps with retroactive effect.

    Rules of state and local taxation of dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of their investing in the FUND in light of their particular
circumstances.


                           THE MANAGEMENT OF THE FUND


       Officers and Trustees are listed with their birthdates, addresses,
principal occupations, and present positions, including any affiliation with
Virtus Capital Management, Inc., Signet Trust Company, Federated Investors,
Federated Securities Corp., Federated Shareholder Services Company, and
Federated Administrative Services or the Funds (as defined below).     

JOHN F. DONAHUE(1)(2)
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  JULY 28, 1924          CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
                                   and Trustee, Federated Investors, Federated
                                   Advisers, Federated Management, and Federated
                                   Research; Chairman and Director, Federated
                                   Research Corp. and Federated Global Research
                                       49
                                   Corp.; Chairman, Passport Research, Ltd.;
                                   Chief Executive Officer and Director,
                                   Trustee, or Managing General Partner of the
                                   Funds. Mr. Donahue is the father of J.
                                   Christopher Donahue, Executive Vice President
                                   of the Fund.

THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA
BIRTHDATE:  FEBRUARY 3, 1934       TRUSTEE OF THE FUND; Director, Oberg
                                   Manufacturing Co.; Chairman of the Board,
                                   Children's Hospital of Pittsburgh; Director,
                                   Trustee or Managing General Partner of the
                                   Funds; formerly, Senior Partner, Ernst &
                                   Young LLP.

JOHN T. CONROY, JR.(3)
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES, INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL
BIRTHDATE:  JUNE 23, 1937          TRUSTEE OF THE FUND; President, Investment
                                   Properties Corporation; Senior Vice-
                                   President, John R. Wood and Associates, Inc.,
                                   Realtors; President, Northgate Village
                                   Development Corporation; Partner or Trustee
                                   in private real estate ventures in Southwest
                                   Florida; Director, Trustee, or Managing

                                       50
                                   General Partner of the Funds; formerly,
                                   President, Naples Property Management, Inc.



WILLIAM J. COPELAND(3)
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA
BIRTHDATE:  JULY 4, 1918           TRUSTEE OF THE FUND; Director and Member of
                                   the Executive Committee, Michael Baker, Inc.;
                                   Director, Trustee, or Managing General
                                   Partner of the Funds; formerly, Vice Chairman
                                   and Director, PNC Bank, N.A., and PNC Bank
                                   Corp. and Director, Ryan Homes, Inc.

JAMES E. DOWD(3)
571 HAYWARD MILL ROAD
CONCORD, MA
BIRTHDATE:  MAY 18, 1922           TRUSTEE OF THE FUND; Attorney-at-law;
                                   Director, The Emerging Germany Fund, Inc.;
                                   Director, Trustee, or Managing General
                                   Partner of the Funds.

LAWRENCE D. ELLIS, M.D.(1)
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 11, 1932       TRUSTEE OF THE FUND; Professor of Medicine
                                   and Member, Board of Trustees, University of
                                   Pittsburgh; Medical Director, University of
                                   Pittsburgh Medical Center-Downtown, Member,
                                   Board of Directors, University of Pittsburgh
                                       51
                                   Medical Center; formerly, Hematologist,
                                   Oncologist, and Internist, Presbyterian and
                                   Montefiore Hospitals; Director, Trustee, or
                                   Managing General Partner of the Funds.

   EDWARD L. FLAHERTY, JR.(3)
MILLER, AMENT, HENNY & KOCHUBA
205 ROSS STREET
PITTSBURGH, PA
BIRTHDATE:  JUNE 18, 1924             TRUSTEE OF THE FUND; Attorney-at-law;
                                   Shareholder, Miller , Ament, Henny & Kochuba;
                                   Director, Eat'N Park Restaurants, Inc., and
                                   Statewide Settlement Agency, Inc.; Director,
                                   Trustee, or Managing General Partner of the
                                   Funds; formerly, Counsel, Horizon Financial,
                                   F.A., Western Region.     



EDWARD C. GONZALES(1)
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 22, 1930       PRESIDENT, TRUSTEE AND TREASURER OF THE FUND;
                                   Vice Chairman, Treasurer, and Trustee,
                                   Federated Investors; Vice President,
                                   Federated Advisers, Federated Management,
                                   Federated Research, Federated Research Corp.,
                                   Federated Global Research Corp. and Passport
                                   Research, Ltd.; Executive Vice President and
                                   Director, Federated Securities Corp.;
                                   Trustee, Federated Shareholder Services
                                       52
                                   Company; Chairman, Treasurer, and Trustee,
                                   Federated Administrative Services; Trustee or
                                   Director of some of the Funds; President,
                                   Executive Vice President and Treasurer of
                                   some of the Funds.

PETER E. MADDEN
SEACLIFF
562 BELLEVUE AVENUE
NEWPORT, RI
BIRTHDATE:  MARCH 16, 1942         TRUSTEE OF THE FUND; Consultant; State
                                   Representative, Commonwealth of
                                   Massachusetts; Director, Trustee, or Managing
                                   General Partner of the Funds; formerly,
                                   President, State Street Bank and Trust
                                   Company and State Street Boston Corporation.

   GREGOR F. MEYER
MILLER, AMENT, HENNY & KOCHUBA
205 ROSS STREET
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 6, 1926           TRUSTEE OF THE FUND; Attorney-at-law;
                                   Shareholder, Miller, Ament, Henny & Kochuba;
                                   Chairman, Meritcare, Inc.; Director, Eat'N
                                   Park Restaurants, Inc.; Director, Trustee, or
                                   Managing General Partner of the Funds.     

JOHN E. MURRAY, JR., J.D., S.J.D.
PRESIDENT, DUQUESNE UNIVERSITY
PITTSBURGH, PA

                                       53
BIRTHDATE:  DECEMBER 20, 1932      TRUSTEE OF THE FUND; President, Law
                                   Professor, Duquesne University; Consulting
                                   Partner, Mollica, Murray and Hogue; Director,
                                   Trustee or Managing Partner of the Funds.



WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
PITTSBURGH, PA
BIRTHDATE:  SEPTEMBER 14, 1925     TRUSTEE OF THE FUND; Professor, International
                                   Politics and Management Consultant; Trustee,
                                   Carnegie Endowment for International Peace,
                                   RAND Corporation, Online Computer Library
                                   Center, Inc., and U.S. Space Foundation;
                                   Chairman, Czecho Management Center; Director,
                                   Trustee, or Managing General Partner of the
                                   Funds; President Emeritus, University of
                                   Pittsburgh; founding Chairman, National
                                   Advisory Council for Environmental Policy and
                                   Technology and Federal Emergency Management
                                   Advisory Board.

MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA
BIRTHDATE:  JUNE 21, 1935          TRUSTEE OF THE FUND; Public
                                   relations/marketing consultant; Conference
                                   Coordinator, Non-profit entities; Director,

                                       54
                                   Trustee, or Managing General Partner of the
                                   Funds.

J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  APRIL 11, 1949         EXECUTIVE VICE PRESIDENT OF THE FUND;
                                   President and Trustee, Federated Investors,
                                   Federated Advisers, Federated Management, and
                                   Federated Research; President and Director,
                                   Federated Research Corp. and Federated Global
                                   Research Corp.; President, Passport Research,
                                   Ltd.; Trustee, Federated Administrative
                                   Services, Federated Shareholder Services
                                   Company, and Federated Shareholder Services;
                                   Director, Federated Services Company;
                                   President or Executive Vice President of the
                                   Funds; Director, Trustee, or Managing General
                                   Partner of some of the Funds. Mr. Donahue is
                                   the son of John F. Donahue, Chairman and
                                   Trustee of the Fund.


JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 26, 1938          EXECUTIVE VICE PRESIDENT AND SECRETARY OF
                                   THE FUND; Executive Vice President,
                                   Secretary, and Trustee, Federated Investors;
                                   Trustee, Federated Advisers, Federated
                                   Management, and Federated Research; Director,
                                       55
                                   Federated Research Corp. and Federated Global
                                   Research Corp.; Trustee, Federated
                                   Shareholder Services Company; Director,
                                   Federated Services Company; President and
                                   Trustee, Federated Shareholder Services;
                                   Director, Federated Securities Corp.;
                                   Executive Vice President and Secretary of the
                                   Funds.     

RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  MAY 17, 1923              VICE PRESIDENT OF THE FUND; Executive Vice
                                   President and Trustee, Federated Investors;
                                   Chairman and Director, Federated Securities
                                   Corp.; President or Vice President of Some of
                                   the Funds; Director or Trustee of some of the
                                   Funds.     

JOSEPH S. MACHI
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  MAY 22, 1962           VICE PRESIDENT AND ASSISTANT TREASURER OF THE
                                   FUND; Vice President, Federated
                                   Administrative Services; Vice President and
                                   Assistant Treasurer of some of the Funds.

(1)  This Trustee is deemed to be an ``nterested person'' of the Trust as
     defined in the Investment Company Act of 1940.
                                       56
(2)  Member of the Executive Committee. The Executive Committee of the Board of
     Trustees handles the responsibilities of the Board of Trustees between
     meetings of the Board.
(3)  Member of the Audit Committee. The Audit Committee is responsible for
     reviewing compliance with all internal controls and all regulations related
     to the financial reporting process.

THE FUNDS

     As referred to in the list of Trustees and Officers, ``unds'' includes the
following investment companies:

     American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; Blanchard Group of Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U. S. Government
Securities Fund: 1-3 Years; Federated U. S. Government Securities Fund: 3-5
Years; Federated U.S. Government Securities Fund: 5-10 Years; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc;
High Yield Cash Trust; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
                                       57
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO
Monument Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Targeted Duration Trust; Tax-Free Instruments Trust; Trust
for Financial Institutions; Trust For Government Cash Reserves; Trust for Short-
Term U.S. Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.

FUND OWNERSHIP

        As of October 1, 1996, Officers and Trustees owned less than 1% of the
outstanding shares of the FUND.

     To the best knowledge of the FUND, as of October 1, 1996, one shareholder
owned 5% or more of the outstanding shares of the FUND:  Fairfield Tire Center
Inc., Fairfield, California, owned approximately 20,510 shares (10.70%).    

     The Trustees and officers of the Portfolio and their age and principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
"interested persons" (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 6 St. James Avenue,
Suite 900, Boston, Massachusetts 02116.
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
Fergus Reid, III       63        Chairman and Chief       1984
971 West Road                 Executive Officer,
                                       58
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
New Canaan, CT  06840         Lumelite Corporation,
                              since September 1985;
                              Trustee, Morgan
                              Stanley Portfolios.
                                  
Richard E. Ten Haken   61     Former District             1984
4 Barnfield Road              Superintendent of
Pittsford, NY  14534          Schools, Monroe No. 2
                              and Orleans Counties,
                              New York; Chairman of
                              the Finance and the
                              Audit and Accounting
                              Committees, Member of
                              the Executive
                              Committee; Chairman of
                              the Board and
                              President, New York
                              State Teachers'
                              Retirement System.
William J. Armstrong   54     Vice President and          1987
49 Aspen Way                  Treasurer, Ingersoll-
Upper Saddle River, NJ        Rand Company.
07458
John R.H. Blum         66     Attorney in Private         1984
322 Main Street               Practice; formerly a
Lakeville, CT  06039          Partner in the law
                              firm of Richards,
                              O'Neil & Allegaert;
                                       59
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              Commissioner of
                              Agriculture - State of
                              Connecticut, 1992-
                              1995.
*Joseph J. Harkins     64     Retired; Commercial         1990
257 Plantation Circle         Sector Executive and
South                         Executive Vice
Ponte Vedra Beach, FL         President of The Chase
32082                         Manhattan Bank, N.A.
                              from 1985 through
                              1989. He has been
                              employed by Chase in
                              numerous capacities
                              and offices since
                              1954. Director of
                              Blessings Corporation,
                              Jefferson Insurance
                              Company of New York,
                              Monticello Insurance
                              Company and National.
*H. Richard            60     Consultant, Republic        1992
Vartabedian                   Bank of New York;
P.O. Box 296                  formerly, Senior
Beach Road                    Investment Officer,
Hendrick's Head               Division Executive of
Southport, ME  04576          the Investment
                              Management Division of
                              The Chase Manhattan
                                       60
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              Bank, N.A., 1980
                              through 1991.
Stuart W. Cragin, Jr.  63     Retired; formerly           1992
108 Valley Road               President, Fairfield
Cos Cob, CT  06807            Testing Laboratory,
                              Inc. He has previously
                              served in a variety of
                              marketing,
                              manufacturing and
                              general management
                              positions with Union
                              Camp Corp., Trinity
                              Paper & Plastics
                              Corp., and Conover
                              Industries.
Irving L. Thode        64     Retired; Vice               1992
80 Perkins Road               President of Quotron
Greenwich, CT  06830          Systems. He has
                              previously served in a
                              number of executive
                              positions with Control      1989    
                              Data Corp., including
   W. Perry Neff              President of its Latin
Trustee                       American Operations,
RR 1 Box 102                  and General Manager of
Weston, VT  05181             its Data Services
                              business.                   1988    
                                 Independent
                                       61
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              Financial Consultant;
                              Director of North
                              America Life Assurance   
    
   1989    
   Roland R. Eppley,          Co., Petroleum &
Jr.                           Resources Corp. and
Trustee                       The Adams Express Co.;
105 Coventry Place            Director and Chairman
Palm Beach Gardens, FL        of The Hanover Funds,
33418                         Inc.; Formerly
                              Director, Chairman and
                              President of The
   W.D. MacCallan             Hanvover Investment
Trustee                       Funds Inc.     
624 East 45th Street
Savannah, GA                     Retired; formerly
31405                         President and Chief
                              Exective Officer,
                              Eastern States
                              Bankcard Assocation
                              Inc. (1971-1988);
                              Director, Janel
                              Hydraulics, Inc.;
                              Formerly, Director of
                              The Hanover Funds,
                              Inc. 
                                 Director of The
                              Adams Express Co. and
                              Petroleum & Resources
                                       62
                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              Corp.; formerly
                              Chairman of the Board
                              and Chief Executive
                              Officer of The Adams
                              Express Co. and
                              Petroleum & Resources
                              Corp.; formerly
                              Director of The
                              Hanover Fund, Inc. and
                              The Hanover Investment
                              Funds, Inc.     

   * Interested Trustees as defined under the 1940 Act.     

REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS:

     Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the Portfolio Adviser is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee also
serves as a Trustee of other investment companies advised by the Portfolio
Adviser. Each Trustee receives a fee, allocated among all investment companies
for which the Trustee serves, which consists of an annual retainer component and
a meeting fee component. Effective August 21, 1995, each Trustee receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
                                       63
for serving in such capacities for all the investment companies advised by the
Portfolio Adviser.



OFFICERS AND TRUSTEES OF THE FUNDS COMPENSATION

NAME, POSITION       AGGREGATE             TOTAL COMPENSATION
WITH THE FUNDS       COMPENSATION FROM     PAID TO TRUSTEES
                     THE FUNDS(1)          FROM THE FUNDS AND
                                           FUND COMPLEX*
John F. Donahue,     $-0-                  $-0- for the Fund
Chairman and Trustee                       Complex
Thomas G. Bigley,    $401.00               $2,480 for the Fund
Trustee                                    Complex
John T. Conroy, Jr., $429.00               $2,657 for the Fund
Trustee                                    Complex
William J. Copeland, $429.00               $2,657 for the Fund
Trustee                                    Complex
James E. Dowd,       $429.00               $2,657 for the Fund
Trustee                                    Complex
Lawrence D. Ellis,   $401.00               $2,480 for the Fund
M.D., Trustee                              Complex
Edward L. Flaherty,  $429.00               $2,657 for the Fund
Jr., Trustee                               Complex
Edward C. Gonzales,  $-0-                  $-0- for the Fund
President, Trustee                         Complex
and Treasurer
Peter E. Madden,     $401.00               $2,480 for the Fund
Trustee                                    Complex
Gregory F. Meyer,    $401.00               $2,480 for the Fund
                                       64
Trustee                                    Complex
John E. Murray, Jr., $401.00               $2,480 for the Fund
J.D., S.J.D.,                              Complex
Trustee
Wesley W. Posvar,    $401.00               $2,480 for the Fund
Trustee                                    Complex
Marjorie P. Smuts,   $401.00               $2,480 for the Fund
Trustee                                    Complex

(1)The aggregate compensation is provided for the Funds which was comprised of
   eleven portfolios on
   December 31, 1995. Information is furnished for the period from May 2, 1995,
   date of election of Trustees,
   to December 31, 1995.
*  The total compensation is provided for the Fund Complex, which consists of
   Blanchard Precious Metals Fund, Inc., The Virtus Funds and the Trust for the
   calendar year ended December 31, 1995.

     Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the Portfolio:


                                    Pension or         Total
                                    Retirement      Compensation
                         Capital     Benefits        from "Fund
                          Growth      Accrued       Complex"(2)
                         Portfoli     as Fund
                           o(1)      Expenses
Fergus Reid,        $7,594.67            0              $78,456.65
III, Trustee
Richard E. Ten       5,063.12            0               52,304.39
                                       65
Haken, Trustee
William J.           5,063.12            0               46,632.34
Armstrong,
Trustee
John R.H.            4,955.42            0               51,304.37
Blum, Trustee
Joseph J.            5,063.12            0               52,304.39
Harkins,
Trustee
H. Richard          13,376.62            0               74,804.44
Vartabedian,
Trustee
Stuart W.            5,063.12            0               52,304.39
Cragin, Jr.,
Trustee
Irving L.            5,063.12            0               52,304.39
Thode, Trustee

(1)  Prior to January 1, 1996, the Portfolio did not pay the Trustees expenses
     directly. Rather, the Trustees payments accrued against the underlying
     Fund, the Vista Growth and Income Fund. Data reflects Trustee compensation
     as if the Portfolio had paid such expenses directly. As of January 1, 1996,
     Trustee compensation will be paid by the Portfolio directly. Mr.
     Vartabedian received a 50% increment over regular Trustee compensation for
     serving as Chairman of the Portfolio. This incremental amount was paid by
     the Portfolio directly.

(2)  Data reflects total compensation earned during the period January 1, 1995
     to December 31, 1995 for service as a Trustee to all thirty-two
     (Portfolios) Funds advised by the Portfolio Adviser.

                                       66
VISTA FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES

     Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of any of the Portfolios, the Portfolio Adviser, Administrator or
distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board of Trustees. Pursuant to the Plan, the normal
retirement date is the date on which the eligible Trustee has attained age 65
and has completed at least five years of continuous service with one or more of
the investment companies advised by the Portfolio Adviser (collectively, the
"Covered Portfolios"). Each Eligible Trustee is entitled to receive from the
Covered Portfolios an annual benefit commencing on the first day of the calendar
quarter coincident with or following his date of retirement equal to 10% of the
highest annual compensation received from the Covered Portfolios multiplied by
the number of such Trustee's years of service (not in excess of 10 years)
completed with respect to any of the Covered Portfolios. Such benefit is payable
to each eligible Trustee in monthly installments for the life of the Trustee.

        Set forth in the table below are the estimated annual benefits payable
to an eligible Trustee upon retirement assuming various compensation and years
of service classifications. The estimated credited years of service for Messrs.
Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian, Cragin, Thode, Neff,
Epply and MacCallan, are 11, 11, 8, 11, 3, 3, 3, 6, 7 and 6, respectively.     

 YEARS OF
  SERVICE      HIGHEST ANNUAL COMPENSATION PAID BY ALL VISTA
                                   FUNDS


Years of     Highest Annual Compensation Paid by all Vista
Service                           Funds
                                       67
             40,000       45,000       50,000       55,000
10           40,000       45,000       50,000       55,000
9            36,000       40,500       45,000       49,500
8            32,000       36,000       40,000       44,000
7            28,000       31,500       35,000       38,500
6            24,000       27,000       30,000       33,000
5            20,000       22,500       25,000       27,500

DEFERRED COMPENSATION PLAN

     Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which
each Trustee (who is not an employee of any of the Funds, the Portfolio Adviser,
Administrator or Distributor or any of their affiliates) may enter into
agreements with the Funds whereby payment of the Trustees' fees are deferred
until the payment date elected by the Trustee (or the Trustee's termination of
service). The deferred amounts are deemed invested in shares of the Fund on
whose Board the Trustee sits. The deferred amounts are paid out in a lump sum or
over a period of several years as elected by the Trustee at the time of
deferral. If a deferring Trustee dies prior to the distribution of amounts held
in the deferral account, the balance of the deferral account will be distributed
to the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
Trustees have executed a deferred compensation agreement for the 1996 calendar
year: Messrs. Ten Haken, Thode and Vartabedian.


                              MANAGEMENT SERVICES


Manager to the Trust
                                       68

     The Trust's manager is Virtus Capital Management, Inc. ("VCM"), which is a
division of Signet Trust Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls maintained by Signet Banking
Corporation to restrict the flow of non-public information, FUND investments are
typically made without any knowledge of Signet Banking Corporation or its
affiliates' lending relationships with an issuer.

     The manager 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.

Management Fees

          For its services, VCM receives an annual management fee as described
in the Prospectus. For the period July 12, 1995, to October 31, 1995, the amount
paid or accrued by the FUND to VCM was $2,415, all of which was waived. For the
period November 1, 1994, to July 11, 1995, the amount paid or accrued by the
FUND to Sheffield Management Corporation was $5,526, all of which was waived.


                            ADMINISTRATIVE SERVICES


     Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the FUND for the
fees set forth in the Prospectus. For the period July 12, 1995 to October 31,
1995, the amount paid or accrued by the FUND to Federated Administrative
Services was $23,014.
                                       69

Transfer Agent & Dividend Disbursing Agent

     Federated Shareholder Services Company serves as transfer agent and
dividend disbursing agent for the FUND. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made by
shareholders.

     Federated Shareholder Services Company also maintains FUND accounting
records. The fee paid for this service is based upon the level of the FUND's
average net assets for the period plus out-of-pocket expenses.




                               DISTRIBUTION PLAN


     The Trust has adopted a Plan for Shares of the FUND pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that the FUND's Distributor
shall act as the Distributor of shares, and it permits the payment of fees to
brokers and dealers for distribution and administrative services and to
administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the FUND and its shareholders and (ii) stimulate administrators to
render administrative support services to the FUND and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to:  providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
                                       70
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
FUND; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.

     Other benefits which the FUND hopes to achieve through the Plan include,
but are not limited to the following:  (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.

     By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the FUND in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.

     For the fiscal year ended October 31, 1995, the FUND paid $3,105 in
distribution services fees.


                            DESCRIPTION OF THE FUND


     Shareholder and Trustee Liability. The FUND is a series of an entity of the
type commonly known as a "Massachusetts business trust". Under Massachusetts
                                       71
law, shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.

     The Declaration of Trust also provides that the FUND shall, upon request,
assume the defense of any claim made against any shareholders for any act or
obligation of the FUND and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.



     Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under "Shareholder and Trustee
Liability" above. The shareholders have certain rights, as set forth in the

                                       72
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.

     The FUND may be terminated upon the sale of its assets to another open-end
management company if approved by the vote of the holders of a majority of the
outstanding shares of the FUND. The FUND may also be terminated upon liquidation
and distribution of its assets, if approved by a majority shareholder vote of
the FUND. Shareholders of the FUND shall be entitled to receive distributions as
a class of the assets belonging to the FUND. The assets of the FUND received for
the issue or sale of the shares of the FUND and all income earnings and the
proceeds thereof, subject only to the rights of creditors, are specially
allocated to the FUND, and constitute the underlying assets of the FUND.


                              SHAREHOLDER REPORTS


     Shareholders received an Annual Report containing financial statements
audited by the FUND's independent accountants for the fiscal year ended October
31, 1995. The Financial Statements for the fiscal year ended October 31, 1995
are incorporated herein by reference to the Annual Report of the FUND filed with
the U.S. Securities and Exchange Commission (File Nos. 33-3165 and 811-4579). A
copy of the Annual Report may be obtained without charge by contacting the FUND
at 1-800-829-3863.







                                       73
                                    APPENDIX A

                       DESCRIPTION OF CERTAIN OBLIGATIONS
                    ISSUED OR GUARANTEED BY U.S. GOVERNMENT
                         AGENCIES OR INSTRUMENTALITIES

      FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.

      MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.

      FNMA BONDS -- are bonds guaranteed by the Federal National Mortgage
Association.  These bonds are not guaranteed by the U.S. Government.

      FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.

      FHA INSURED NOTES -- are bonds issued by the Farmers Home Administration,
the U.S. Government and are guaranteed by the U.S. Government.

      GNMA CERTIFICATES -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations.  Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government.  As a consequence of the fees Paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA


Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates.  The average life of a GNMA Certificate
is likely to be substantially less than the original maturity of the mortgage
pools underlying the securities.  Prepayments of principal by mortgagors and
mortgage foreclosures may result in the return of the greater part of principal
invested far in advance of the maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee.  As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates.  The yield which will be earned on GNMA
Certificates may vary from their coupon rates for the following reasons:  (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the effect
of raising the effective yield earned on the Certificates; and (iv) the actual
yield of each Certificate is affected by the prepayment of mortgages included in
the mortgage pool underlying the Certificates.  Principal which is so prepaid
will be reinvested although possibly at a lower rate.  In addition, prepayment
of mortgages included in the mortgage pool underlying a GNMA Certificate
purchased at a premium could result in a loss to the Portfolio.  Due to the
large amount of GNMA Certificates outstanding and active participation in the
secondary market by securities dealers and investors, GNMA Certificates are
highly liquid instruments.  Prices of GNMA Certificates are readily available
from securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate.  If agency securities are purchased at a
premium above principal, the premium is not guaranteed by the issuing agency and
a decline in the market value to par may result in a loss of the premium, which

                                       2


may be particularly likely in the event of a prepayment.  When and if available,
U.S. Government obligations may be purchased at a discount from face value.

      GNMA FHLMC BONDS and GNMA FNMA BONDS -- are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.

      GSA PARTICIPATION CERTIFICATES -- are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed by
the U.S. Government.

      NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.

      PUBLIC HOUSING BONDS -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.

      PENN CENTRAL TRANSPORTATION CERTIFICATES -- are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.

      SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.



                                       3


      WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds issued
by the Washington Metropolitan Area Transit Authority and are guaranteed by the
U.S. Government.

      FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation.  These bonds are not guaranteed by the U.S. Government.

      FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S. Government.

      STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS -- are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.

      D.C. ARMORY BOARD BONDS -- are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.

      EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.

      In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.

      Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.     
                                       4




                                    APPENDIX B

DESCRIPTION OF RATINGS

      A description of the rating policies of Moody's, S&P and Fitch with
respect to bonds and commercial paper appears below.

MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS

      Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk.  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 qualities
and are to be considered as upper medium grade obligations.  Factors giving

                                       5


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 a desirable
investment.  Assurance of interest and principal payments or of maintenance and
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 high degree.

      Such issues are often in default or have other marked shortcomings.

                                       6


      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" to certain of its
rating classifications.  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.


STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS

      AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.

      AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.

      A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

      BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest.  Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
                                       7


more likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for higher rated categories.

      BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations.  BB indicates the lowest degree of speculation and C the highest
degree of speculation.  While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

      CI--Bonds rated "CI" are income bonds on which no interest is being paid.

      D--Bonds rated "D" are in default.  The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period.  The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

      The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.

MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS

      Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics:  leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
                                       8


moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.

      Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt 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 alternative liquidity is
maintained.

      Prime-3--Issuers (or related supporting institutions) rated "Prime-3" 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 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.

STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS

      A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.

                                       9


Ratings are graded in several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest.  The four categories are as follows:

      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, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the bigger 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.

FITCH BOND RATINGS


                                       10


      AAA--Bonds rated AAA by Fitch are 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 rated AA by Fitch are 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 issues
is generally rated F-1+ by Fitch.

      A--Bonds rated A by Fitch are 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 rated BBB by Fitch are 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 consequences 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.

      Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category.  Plus and minus signs, however, are not
used in the AAA category.

                                       11



FITCH SHORT-TERM RATINGS

      Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

      The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

Fitch's short-term ratings are as follows:

      F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.

      F-1--Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.

      F-2--Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.

      F-3--Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.


                                       12


      LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.

      Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest.  However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.

      After purchase by the Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio.  However,
the Portfolio's investment manager will consider such event in its determination
of whether the Portfolio should continue to hold the security.  To the extent
the ratings given by Moody's, S&P or Fitch may change as a result of changes in
such organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained the Prospectus and statement of additional
information.     









                                       13










   G01386-08 (10/96)     
093265403




                      STATEMENT OF ADDITIONAL INFORMATION

                         BLANCHARD GROWTH & INCOME FUND
                           FEDERATED INVESTORS TOWER
                           PITTSBURGH, PA  15222-3779

This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated February 29, 1996 (the ``rospectus''), pursuant to
which the Blanchard Growth & Income Fund (the ``UND'') is offered. Please
retain this document for future reference.

To obtain a copy of the Prospectus or a paper copy of this Statement of
Additional Information, if you have received your Statement of Additional
Information electronically, please call the FUND at 1-800-829-3863.

                                       14


   
TABLE OF CONTENTS                                      Page

General Information and History                        1
Investment Objectives, Policies and Restrictions       1
Portfolio Transactions                                 13
Computation of Net Asset Value                         15
Performance Information                                16
Additional Purchase and Redemption Information         17
Tax Matters                                            17
The Management of the FUND                             22
Management Services                                    32
Administrative Services                                33
Distribution Plan                                      33
Description of the FUND                                34
Shareholder Reports                                    34
Appendix A                                            A-1
Appendix B                                            A-3
    
Manager
Virtus Capital Management, Inc.

Portfolio Adviser
The Chase Manhattan Bank, N.A.

Distributor
Federated Securities Corp.

Transfer Agent
                                       15


Federated Shareholder Services Company

Independent Accountants
Price Waterhouse LLP                          Dated: February 29, 1996
                                             (Revised October 7, 1996)     




FEDERATED SECURITIES CORP.



















                                       16

                        GENERAL INFORMATION AND HISTORY


    As described in the Blanchard Growth & Income Fund's (the `FUND'')
Prospectus, the FUND is a non-diversified series of Blanchard Funds, a
Massachusetts business trust that was organized under the name `Blanchard
Strategic Growth Fund''(the ``Trust''). The trustees of the Trust approved the
change in the name of the Trust on December 4, 1990.
   
    Effective March 31, 1996, the merger of The Chase Manhattan Corporation with
and into Chemical Banking Corporation was consummated and Chemical Banking
Corporation thereupon changed its name to The Chase Manhattan Corporation. The
Chase Manhattan Corporation is now the parent of The Chase Manhattan Bank, the
adviser to the Growth & Income Portfolio (the `Portfolio'').     


                INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS


    The FUND seeks its investment objectives by investing 100% of its net assets
in the Growth & Income Portfolio (the `Portfolio''). The Portfolio has
investment objectives identical to the FUND and invests in accordance with
investment policies and restrictions identical to those of the FUND.

    The investment objectives of the FUND and the Portfolio may not be changed
except by a majority vote of shareholders.

    The investment policies of the FUND and the Portfolio, as described below,
are not fundamental and may be changed without shareholder approval.

                              INVESTMENT POLICIES



       The Prospectus sets forth the investment objective and various investment
policies of the Portfolio. This Statement of Additional Information supplements
and should be read in conjunction with the related sections of the Prospectus.
For descriptions of the securities ratings of Moody's Investors Service, Inc.
(``oody's''), Standard & Poor's Ratings Group (``Standard & Poor's'') and Fitch
Investors Service, Inc. (``itch''), see Appendix B.     

     U.S. GOVERNMENT SECURITIES -    U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including:  U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following:  (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality.  Agencies and instrumentalities of the U.S. Government
include but are not limited to:  Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government.  Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
                                       3


supported by the full faith and credit of the United States.  Other U.S.
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States.  These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of the
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.     

       In addition, certain U.S. Government agencies and instrumentalities issue
specialized types of securities, such as guaranteed notes of the Small Business
Administration, Federal Aviation Administration, Department of Defense, Bureau
of Indian Affairs and Private Export Funding Corporation, which often provide
higher yields than are available from the more common types of government-backed
instruments.  However, such specialized instruments may only be available from a
few sources, in limited amounts, or only in very large denominations; they may
also require specialized capability in portfolio servicing and in legal matters
related to government guarantees.  While they may frequently offer attractive
yields, the limited-activity markets of many of these securities means that, if
the Portfolio were required to liquidate any of them, it might not be able to do
so advantageously; accordingly, the Portfolio investing in such securities
normally to hold such securities to maturity or pursuant to repurchase
agreements, and would treat such securities (including repurchase agreements
maturing in more than seven days) as illiquid for purposes of its limitation on
investment in illiquid securities.     


                                       4


     BANK OBLIGATIONS -    Investments in bank obligations are limited to those
of U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.     

        Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes.  A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis.  A bankers' acceptance is a short-term draft drawn on a commercial bank
by a borrower, usually in connection with an international commercial
transaction.  The borrower is liable for payment as is the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date.  Fixed time deposits are obligations of branches of United States banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest.  Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party.  Fixed time deposits subject to withdrawal penalties
and with respect to which the Portfolio cannot realize the proceeds thereon
within seven days are deemed "illiquid" for the purposes of its restriction on
investments in illiquid securities.  Deposit notes are notes issued by
commercial banks which generally bear fixed rates of interest and typically have
original maturities ranging from eighteen months to five years.     


                                       5


       Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged.  The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions.  Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations.  Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation.  Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.     

        DEPOSITARY RECEIPTS - The Portfolio will limit its investment in
Depository Receipts not sponsored by the issuer of the underlying security to no
more than 5% of the value of its net assets (at the time of investment).  A
purchaser of an unsponsored Depositary Receipt may not have unlimited voting
rights and may not receive as much information about the issuer of the
underlying securities as with a sponsored Depositary Receipt.     



        ECU OBLIGATIONS - The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies.  The Trustees do not
believe that such adjustments will adversely affect holders of ECU-denominated
securities or the marketability of such securities.     
                                       6



        SUPRANATIONAL OBLIGATIONS - Supranational organizations, include
organizations such as The World Bank, which was chartered to finance development
projects in developing member countries; the European Community, which is a
twelve-nation organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations steel and coal industries; and the Asian Development Bank,
which is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations of the Asian and
Pacific regions.     

        CORPORATE REORGANIZATIONS - In general, securities that are the subject
of a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or proposal.
The increased market price of these securities may also discount what the stated
or appraised value of the security would be if the contemplated action were
approved or consummated.  These investments may be advantageous when the
discount significantly overstates the risk of the contingencies involved;
significantly undervalues the securities, assets or cash to be received by
shareholders of the prospective portfolio company as a result of the
contemplated transaction; or fails adequately to recognize the possibility that
the offer or proposal may be replaced or superseded by an offer or proposal of
greater value.  The evaluation of these contingencies requires unusually broad
knowledge and experience on the part of the advisers that must appraise not only
the value of the issuer and its component businesses as well as the assets or
securities to be received as a result of the contemplated transaction, but also
the financial resources and business motivation of the offeror as well as the
dynamics of the business climate when the offer or proposal is in progress.

                                       7


Investments in reorganization securities may tend to increase the turnover ratio
of the Portfolio and increase its brokerage and other transaction expenses.     

        WARRANTS AND RIGHTS - Warrants basically are options to purchase equity
securities at a specified price for a specific period of time.  Their prices do
not necessarily move parallel to the prices of the underlying securities.
Rights are similar to warrants but normally have a shorter duration and are
distributed directly by the issuer to shareholders.  Rights and warrants have no
voting rights, receive no dividends and have no rights with respect to the
assets of the issuer.     

    COMMERCIAL PAPER -    Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations.  A variable amount master demand note (which
is a type of commercial paper) represents a direct borrowing arrangement
involving periodically fluctuating rates of interest under a letter agreement
between a commercial paper issuer and an institutional lender pursuant to which
the lender may determine to invest varying amounts.     

    REPURCHASE AGREEMENTS -    The Portfolio will enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, the Portfolio would acquire an underlying debt instrument
for a relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Portfolio to
resell the instrument at a fixed price and time, thereby determining the yield
during the Portfolio's holding period. This procedure results in a fixed rate of
return insulated from market fluctuations during such period. A repurchase
                                       8


agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements are considered under the 1940 Act to be loans
collateralized by the underlying securities. All repurchase agreements entered
into by the Portfolio will be fully collateralized at all times during the
period of the agreement in that the value of the underlying security will be at
least equal to the amount of the loan, including the accrued interest thereon,
and the Portfolio or its custodian or sub-custodian will have possession of the
collateral, which the Board of Trustees believes will give it a valid, perfected
security interest in the collateral. Whether a repurchase agreement is the
purchase and sale of a security or a collateralized loan has not been
conclusively established. This might become an issue in the event of the
bankruptcy of the other party to the transaction. In the event of default by the
seller under a repurchase agreement construed to be a collateralized loan, the
underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase price.
Therefore, the Portfolio may suffer time delays and incur costs in connection
with the disposition of the collateral. The Board of Trustees believes that the
collateral underlying repurchase agreements may be more susceptible to claims of
the seller's creditors than would be the case with securities owned by the
Portfolio. Repurchase agreements maturing in more than seven days are treated as
illiquid for purposes of the Portfolio's restrictions on purchases of illiquid
securities. Repurchase agreements are also subject to the risks described below
with respect to stand-by commitments.     

        FORWARD COMMITMENTS - In order to invest the Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased.  When a commitment to purchase a security
on a forward commitment basis is made, procedures are established consistent
                                       9


with the General Statement of Policy of the Securities and Exchange Commission
concerning such purchases.  Since that policy currently recommends that an
amount of the Portfolio's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, a separate account of
the Portfolio consisting of cash, cash equivalents or high quality debt
securities equal to the amount of the Portfolio's commitments securities will be
established at the Portfolio's custodian bank.  For the purpose of determining
the adequacy of the securities in the account, the deposited securities will be
valued at market value.  If the market value of such securities declines,
additional cash, cash equivalents or highly liquid securities will be placed in
the account daily so that the value of the account will equal the amount of such
commitments by the Portfolio.     

        Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases.  Securities purchased on a
forward commitment basis and the securities held in the Portfolio's portfolio
are subject to changes in value based upon the public's perception of the issuer
and changes, real or anticipated, in the level of interest rates.  Purchasing
securities on a forward commitment basis can involve the risk that the yields
available in the market when the delivery takes place may actually be higher or
lower than those obtained in the transaction itself.  On the settlement date of
the forward commitment transaction, the Portfolio will meet its obligations from
then available cash flow, sale of securities held in the separate account, sale
of other securities or, although it would not normally expect to do so, from
sale of the forward commitment securities themselves (which may have a value
greater or lesser than the Portfolio's payment obligations).  The sale of
securities to meet such obligations may result in the realization of capital
gains or losses.     
                                       10



        To the extent the Portfolio engages in forward commitment transactions,
it will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.     

        REVERSE REPURCHASE AGREEMENTS - Reverse repurchase agreements involve
the sale of securities held by the Portfolio with an agreement to repurchase the
securities at an agreed upon price and date.  The repurchase price is generally
equal to the original sales price plus interest.  Reverse repurchase agreements
are usually for seven days or less and cannot be repaid prior to their
expiration dates.  Reverse repurchase agreements involve the risk that the
market value of the portfolio securities transferred may decline below the price
at which the Portfolio is obliged to purchase the securities.     

        STRIPPED OBLIGATIONS - The principal and interest components of United
States Treasury bonds with remaining maturities of longer than ten years are
eligible to be traded independently under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program.  Under the STRIPS
program, the principal and interest components are separately issued by the
United States Treasury at the request of depository financial institutions,
which then trade the component parts separately.  The interest component of
STRIPS may be more volatile than that of United States Treasury bills with
comparable maturities.     

        ILLIQUID SECURITIES - For purposes of its limitation on investments in
illiquid securities, the Portfolio may elect to treat as liquid, in accordance
with procedures established by the Board of Trustees, certain investments in
                                       11


restricted securities for which there may be a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "Securities Act") and commercial obligations issued in
reliance on the so-called "private placement" exemption from registration
afforded by Section 4(2) of the Securities Act ("Section 4(2) paper").  Rule
144A provides an exemption from the registration requirements of the Securities
Act for the resale of certain restricted securities to qualified institutional
buyers.  Section 4(2) paper is restricted as to disposition under the federal
securities laws, and generally is sold to institutional investors such as the
Portfolio who agree that they are purchasing the paper for investment and not
with a view to public distribution.  Any resale of Section 4(2) paper by the
purchaser must be in an exempt transaction.     

        One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities.  Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security.  The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A securities
and Section 4(2) paper.     

                                       12


        STAND-BY COMMITMENTS - In a put transaction, the Portfolio acquires the
right to sell a security at an agreed upon price within a specified period prior
to its maturity date, and a stand-by commitment entitles the Portfolio to
same-day settlement and to receive an exercise price equal to the amortized cost
of the underlying security plus accrued interest, if any, at the time of
exercise.  Stand-by commitments are subject to certain risks, which include the
inability of the issuer of the commitment to pay for the securities at the time
the commitment is exercised, the fact that the commitment is not marketable by
the Portfolio, and that the maturity of the underlying security will generally
be different from that of the commitment.     

        SECURITIES LOANS - To the extent specified in the prospectus, the
Portfolio is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income.  Such loans of
portfolio securities may not exceed 30% of the value of the Portfolio's total
assets.  In connection with such loans, the Portfolio will receive collateral
consisting of cash, cash equivalents, U.S. Government securities or irrevocable
letters of credit issued by financial institutions.  Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value plus accrued interest of the securities loaned.  The Portfolio can
increase its income through the investment of such collateral.  The Portfolio
continues to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, to receive interest on
the amount of the loan.  However, the receipt of any dividend-equivalent
payments by the Portfolio on a loaned security from the borrower will not
qualify for the dividends-received deduction.  Such loans will be terminable at
any time upon specified notice.  The Portfolio might experience risk of loss if
the institutions with which it has engaged in portfolio loan transactions breach
their agreements with the Portfolio.  The risks in lending portfolio securities,
                                       13


as with other extensions of secured credit, consist of possible delays in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower experience financial
difficulty.  Loans will be made only to firms deemed by the advisers to be of
good standing and will not be made unless, in the judgment of the advisers, the
consideration to be earned from such loans justifies the risk.     

       ADDITIONAL POLICIES REGARDING DERIVATIVES AND RELATED TRANSACTIONS

INTRODUCTION

     As explained more fully below, the Portfolio may employ derivative and
related instruments as tools in the management of portfolio assets. Put briefly,
a ``erivative'' instrument may be considered a security or other instrument
which derives its value from the value or performance of other instruments or
assets, interest or currency exchange rates, or indexes. For instance,
derivatives include futures, options, forward contracts, structured notes and
various over-the-counter instruments.

        Like other investment tools or techniques, the impact of using
derivatives strategies or related instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,

                                       14


derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for the Portfolio.     

     The Portfolio may invest its assets in derivative and related instruments
subject only to the Portfolio's investment objective and policies and the
requirement that the Portfolio maintain segregated accounts consisting of liquid
assets, such as cash, U.S. Government securities, or other high-grade debt
obligations (or, as permitted by applicable regulation, enter into certain
offsetting positions) to cover its obligations under such instruments with
respect to positions where there is no underlying portfolio asset so as to avoid
leveraging the Portfolio.

        The value of some derivative or related instruments in which the
Portfolio may invest may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and -- like other investments of the
Portfolio -- the ability of a Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers
inaccurately forecast such factors and have taken positions in derivative or
similar instruments contrary to prevailing market trends, the Portfolio could be
exposed to the risk of a loss. The Portfolio might not employ any or all of the
strategies described herein, and no assurance can be given that any strategy
used will succeed.     

     Set forth below is an explanation of the various derivatives strategies and
related instruments the Portfolio may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Portfolio's current prospectuses as well as provide useful information to
prospective investors.
                                       15



RISK FACTORS
     As explained more fully below and in the discussions of particular
strategies or instruments, there are a number of risks associated with the use
of derivatives and related instruments:

       There can be no guarantee that there will be a correlation between price
       movements in a hedging vehicle and in the portfolio assets being hedged.
       As incorrect correlation could result in a loss on both the hedged
       assets in the Portfolio and the hedging vehicle so that the portfolio
       return might have been greater had hedging not been attempted. This risk
       is particularly acute in the case of ``cross-hedges'' between currencies.

          The advisers may incorrectly forecast interest rates, market values
       or other economic factors in utilizing a derivatives strategy. In such a
       case, the Portfolio may have been in a better position had it not
       entered into such strategy.     

       Hedging strategies, while reducing risk of loss, can also reduce the
       opportunity for gain. In other words, hedging usually limits both
       potential losses as well as potential gains.

       Strategies not involving hedging may increase the risk to the Portfolio.
       Certain strategies, such as yield enhancement, can have speculative
       characteristics and may result in more risk to the Portfolio than
       hedging strategies using the same instruments.

       There can be no assurance that a liquid market will exist at a time when
       the Portfolio seeks to close out an option, futures contract or other
                                       16


       derivative or related position. Many exchanges and boards of trade limit
       the amount of fluctuation permitted in option or futures contract prices
       during a single day; once the daily limit has been reached on particular
       contract, no trades may be made that day at a price beyond that limit.
       In addition, certain instruments are relatively new and without a
       significant trading history. As a result, there is no assurance that an
       active secondary market will develop or continue to exist. Finally,
       over-the-counter instruments typically do not have a liquid market. Lack
       of a liquid market for any reason may prevent the Portfolio from
       liquidating an unfavorable position.

       Activities of large traders in the futures and securities markets
       involving arbitrage, ``program trading,'' and other investment strategies
       may cause price distortions in these markets.

          In certain instances, particularly those involving over-the-counter
       transactions or forward contracts, there is a greater potential that a
       counterparty or broker may default or be unable to perform on its
       commitments. In the event of such a default, the Portfolio may
       experience a loss.     

       In transactions involving currencies, the value of the currency
       underlying an instrument may fluctuate due to many factors, including
       economic conditions, interest rates, governmental policies and market
       forces.

SPECIFIC USES AND STRATEGIES


                                       17


        Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Portfolio.     

     OPTIONS ON SECURITIES, SECURITIES INDEXES AND DEBT INSTRUMENTS. The
Portfolio may PURCHASE, SELL or EXERCISE call and put options on:

          securities;
       securities indexes; and
       debt instruments.     

     Although in most cases these options will be exchange-traded, the Portfolio
may also purchase, sell or exercise over-the-counter options. Over-the-counter
options differ from exchange-traded options in that they are two-party contracts
with price and other terms negotiated between buyer and seller. As such, over-
the-counter options generally have much less market liquidity and carry the risk
of default or nonperformance by the other party.

        One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. The Portfolio may
also use combinations of options to minimize costs, gain exposure to markets or
take advantage of price disparities or market movements. For example, the
Portfolio may sell put or call options it has previously purchased or purchase
put or call options it has previously sold. These transactions may result in a
net gain or loss depending on whether the amount realized on the sale is more or
less than the premium and other transaction costs paid on the put or call option
which is sold. The Portfolio may write a call or put option in order to earn the
                                       18


related premium from such transactions. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of a related option.
The Portfolio will not write uncovered options.     

     In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, the
Portfolio writing a covered call (i.e., where the underlying securities are held
by the Portfolio) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price.

     If a put or call option purchased by the Portfolio is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price or, in the case of
a call, remains less than or equal to the exercise price, the Portfolio will
lose its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security. There can be no assurance that a liquid market
will exist when the Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, the Portfolio may be unable to close out a position.


                                       19


     FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Portfolio may
purchase or sell:

          interest-rate futures contracts;
       futures contracts on specified instruments or indices; and
       options on these futures contracts (``futures options'').     

        The futures contracts and futures options may be based on various
instruments or indices in which the Portfolio may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).     

        Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
the Portfolio may sell a futures contract -- or buy a futures option -- to
protect against a decline in value, or reduce the duration, of portfolio
holdings. Likewise, these instruments may be used where the Portfolio intends to
acquire an instrument or enter into a position. For example, the Portfolio may
purchase a futures contract -- or buy a futures option -- to gain immediate
exposure in a market or otherwise offset increases in the purchase price of
securities or currencies to be acquired in the future. Futures options may also
be written to earn the related premiums.     

        When writing or purchasing options, the Portfolio may simultaneously
enter into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolio may engage in cross-hedging by purchasing or
                                       20


selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.     

        Investments in futures contracts and options thereon involve risks
related to those associated with options transactions discussed above. The
Portfolio will only enter into futures contracts or options or futures contracts
which are traded on a U.S. or foreign exchange or board of trade, or similar
entity, or quoted on an automated quotation system.     

     FORWARD CONTRACTS. The Portfolio may use foreign currency and interest-rate
forward contracts for various purposes as described below.

        Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. The Portfolio that
may invest in securities denominated in foreign currencies may, in addition to
buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, the Portfolio `locks in''
the exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, the Portfolio reduces its
                                       21


exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Portfolio is similar to selling securities
denominated in one currency and purchasing securities denominated in another.
Transactions that use two foreign currencies are sometimes referred to as
``ross-hedges.''     

     The Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. The
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.

     The Portfolio may also use forward contracts to hedge against changes in
interest-rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.

        INTEREST RATE AND CURRENCY TRANSACTIONS.  The Portfolio may employ
currency and interest rate management techniques, including transactions in
options (including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps.  The aggregate amount of the Portfolio's net currency
exposure will not exceed the total net asset value of its portfolio.  However,
to the extent that the Portfolio is fully invested while also maintaining
currency positions, it may be exposed to greater combined risk.     


                                       22


        The Portfolio will only enter into interest rate and currency swaps on a
net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments.  Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency swaps
is limited to the net amount of interest or currency payments that the Portfolio
is contractually obligated to make.  If the other party to an interest rate or
currency swap defaults, the Portfolio's risk of loss consists of the net amount
of interest or currency payments that the Portfolio is contractually entitled to
receive.  Since interest rate and currency swaps are individually negotiated,
the Portfolio expects to achieve an acceptable degree of correlation between
their portfolio investments and their interest rate or currency swap positions.
    

        The Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.     

        The Portfolio may purchase or sell without limitation as to a percentage
of its assets forward foreign currency exchange contracts when the advisers
anticipate that the foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities and are not held by the Portfolio.  In addition, the Portfolio may
enter into forward foreign currency exchange contracts in order to protect
against adverse changes in future foreign currency exchange rates.  The
Portfolio may engage in cross-hedging by using forward contracts in one currency
to hedge against fluctuations in the value of securities denominated in a
                                       23


different currency if its advisers believe that there is a pattern of
correlation between the two currencies.  Forward contracts may reduce the
potential gain from a positive change in the relationship between the U.S.
Dollar and foreign currencies.  Unanticipated changes in currency prices may
result in poorer overall performance for the Portfolio than if it had not
entered into such contracts.  The use of foreign currency forward contracts will
not eliminate fluctuations in the underlying U.S. dollar equivalent value of the
prices of or rates of return on the Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject the Portfolio
to certain risks.     

        The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise.  In
addition, the Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices, and this will limit the Portfolio's
ability to use such contract to hedge or cross-hedge its assets.  Also, with
regard to the Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue.  Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying the Portfolio's cross-hedges and the movements in the exchange rates
of the foreign currencies in which the Portfolio's assets that are the subject
of such cross-hedges are denominated.     

        The Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law.  The Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio.
Interest rate swaps involve the exchange by the Portfolio with another party of
                                       24


their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments.  Currency swaps involve the
exchange of their respective rights to make or receive payments in specified
currencies.    

     STRUCTURED PRODUCTS.    The Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities (``tructured products'')
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the  extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. The Portfolio may invest in structured products which represent
derived investment positions based on relationships among different markets or
asset classes.     

        The Portfolio may also invest in other types of structured products,
including, among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate").  As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
                                       25


designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index.  Any rise in the reference rate of an inverse floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an inverse floater causes an increase in
the coupon rate.  A spread trade is an investment position relating to a
difference in the prices or interest rates of two securities where the value of
the investment position is determined by movements in the difference between the
prices or interest rates, as the case may be, of the respective securities. When
the Portfolio invests in notes linked to the price of an underlying instrument,
the price of the underlying security is determined by a multiple (based on a
formula) of the price of such underlying security.  A structured product may be
considered to be leveraged to the extent its interest rate varies by a magnitude
that exceeds the magnitude of the change in the index rate of interest.  Because
they are linked to their underlying markets or securities, investments in
structured products generally are subject to greater volatility than an
investment directly in the underlying market or security.  Total return on the
structured product is derived by linking return to one or more characteristics
of the underlying instrument.  Because certain structured products of the type
in which the Portfolio may invest may involve no credit enhancement, the credit
risk of those structured products generally would be equivalent to that of the
underlying instruments.  The Portfolio may invest in a class of structured
products that is either subordinated or unsubordinated to the right of payment
of another class.  Subordinated structured products typically have higher yields
and present greater risks than unsubordinated structured products.  Although the
Portfolio's purchase of subordinated structured products would have similar
economic effect to that of borrowing against the underlying securities, the
purchase will not be deemed to be leverage for purposes of the Portfolio's
fundamental investment limitation related to borrowing and leverage.     

                                       26


        Certain issuers of structured products may be deemed to be,  "investment
companies" as defined in the 1940 Act.  As a result, the Portfolio's investments
in these structured products may be limited by the restrictions contained in the
1940 Act.  Structured products are typically sold in private placement
transactions and there currently is no action trading market for structured
products.  As a result, certain structured  products in which the Portfolio
invests may be deemed illiquid and subject to its limitation on illiquid
investments.     

     Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.

      ADDITIONAL RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS    

        The Portfolio is not a "commodity pool" (i.e., a pooled investment
vehicle which trades in commodity futures contracts and options thereon and the
operator of which is registered with the CFTC and futures contracts and futures
options will be purchased, sold or entered into only for bona fide hedging
purposes, provided that the Portfolio may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open contracts and options would
not exceed 5% of the liquidation value of the Portfolio's portfolio, provided,
further, that, in the case of an option that is in-the-money, the in-the-money
amount may be excluded in calculating the 5% limitation.     


                                       27


       When the Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with the Portfolio's custodian or sub-custodian so that the
amount so segregated, plus the initial deposit and variation margin held in the
account of its broker, will at all times equal the value of the futures
contract, thereby insuring that the use of such futures is unleveraged.     

    The Portfolio's ability to engage in the transactions described herein may
be limited by the current federal income tax requirement that the Portfolio
derive less than 30% of its gross income from the sale or other disposition of
stock or securities held for less than three months.

                            INVESTMENT RESTRICTIONS

       The Portfolio has adopted the following investment restrictions which may
not be changed without approval by a "majority of the outstanding shares" of the
Portfolio which, as used in this Statement of Additional Information, means the
vote of the lesser of (i) 67% or more of the total beneficial interests of a
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding total beneficial interests of a Portfolio are present or represented
by proxy, or (ii) more than 50% of the outstanding total beneficial interests of
a Portfolio.     

The Portfolio may not:

                 (1)  borrow money, except that the Portfolio may
         borrow money for temporary or emergency purposes, or by
         engaging in reverse repurchase transactions, in an amount not
         exceeding 33-1/3% of the value of its total assets at the time
                                       28


         when the loan is made and may pledge, mortgage or hypothecate
         no more than 1/3 of its net assets to secure such borrowings.
         Any borrowings representing more than 5% of the Portfolio's
         total assets must be repaid before the Portfolio may make
         additional investments;     

                 (2)  make loans, except that the Portfolio may:  (i)
         purchase and hold debt instruments (including without
         limitation, bonds, notes, debentures or other obligations and
         certificates of deposit, bankers' acceptances and fixed time
         deposits) in accordance with its investment objectives and
         policies; (ii) enter into repurchase agreements with respect
         to portfolio securities; and (iii) lend portfolio securities
         with a value not in excess of one-third of the value of its
         total assets;     

                 (3)  purchase the securities of any issuer (other than
         securities issued or guaranteed by the U.S. government or any
         of its agencies or instrumentalities, or repurchase agreements
         secured thereby) if, as a result, more than 25% of the
         Portfolio's total assets would be invested in the securities
         of companies whose principal business activities are in the
         same industry. Notwithstanding the foregoing, with respect to
         the Portfolio's permissible futures and options transactions
         in U.S. government securities, positions in such options and
         futures shall not be subject to this restriction;     

                 (4)  purchase or sell physical commodities unless
         acquired as a result of ownership of securities or other
                                       29


         instruments but this shall not prevent the Portfolio from (i)
         purchasing or selling options and futures contracts or from
         investing in securities or other instruments backed by
         physical commodities or (ii) engaging in forward purchase or
         sales of foreign currencies or securities;     

                 (5)  purchase or sell real estate unless acquired as a
         result of ownership of securities or other instruments (but
         this shall not prevent the Portfolio from investing in
         securities or other instruments backed by real estate or
         securities of companies engaged in the real estate business).
         Investments by the Portfolio in securities backed by mortgages
         on real estate or in marketable securities of companies
         engaged in such activities are not hereby precluded;     

                 (6)  issue any senior security (as defined in the 1940
         Act), except that (a) the Portfolio may engage in transactions
         that may result in the issuance of senior securities to the
         extent permitted under applicable regulations and
         interpretations of the 1940 Act or an exemptive order; (b) the
         Portfolio may acquire other securities, the acquisition of
         which may result in the issuance of a senior security, to the
         extent permitted under applicable regulations or
         interpretations of the 1940 Act; and (c) subject to the
         restrictions set forth above, the Portfolio may borrow money
         as authorized by the 1940 Act. For purposes of this
         restriction, collateral arrangements with respect to
         permissible options and futures transactions, including

                                       30


         deposits of initial and variation margin, are not considered
         to be the issuance of a senior security; or    

                 (7)  underwrite securities issued by other persons
         except insofar as the Portfolio may technically be deemed to
         be an underwriter under the Securities Act of 1933 in selling
         a portfolio security.     

       For purposes of investment restriction (5) above, real estate includes
Real Estate Limited Partnerships.  For purposes of investment restriction (3)
above,  industrial development bonds, where the payment of principal and
interest is the ultimate responsibility of companies within the same industry,
are grouped together as an ``ndustry.'' Supranational organizations are
collectively considered to be members of a single ``ndustry'' for purposes of
restriction (3) above.     

       In addition, the Portfolio is subject to the following non-fundamental
restrictions which may be changed without shareholder approval:     

       (1)  The Portfolio may not, with respect to 50% of its assets, hold more
than 10% of the outstanding voting securities of an issuer.     

       (2)  The Portfolio may not make short sales of securities, other than
short sales `against the box,'' or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Portfolio.     

                                       31


       (3)  The Portfolio may not purchase or sell interests in oil, gas or
mineral leases.     
       (4)  The Portfolio may not invest more than 15% of its net assets in
illiquid securities.     

       (5)  The Portfolio may not write, purchase or sell any put or call option
or any combination thereof, provided that this shall not prevent (i) the
purchase, ownership, holding or sale of warrants where the grantor of the
warrants is the issuer of the underlying securities, (ii) the writing,
purchasing or selling of puts, calls or combinations thereof with respect to
portfolio securities or (iii) with respect to the Portfolio's permissible
futures and options transactions, the writing, purchasing, ownership, holding or
selling of futures and options positions or of puts, calls or combinations
thereof with respect to futures.     

       (6)  The Portfolio may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies.     

        It is the Portfolio's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Portfolio has been
advised that the staff of the Securities and Exchange Commission's Division of
Investment Management does not consider these to be United States Government
securities, as defined under the Investment Company Act of 1940, as amended.
    

        For purposes of the Portfolio's investment restrictions, the issuer of a
tax-exempt security is deemed to be the entity (public or private) ultimately
                                       32


responsible for the payment of the principal of and interest on the security.
    

        In order to permit the sale of its beneficial interests in certain
states, the Portfolio may make commitments more restrictive than the investment
policies and limitations described above and in the prospectus. Should the
Portfolio determine that any such commitment is no longer in its best interests,
it will revoke the commitment by terminating sales of its beneficial interests
in the state involved. In order to comply with certain federal and state
statutes and regulatory policies, as a matter of operating policy, the Portfolio
will not:  (i)  invest more than 5% of its assets in companies which, including
predecessors, have a record of less than three years' continuous operation, (ii)
 invest in warrants valued at the lower of cost or market, in excess of 5% of
the value of its net assets, and no more than 2% of such value may be warrants
which are not listed on the New York or American Stock Exchanges, or (iii)
purchase or retain in its portfolio any securities issued by an issuer any of
whose officers, directors, trustees or security holders is an officer or trustee
of the Trust or Portfolio, or is an officer or director of the Adviser, if after
the purchase of the securities of such issuer by the Portfolio one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.     

        If a percentage or rating restriction on investment or use of assets set
forth herein or in the Prospectus is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by  the Portfolio will not be considered a violation. If the value of
the Portfolio's holdings of illiquid securities at any time exceeds the
                                       33


percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Trustees will consider what
actions, if any, are appropriate to maintain adequate liquidity.     


                             PORTFOLIO TRANSACTIONS


    Specific decisions to purchase or sell securities for the Portfolio are made
by a portfolio manager who is an employee of the Portfolio Adviser and who is
appointed and supervised by senior officers of the Portfolio Adviser. Changes in
the Portfolio's investments are reviewed by the Board of Trustees. The
Portfolio's portfolio manager may serve other clients of the Portfolio Adviser
in a similar capacity.



    The frequency of the Portfolio's portfolio transactions, the portfolio
turnover rate, will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the Portfolio Adviser will weigh the added costs of
short-term investment against anticipated gains.

       The Portfolio Adviser does not anticipate that portfolio turnover will
result in adverse tax consequences. However, high portfolio turnover may result
in high transaction costs to the Portfolio. For the fiscal year ended October
31, 1995, the portfolio turnover rate for the Portfolio was 71%.    


                                       34


    The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Portfolio Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolio and
other clients of the Portfolio Adviser on the basis of their professional
capability, the value and quality of their brokerage services, and the level of
their brokerage commissions. Debt securities are traded principally in the over-
the-counter market through dealers acting on their own account and not as
brokers. In the case of securities traded in the over-the-counter market (where
no stated commissions are paid but the prices include a dealer's markup or
markdown), the Portfolio Adviser normally seeks to deal directly with the
primary market makers unless, in its opinion, best execution is available
elsewhere. In the case of securities purchased from underwriters, the cost of
such securities generally includes a fixed underwriting commission or
concession. From time to time, soliciting dealer fees are available to the
Portfolio Adviser on the tender of the Portfolio's portfolio securities in so-
called tender or exchange offers. Such soliciting dealer fees are in effect
recaptured for the Portfolios by the Portfolio Adviser. At present, no other
recapture arrangements are in effect.

    Under Section 28(e) of the Securities Exchange Act of 1934, the Portfolio
Adviser may cause the Portfolio to pay a broker-dealer which provides brokerage
and research services to the Adviser an amount of commission for effecting a
securities transaction for the Portfolio in excess of the amount other broker-
dealers would have charged for the transaction if the Portfolio Adviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
                                       35


Portfolio Adviser's overall responsibilities to the Portfolio or to its clients.
Not all of such services are useful or of value in advising the Portfolio.

    The term ``rokerage and research services'' includes advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or of purchasers or sellers of
securities, furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts, and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.

    Although commissions paid on every transaction will, in the judgment of the
Portfolio Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolio and the Portfolio Adviser's other clients as part of
providing advice as to the availability of securities or of purchasers or
sellers of securities and services in effecting securities transactions and
performing functions incidental thereto, such as clearance and settlement.

    Broker-dealers may be willing to furnish statistical, research and other
factual information or services (``esearch'') to the Portfolio Adviser for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Portfolio, a commission higher than one charged elsewhere will
not be paid to such a firm solely because it provided Research to the Portfolio
Adviser.


                                       36


    The Portfolio Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Portfolio Adviser as a consideration in the selection of
brokers to execute portfolio transactions. However, the Portfolio Adviser would
be unable to quantify the amount of commissions which are paid as a result of
such Research because a substantial number of transactions are effected through
brokers which provide Research but which are selected principally because of
their execution capabilities.

    The management fees that the Funds pay to the Portfolio Adviser will not be
reduced as a consequence of the Adviser's receipt of brokerage and research
services. To the extent the Portfolio's portfolio transactions are used to
obtain such services, the brokerage commissions paid by the Portfolio will
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Portfolio Adviser in serving the Portfolio and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Portfolio Adviser in carrying out its obligations to the
Portfolio. While such services are not expected to reduce the expenses of the
Portfolio Adviser, the Portfolio Adviser would, through use of the services,
avoid the additional expenses which would be incurred if it should attempt to
develop comparable information through its own staff.

    In certain instances, there may be securities that are suitable for the
Portfolio as well as one or more of the Portfolio Adviser's other clients.
Investment decisions for the Portfolio and for the Portfolio Adviser's other
clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
                                       37


client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When the Portfolio or the
Portfolio Adviser's other clients are simultaneously engaged in the purchase or
sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio is concerned. However, it is believed that the
ability of the Portfolio to participate in volume transactions will generally
produce better executions for the Portfolio.


                         COMPUTATION OF NET ASSET VALUE


    The net asset value of the FUND is determined at 4:15 P.M. New York Time, on
each day that the New York Stock Exchange is open for business and on such other
days as there is sufficient trading in the FUND's securities to affect
materially the net asset value per share of the FUND. The FUND will be closed on
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.

    The Portfolio will invest in foreign securities, and as a result, the
calculation of the FUND's net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
                                       38


securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of the FUND's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
under procedures established by and under the supervision of the Trustees of the
Portfolio. Portfolio securities which are traded both on an exchange and in the
over-the-counter market, will be valued according to the broadest and most
representative market. All assets and liabilities initially expressed in foreign
currency values will be converted into U.S. Dollar values at the mean between
the bid and offered quotations of the currencies against U.S. Dollars as last
quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:15 P.M. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Trustees. As of the date of this Statement of Additional
Information, such securities will be valued by the latter method. Securities for
which reliable quotations are not readily available and all other assets will be
valued at their respective fair market value as determined in good faith by, or
under procedures established by, the Trustees of the Portfolio.

    Money market instruments with less than sixty days remaining to maturity
when acquired by the Portfolio will be valued on an amortized cost basis by the
Portfolio, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If the Portfolio acquires a
                                       39


money market instrument with more than sixty days remaining to its maturity, it
will be valued at current market value until the 60th day prior to maturity, and
will then be valued on an amortized cost basis based upon the value on such date
unless the Trustees of the Portfolio determine during such 60-day period that
this amortized cost value does not represent fair market value.

    All liabilities incurred or accrued are deducted from the FUND's total
assets. The resulting net assets are divided by the number of shares of the FUND
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.

    Orders to purchase or redeem Shares of the FUND received by dealers prior to
4:00 P.M. (Eastern Time) will be confirmed at the previous offering or
redemption price computed as of the close of trading on the options exchanges
(normally 4:15 P.M New York Time), provided the order is received by the FUND's
Transfer Agent prior to 4:00 P.M. on that day. It is the responsibility of the
dealer to insure that all orders are transmitted timely to the FUND. Orders
received by dealers after 4:00 P.M. will be confirmed at the next computed
offering or redemption price.


                            PERFORMANCE INFORMATION


    For purposes of quoting and comparing the performance of the FUND to that of
other mutual funds and to stock or other relevant indices in advertisements or
in reports to Shareholders, performance will be stated both in terms of total
return and in terms of yield. The total return basis combines principal and
dividend income changes for the periods shown. Principal changes are based on
                                       40


the difference between the beginning and closing net asset values for the period
and assumes reinvestment of dividends and distributions paid by the FUND.
Dividends and distributions are comprised of net investment income and net
realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:

                                P(1 + T)n = ERV

     Where P =               a hypothetical initial payment of $1,000

         T =  average annual total return
         n =  number of years (1, 5 or 10)

      ERV =   ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1,       5 or 10 year periods or at the end of the 1, 5 or
10 year periods (or fractional portion            thereof)

    Under the foregoing formula the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
one, five, and ten year periods or a shorter period dating from the
effectiveness of the FUND's registration statement. In calculating the ending
redeemable value, the pro rata share of the account opening fee is deducted from
the initial $1,000 investment and all dividends and distributions by the FUND
are assumed to have been reinvested at net asset value as described in the
prospectus on the reinvestment dates during the period. Total return, or ``''
in the formula above, is computed by finding the average annual compounded rates

                                       41


of return over the 1, 5 and 10 year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.

    The FUND's cumulative total return, for the fiscal year ended October 31,
1995 was 16.03% and the Portfolio's cumulative total return from inception
through October 31, 1995 was 435.78%.

    The FUND may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the FUND's performance with other measures of
investment return. For example, in comparing the FUND's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the FUND calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. The FUND does not, for these purposes, deduct the pro rata share of
the account opening fee, which was in effect until December, 1994, from the
initial value invested. THE FUND WILL, HOWEVER, DISCLOSE THE PRO RATA SHARE OF
THE ACCOUNT OPENING FEE AND WILL DISCLOSE THAT THE PERFORMANCE DATA DOES NOT
REFLECT SUCH NON-RECURRING CHARGE AND THAT INCLUSION OF SUCH CHARGE WOULD REDUCE
THE PERFORMANCE QUOTED. Such alternative total return information will be given
no greater prominence in such advertising than the information prescribed under
the Commission's rules.


                 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

                                       42



    The FUND reserves the right to close an account that has dropped below
$1,000 in value for a period of three months or longer other than as a result of
a decline in the net asset value per share. Shareholders are notified at least
60 days prior to any proposed redemption and are invited to add to their account
if they wish to continue as shareholders of the FUND, however, the FUND does not
presently contemplate making such redemptions and the FUND will not redeem any
shares held in tax-sheltered retirement plans.

    The FUND has elected to be governed by Rule 18f-1 of the 1940 Act, under
which the FUND is obligated to redeem the shares of any shareholder solely in
cash up to the lesser of 1% of the net asset value of the FUND or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, the FUND can, at its sole option, redeem the excess in cash or in
portfolio securities. Such securities would be selected solely by the FUND and
valued as in computing net asset value. In these circumstances a shareholder
selling such securities would probably incur a brokerage charge and there can be
no assurance that the price realized by a shareholder upon the sale of such
securities will not be less than the value used in computing net asset value for
the purpose of such redemption.


                                  TAX MATTERS


    The following is only a summary of certain additional tax considerations
generally affecting the FUND and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax

                                       43


treatment of the FUND or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.

Qualification as a Regulated Investment Company

    The FUND has elected to be taxed as a regulated investment company (``IC'')
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
``ode''). As a RIC, the FUND is not subject to federal income tax on the
portion of its net investment income (i.e., taxable interest, dividends and
other taxable ordinary income, net of expenses) and capital gain net income
(i.e., the excess of capital gains over capital losses) that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (i.e., net investment income and the excess of net short-
term capital gain over net long-term capital loss) for the taxable year (the
``istribution Requirement''), and satisfies certain other requirements of the
Code that are described below. Distributions by the FUND made during the taxable
year or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of the
taxable year and can therefore satisfy the Distribution Requirement. Because the
FUND invests all of its assets in the Portfolio, which is classified as a
partnership for federal income tax purposes, the FUND will be deemed to own a
proportionate share of the assets and income of the Portfolio for purposes of
determining whether the FUND satisfies the requirements (described more fully
below) necessary to qualify as a regulated investment company.

    In addition to satisfying the Distribution Requirement, a RIC must: (1)
derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies (to the extent such
                                       44


currency gains are directly related to the company's principal business of
investing in stock or securities) and other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the ``ncome Requirement'');
and (2) derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the `Short-Short Gain Test''). Because of the
Short-Short Gain Test, the FUND may have to limit the sale of appreciated
securities that it held for less than three months. However, foreign currency
gains that are directly related to the company's investment in stock or
securities are not treated as short-short gains. Similarly, the Short-Short Gain
Test will not prevent the FUND from disposing of investments at a loss, since
losses are disregarded for this purpose. Interest (including original issue
discount) received by the FUND at maturity or upon the disposition of a security
held for less than three months is not treated as gross income derived from the
sale or other disposition of a security within the meaning of the Short-Short
Gain Test. However, income attributable to realized market appreciation will be
so treated for this purpose.

    In general, gain or loss recognized by the Portfolio on the disposition of
an asset (and allocated to the FUND) will be a capital gain or loss. However,
gain recognized on the disposition of a debt obligation purchased at a market
discount will be treated as ordinary income to the extent of the portion of the
discount that accrued while the Portfolio held the obligation. In addition,
under the rules of Code Section 988, a portion of gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto, and (with certain exceptions) gain or loss recognized on
                                       45


the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, will generally
be treated as ordinary income or loss.

    In general, for purposes of determining whether capital gain or loss
recognized by the FUND (through its Portfolio) on the disposition of an asset is
long-term or short-term, the holding period of the asset may be affected if (1)
the asset is used to close a `short sale'' (which may include the acquisition
of a put option) or is substantially identical to another asset so used, (2) the
asset is otherwise held by the Portfolio as part of a `straddle'' (as defined)
or (3) the asset is stock and the Portfolio grants an in-the-money qualified
covered call option with respect thereto. In addition, the FUND may be required
to defer the recognition of a loss on a disposition of an asset held as part of
a straddle to the extent of any unrecognized gain on the offsetting position.

    Any gain allocated to the FUND on the lapse of, or any gain or loss
allocated to it from a closing transaction with respect to, an option written by
the Portfolio will be treated as a short-term capital gain or loss. For purposes
of the Short-Short Gain Test, the holding period of such an option will commence
on the date it is written and end on the date it lapses or the date a closing
transaction is entered into. Accordingly, the Portfolio may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.

    Regulated futures contracts, certain foreign currency contracts, and options
on stock indexes and futures contracts are subject to special tax treatment as
`Section 1256 contracts.'' Such contracts are treated as if they are sold for
their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
                                       46


terminated as of such date. Gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any gain or loss recognized upon the actual
termination of such contracts during the year. The combined capital gain or loss
for the year with respect to Section 1256 contracts is generally treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. (The
Portfolio may elect not to have this special tax treatment apply to Section 1256
contracts that are part of a `mixed straddle'' with other investments that are
not Section 1256 contracts.) The IRS has held in private rulings that
constructive gains arising from deemed year-end dispositions of Section 1256
contracts will not be taken into account for purposes of the Short-Short Gain
Test.

    Treasury Regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) for any taxable
year, to elect (unless it has made a taxable year election for excise tax
purposes as discussed below) to treat all or any part of any net capital loss,
any net long-term capital loss or any net foreign currency loss incurred after
October 31 as if it were incurred in the succeeding year.

    In addition to the requirements described above, the FUND must satisfy an
asset diversification test in order to qualify as a regulated investment
company. Under this test, at the close of each quarter of a RIC's taxable year,
at least 50% of the value of its assets must consist of cash and cash items,
U.S. Government securities, securities of other RICs, and securities of other
issuers (as to which the RIC has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which it does not hold more
than 10% of the outstanding voting securities of such issuer), and no more than
                                       47


25% of the value of its total assets may be invested in the securities of any
one issuer (other than U.S. Government securities and securities of other RICs),
or in two or more issuers which the RIC controls and which are engaged in the
same or similar trades or businesses. Generally, an option (call or put) with
respect to a security is treated as issued by the issuer of the security and not
the issuer of the option.

    If for any taxable year the FUND does not qualify as a RIC, all of its
taxable income (including its net capital gain) will be subject to tax at
regular corporate rates without any deduction for distributions to shareholders,
and such distributions will be taxable to the shareholders as ordinary dividends
to the extent of the FUND's current and accumulated earnings and profits. Such
distributions generally will be eligible for the dividends-received deduction in
the case of corporate shareholders.

Excise Tax on Regulated Investment Companies

    A 4% non-deductible excise tax is imposed on a RIC that fails to distribute
in each calendar year an amount equal to 98% of its ordinary taxable income for
the calendar year and 98% of its capital gain net income for the one-year period
ended on October 31 of the year. The balance of such income must be distributed
during the next calendar year.

    The FUND intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of each
calendar year to avoid liability for the excise tax. The FUND may in certain
circumstances have to liquidate portfolio investments in order to effect such
distributions.

                                       48


FUND Distributions

    The FUND intends to distribute substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below.

    The FUND may either retain or distribute to shareholders its net capital
gain for each taxable year. The FUND currently intends to distribute such gains
annually. Net capital gain distributed and designated as a capital gain dividend
is taxable to shareholders as long-term capital gain, regardless of the
shareholder's holding period in his shares and the time when such gain was
recognized by the Portfolio.

    If the FUND elects to retain its net capital gain, it will be taxed thereon
(except to the extent of any available capital loss carryovers) at the 35%
corporate tax rate. In this case, the FUND would expect to elect to have
shareholders of record on the last day of the taxable year treated as if each
received a distribution of his pro rata share of the gain, with the result that
each would be required to report his pro rata share of such gain on his tax
return as a long-term capital gain, would receive a refundable tax credit for
his pro rata share of the tax paid by the FUND on the gain, and would increase
the tax basis for his shares by an amount equal to the deemed distribution less
the credit.

    Ordinary income dividends distributed by the FUND will qualify for the 70%
dividends-received deduction generally available to corporations (other than
corporations, such as S corporations, which are not eligible for the deduction)
                                       49


to the extent of the portion of the distribution attributed to `qualifying
dividends''received by the Portfolio during the taxable year from domestic
corporations. A dividend received by the Portfolio will not be treated as a
qualifying dividend (1) if it was received with respect to stock that the
Portfolio held for less than 46 days (91 days in the case of certain preferred
stock), subject to the limitations of Code Sections 246(c)(3) and (4) and 246A.
Moreover, the dividends-received deduction for a corporate shareholder will also
be disallowed if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its FUND shares or the FUND fails to satisfy them
with respect to its interest in the Portfolio.

    Investment income that may be received by the Portfolio from foreign sources
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with a number of foreign countries, which entitle the
Portfolio to reduced rates of, or exemptions from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
future mix of the Portfolio's investments in various countries is not known.

    Distributions by the FUND that do not constitute ordinary income dividends
or capital gain dividends will be treated as a return of capital to the extent
of (and in reduction of) the shareholders' tax basis in their shares; any excess
will be treated as gain from a sale of the shares, as discussed more fully
below.

    Distributions by the FUND will be treated in the manner described above
whether they are paid in cash or reinvested in additional shares of the FUND (or
of another fund). In addition, if a shareholder's cost for his shares already
reflects undistributed (realized or unrealized) income or gain, a subsequent

                                       50


distribution of such amounts will be taxable to the shareholder in the manner
described above, although economically it constitutes a return of capital.

    Ordinarily, shareholders are required to take distributions into account in
the year in which they are made. However, dividends declared by the FUND in
October, November or December of any calendar year and payable to shareholders
of record on a specified date in such a month will be deemed to have been
received by the shareholders (and made by the FUND) on December 31 of such year
if such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.

    The FUND will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of dividends and the proceeds of redemption paid to any shareholder
(1) who has provided either an incorrect tax identification number or no number
at all to the FUND, (2) who is subject to backup withholding pursuant to a
notice from the IRS for failure to report interest or dividend income properly,
or (3) who has not otherwise certified to the FUND that it is not subject to
backup withholding.

Sale or Redemption of Shares

    A shareholder will recognize gain or loss on the sale or redemption of his
shares in an amount equal to the difference between the amount realized on the
shares and his adjusted tax basis in them. All or a portion of any loss so
recognized may be disallowed if the shareholder purchases other shares of the
FUND within 30 days before or after the disposition. In general, gain or loss
arising from a sale or redemption of FUND shares will constitute capital gain or
loss, and will be long-term capital gain or loss if the shares were held longer
                                       51


than one year. However, a capital loss arising from a disposition of shares held
for six months or less will be treated as a long-term capital loss to the extent
of any amount of capital gain dividends received on the shares. For this
purpose, the special holding period rules of Code Section 246(c)(3) and (4)
(alluded to above in connection with the dividends-received deduction for
corporations) will generally apply. Capital losses in any year are deductible
only to the extent of capital gains plus, in the case of noncorporate taxpayers,
$3,000 of ordinary income.

Foreign Shareholders

    Taxation of a shareholder who, as to the United States, is a nonresident
alien individual, foreign trust or estate, foreign corporation, or foreign
partnership (`foreign shareholder''), depends on whether the income received
from the FUND is ``ffectively connected'' with a U.S. trade or business carried
on by the shareholder.

    If the income is not effectively connected in the above sense, ordinary
income dividends distributed to a foreign shareholder will be subject to U.S.
withholding tax at the rate of 30% (or a lower treaty rate, if one applies) of
the gross amount of the dividend. Such a shareholder would generally be exempt
from U.S. federal income tax on gains realized on a sale of FUND shares and
capital gain dividends.

    If income from the FUND is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and gain realized upon the sale of FUND shares will be
subject to U.S. federal income tax at the rates applicable to U.S. citizens or
domestic corporations.
                                       52



    In the case of foreign noncorporate shareholders, the FUND may be required
to withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless they furnish the FUND with proper notification of their exempt status.

    The tax consequences to foreign shareholders entitled to claim the benefits
of applicable treaties may differ from one treaty to another. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the FUND, including the
applicability of any foreign taxes.

Effect of Future Legislation; Local Tax Considerations

    The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury Regulations as in effect on the date of this
Statement of Additional Information. Future legislative or administrative
changes or court decisions may significantly alter the conclusions expressed
herein, perhaps with retroactive effect.

    Rules of state and local taxation of dividends from regulated investment
companies often differ from the rules for U.S. federal income taxation described
above. Shareholders are urged to consult their tax advisers as to the
consequences of their investing in the FUND in light of their particular
circumstances.



                           THE MANAGEMENT OF THE FUND
                                       53




       Officers and Trustees are listed with their birthdates, addresses,
principal occupations, and present positions, including any affiliation with
Virtus Capital Management, Inc., Signet Trust Company, Federated Investors,
Federated Securities Corp., Federated Shareholder Services Company, and
Federated Administrative Services or the Funds (as defined below).     

JOHN F. DONAHUE(1)(2)
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  JULY 28, 1924          CHAIRMAN AND TRUSTEE OF THE FUND; Chairman
                                   and Trustee, Federated Investors, Federated
                                   Advisers, Federated Management, and Federated
                                   Research; Chairman and Director, Federated
                                   Research Corp. and Federated Global Research
                                   Corp.; Chairman, Passport Research, Ltd.;
                                   Chief Executive Officer and Director,
                                   Trustee, or Managing General Partner of the
                                   Funds. Mr. Donahue is the father of J.
                                   Christopher Donahue, Executive Vice President
                                   of the Fund.

THOMAS G. BIGLEY
28TH FLOOR
ONE OXFORD CENTRE
PITTSBURGH, PA
BIRTHDATE:  FEBRUARY 3, 1934       TRUSTEE OF THE FUND; Director, Oberg
                                   Manufacturing Co.; Chairman of the Board,
                                       54


                                   Children's Hospital of Pittsburgh; Director,
                                   Trustee or Managing General Partner of the
                                   Funds; formerly, Senior Partner, Ernst &
                                   Young LLP.

JOHN T. CONROY, JR.(3)
WOOD/IPC COMMERCIAL DEPARTMENT
JOHN R. WOOD AND ASSOCIATES, INC., REALTORS
3255 TAMIAMI TRAIL NORTH
NAPLES, FL
BIRTHDATE:  JUNE 23, 1937          TRUSTEE OF THE FUND; President, Investment
                                   Properties Corporation; Senior Vice-
                                   President, John R. Wood and Associates, Inc.,
                                   Realtors; President, Northgate Village
                                   Development Corporation; Partner or Trustee
                                   in private real estate ventures in Southwest
                                   Florida; Director, Trustee, or Managing
                                   General Partner of the Funds; formerly,
                                   President, Naples Property Management, Inc.


WILLIAM J. COPELAND(3)
ONE PNC PLAZA - 23RD FLOOR
PITTSBURGH, PA
BIRTHDATE:  JULY 4, 1918           TRUSTEE OF THE FUND; Director and Member of
                                   the Executive Committee, Michael Baker, Inc.;
                                   Director, Trustee, or Managing General
                                   Partner of the Funds; formerly, Vice Chairman

                                       55


                                   and Director, PNC Bank, N.A., and PNC Bank
                                   Corp. and Director, Ryan Homes, Inc.
JAMES E. DOWD(3)
571 HAYWARD MILL ROAD
CONCORD, MA
BIRTHDATE:  MAY 18, 1922           TRUSTEE OF THE FUND; Attorney-at-law;
                                   Director, The Emerging Germany Fund, Inc.;
                                   Director, Trustee, or Managing General
                                   Partner of the Funds.

LAWRENCE D. ELLIS, M.D.(1)
3471 FIFTH AVENUE, SUITE 1111
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 11, 1932       TRUSTEE OF THE FUND; Professor of Medicine
                                   and Member, Board of Trustees, University of
                                   Pittsburgh; Medical Director, University of
                                   Pittsburgh Medical Center-Downtown, Member,
                                   Board of Directors, University of Pittsburgh
                                   Medical Center; formerly, Hematologist,
                                   Oncologist, and Internist, Presbyterian and
                                   Montefiore Hospitals; Director, Trustee, or
                                   Managing General Partner of the Funds.

   EDWARD L. FLAHERTY, JR.(3)
MILLER, AMENT, HENNY & KOCHUBA
205 ROSS STREET
PITTSBURGH, PA
BIRTHDATE:  JUNE 18, 1924             TRUSTEE OF THE FUND; Attorney-at-law;
                                   Shareholder, Miller, Ament, Henny & Kochuba;
                                       56


                                   Director, Eat'N Park Restaurants, Inc., and
                                   Statewide Settlement Agency, Inc.; Director,
                                   Trustee, or Managing General Partner of the
                                   Funds; formerly, Counsel, Horizon Financial,
                                   F.A., Western Region.     


EDWARD C. GONZALES(1)
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 22, 1930       PRESIDENT, TRUSTEE AND TREASURER OF THE FUND;
                                   Vice Chairman, Treasurer, and Trustee,
                                   Federated Investors; Vice President,
                                   Federated Advisers, Federated Management,
                                   Federated Research, Federated Research Corp.,
                                   Federated Global Research Corp. and Passport
                                   Research, Ltd.; Executive Vice President and
                                   Director, Federated Securities Corp.;
                                   Trustee, Federated Shareholder Services
                                   Company; Chairman, Treasurer, and Trustee,
                                   Federated Administrative Services; Trustee or
                                   Director of some of the Funds; President,
                                   Executive Vice President and Treasurer of
                                   some of the Funds.

PETER E. MADDEN
SEACLIFF
562 BELLEVUE AVENUE
NEWPORT, RI
                                       57


BIRTHDATE:  MARCH 16, 1942         TRUSTEE OF THE FUND; Consultant; State
                                   Representative, Commonwealth of
                                   Massachusetts; Director, Trustee, or Managing
                                   General Partner of the Funds; formerly,
                                   President, State Street Bank and Trust
                                   Company and State Street Boston Corporation.

   GREGOR F. MEYER
MILLER, AMENT, HENNY & KOCHUBA
205 ROSS STREET
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 6, 1926           TRUSTEE OF THE FUND; Attorney-at-law;
                                   Shareholder, Miller, Ament, Henny & Kochuba;
                                   Chairman, Meritcare, Inc.; Director, Eat'N
                                   Park Restaurants, Inc.; Director, Trustee, or
                                   Managing General Partner of the Funds.     

JOHN E. MURRAY, JR., J.D., S.J.D.
PRESIDENT, DUQUESNE UNIVERSITY
PITTSBURGH, PA
BIRTHDATE:  DECEMBER 20, 1932      TRUSTEE OF THE FUND; President, Law
                                   Professor, Duquesne University; Consulting
                                   Partner, Mollica, Murray and Hogue; Director,
                                   Trustee or Managing Partner of the Funds.


WESLEY W. POSVAR
1202 CATHEDRAL OF LEARNING
UNIVERSITY OF PITTSBURGH
                                       58


PITTSBURGH, PA
BIRTHDATE:  SEPTEMBER 14, 1925     TRUSTEE OF THE FUND; Professor, International
                                   Politics and Management Consultant; Trustee,
                                   Carnegie Endowment for International Peace,
                                   RAND Corporation, Online Computer Library
                                   Center, Inc., and U.S. Space Foundation;
                                   Chairman, Czecho Management Center; Director,
                                   Trustee, or Managing General Partner of the
                                   Funds; President Emeritus, University of
                                   Pittsburgh; founding Chairman, National
                                   Advisory Council for Environmental Policy and
                                   Technology and Federal Emergency Management
                                   Advisory Board.

MARJORIE P. SMUTS
4905 BAYARD STREET
PITTSBURGH, PA
BIRTHDATE:  JUNE 21, 1935          TRUSTEE OF THE FUND; Public
                                   relations/marketing consultant; Conference
                                   Coordinator, Non-profit entities; Director,
                                   Trustee, or Managing General Partner of the
                                   Funds.

J. CHRISTOPHER DONAHUE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  APRIL 11, 1949         EXECUTIVE VICE PRESIDENT OF THE FUND;
                                   President and Trustee, Federated Investors,
                                   Federated Advisers, Federated Management, and
                                       59


                                   Federated Research; President and Director,
                                   Federated Research Corp. and Federated Global
                                   Research Corp.; President, Passport Research,
                                   Ltd.; Trustee, Federated Administrative
                                   Services, Federated Shareholder Services
                                   Company, and Federated Shareholder Services;
                                   Director, Federated Services Company;
                                   President or Executive Vice President of the
                                   Funds; Director, Trustee, or Managing General
                                   Partner of some of the Funds. Mr. Donahue is
                                   the son of John F. Donahue, Chairman and
                                   Trustee of the Fund.


JOHN W. MCGONIGLE
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  OCTOBER 26, 1938          EXECUTIVE VICE PRESIDENT AND SECRETARY OF
                                   THE FUND; Executive Vice President,
                                   Secretary, and Trustee, Federated Investors;
                                   Trustee, Federated Advisers, Federated
                                   Management, and Federated Research; Director,
                                   Federated Research Corp. and Federated Global
                                   Research Corp.; Trustee, Federated
                                   Shareholder Services Company; Director,
                                   Federated Services Company; President and
                                   Trustee, Federated Shareholder Services;
                                   Director, Federated Securities Corp.;

                                       60


                                   Executive Vice President and Secretary of the
                                   Funds.     

RICHARD B. FISHER
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  MAY 17, 1923              VICE PRESIDENT OF THE FUND; Executive Vice
                                   President and Trustee, Federated Investors;
                                   Chairman and Director, Federated Securities
                                   Corp.; President or Vice President of Some of
                                   the Funds; Director or Trustee of some of the
                                   Funds.     

JOSEPH S. MACHI
FEDERATED INVESTORS TOWER
PITTSBURGH, PA
BIRTHDATE:  MAY 22, 1962           VICE PRESIDENT AND ASSISTANT TREASURER OF THE
                                   FUND; Vice President, Federated
                                   Administrative Services; Vice President and
                                   Assistant Treasurer of some of the Funds.

(1)  This Trustee is deemed to be an `interested person'' of the Trust as
     defined in the Investment Company Act of 1940.
(2)  Member of the Executive Committee. The Executive Committee of the Board of
     Trustees handles the responsibilities of the Board of Trustees between
     meetings of the Board.
(3)  Member of the Audit Committee. The Audit Committee is responsible for
     reviewing compliance with all internal controls and all regulations related
     to the financial reporting process.
                                       61



THE FUNDS

     As referred to in the list of Trustees and Officers, ``unds'' includes the
following investment companies:

     American Leaders Fund, Inc.; Annuity Management Series; Arrow Funds;
Automated Government Money Trust; Blanchard Group of Funds; Blanchard Precious
Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc.; DG Investor
Series; Edward D. Jones & Co. Daily Passport Cash Trust; Federated ARMs Fund;
Federated Equity Funds; Federated Exchange Fund, Ltd.; Federated GNMA Trust;
Federated Government Trust; Federated High Yield Trust; Federated Income
Securities Trust; Federated Income Trust; Federated Index Trust; Federated
Institutional Trust; Federated Master Trust; Federated Municipal Trust;
Federated Short-Term Municipal Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U. S. Government
Securities Fund: 1-3 Years; Federated U. S. Government Securities Fund: 3-5
Years; Federated U.S. Government Securities Fund: 5-10 Years; First Priority
Funds; Fixed Income Securities, Inc.; Fortress Adjustable Rate U.S. Government
Fund, Inc.; Fortress Municipal Income Fund, Inc.; Fortress Utility Fund, Inc.;
Fund for U.S. Government Securities, Inc.; Government Income Securities, Inc.;
High Yield Cash Trust; Insurance Management Series; Intermediate Municipal
Trust; International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Equity Income Fund, Inc.; Liberty High Income Bond Fund,
Inc.; Liberty Municipal Securities Fund, Inc.; Liberty U.S. Government Money
Market Trust; Liberty Term Trust, Inc.-1999; Liberty Utility Fund, Inc.; Liquid
Cash Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Trust; Municipal Securities Income Trust;
                                       62


Newpoint Funds; 111 Corcoran Funds; Peachtree Funds; The Planters Funds; RIMCO
Monument Funds; Star Funds; The Starburst Funds; The Starburst Funds II; Stock
and Bond Fund, Inc.; Targeted Duration Trust; Tax-Free Instruments Trust; Trust
for Financial Institutions; Trust For Government Cash Reserves; Trust for Short-
Term U.S. Government Securities; Trust for U.S. Treasury Obligation; The Virtus
Funds; and World Investment Series, Inc.

FUND OWNERSHIP

     As of October 1, 1996, Officers and Trustees owned less than 1% of the
outstanding shares of the FUND.

     To the best knowledge of the FUND, as of October 1, 1996, one shareholder
owned 5% or more of the outstanding shares of the FUND. Stephens Inc., Little
Rock, Arkansas, owned approximately 312,417 shares (18.65%).     


     The Trustees and officers of the Portfolio and their age and principal
occupations for at least the past five years are set forth below. Their titles
may have varied during that period. Asterisks indicate those Trustees who are
`interested persons'' (as defined in the 1940 Act) of the Portfolio. Unless
otherwise indicated below, the address of each officer is 6 St. James Avenue,
Suite 900, Boston, Massachusetts 02116.






                                       63


                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
   Fergus Reid, III    63     Chairman and Chief          1984
971 West Road                 Executive Officer,
New Canaan, CT  06840         Lumelite Corporation,
                              since September 1985;
                              Trustee, Morgan
                              Stanley Portfolios.
                                  
Richard E. Ten Haken   61     Former District             1984
4 Barnfield Road              Superintendent of
Pittsford, NY  14534          Schools, Monroe No. 2
                              and Orleans Counties,
                              New York; Chairman of
                              the Finance and the
                              Audit and Accounting
                              Committees, Member of
                              the Executive
                              Committee; Chairman of
                              the Board and
                              President, New York
                              State Teachers'
                              Retirement System.
William J. Armstrong   54     Vice President and          1987
49 Aspen Way                  Treasurer, Ingersoll-
Upper Saddle River, NJ        Rand Company.
07458
John R.H. Blum         66     Attorney in Private         1984
                                       64


                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
322 Main Street               Practice; formerly a
Lakeville, CT  06039          Partner in the law
                              firm of Richards,
                              O'Neil & Allegaert;
                              Commissioner of
                              Agriculture - State of
                              Connecticut, 1992-
                              1995.
*Joseph J. Harkins     64     Retired; Commercial         1990
257 Plantation Circle         Sector Executive and
South                         Executive Vice
Ponte Vedra Beach, FL         President of The Chase
32082                         Manhattan Bank, N.A.
                              from 1985 through
                              1989. He has been
                              employed by Chase in
                              numerous capacities
                              and offices since
                              1954. Director of
                              Blessings Corporation,
                              Jefferson Insurance
                              Company of New York,
                              Monticello Insurance
                              Company and National.
                       60     Consultant, Republic        1992
                              Bank of New York;
                                       65


                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
*H. Richard                   formerly, Senior
Vartabedian                   Investment Officer,
P.O. Box 296                  Division Executive of
Beach Road                    the Investment
Hendrick's Head               Management Division of
Southport, ME  04576          The Chase Manhattan
                              Bank, N.A., 1980
                              through 1991.
Stuart W. Cragin, Jr.  63     Retired; formerly           1992
108 Valley Road               President, Fairfield
Cos Cob, CT  06807            Testing Laboratory,
                              Inc. He has previously
                              served in a variety of
                              marketing,
                              manufacturing and
                              general management
                              positions with Union
                              Camp Corp., Trinity
                              Paper & Plastics
                              Corp., and Conover
                              Industries
Irving L. Thode        64     Retired; Vice               1992
80 Perkins Road               President of Quotron
Greenwich, CT  06830          Systems. He has
                              previously served in a
                              number of executive
                                       66


                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              positions with Control      1989    
                              Data Corp., including
   W. Perry Neff              President of its Latin
Trustee                       American Operations,
RR 1 Box 102                  and General Manager of
Weston, VT  05181             its Data Services           1988    
                              business.
                                 Independent
                              Financial Consultant;

    
   Roland R. Eppley,          Director of North        
    
   1989    
Jr.                           America Life Assurance
Trustee                       Co., Petroleum &
105 Coventry Place            Resources Corp. and
Palm Beach Gardens, FL        The Adams Express Co.;
33418                         Director and Chairman
                              of The Hanover Funds,
                              Inc.; Formerly
   W.D. MacCallan             Director, Chairman and
Trustee                       President of The
624 East 45th Street          Hanvover Investment
Savannah, GA                  Funds Inc.     
31405                            Retired; formerly
                              President and Chief
                              Exective Officer,
                              Eastern States
                              Bankcard Assocation
                                       67


                              PRINCIPAL OCCUPATIONS    YEAR FIRST
                              FOR THE LAST FIVE          BECAME
TRUSTEE                AGE    YEARS                     A TRUSTEE
                              Inc. (1971-1988);
                              Director, Janel
                              Hydraulics, Inc.;
                              Formerly, Director of
                              The Hanover Funds,
                              Inc.     
                                 Director of The
                              Adams Express Co. and
                              Petroleum & Resources
                              Corp.; formerly
                              Chairman of the Board
                              and Chief Executive
                              Officer of The Adams
                              Express Co. and
                              Petroleum & Resources
                              Corp.; formerly
                              Director of The
                              Hanover Fund, Inc. and
                              The Hanover Investment
                              Funds, Inc.     

   * Interested Trustees as defined under the 1940 Act.     

REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS:


                                       68


     Each Trustee is reimbursed for expenses incurred in attending each meeting
of the Board of Trustees or any committee thereof. Each Trustee who is not an
affiliate of the Portfolio Adviser is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee also
serves as a Trustee of other investment companies advised by the Portfolio
Adviser. Each Trustee receives a fee, allocated among all investment companies
for which the Trustee serves, which consists of an annual retainer component and
a meeting fee component. Effective August 21, 1995, each Trustee receives a
quarterly retainer of $12,000 and an additional per meeting fee of $1,500. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Portfolio Adviser.



OFFICERS AND TRUSTEES OF THE FUNDS COMPENSATION


NAME, POSITION       AGGREGATE             TOTAL COMPENSATION
WITH THE FUNDS       COMPENSATION FROM     PAID TO TRUSTEES
                     THE FUNDS(1)          FROM THE FUNDS AND
                                           FUND COMPLEX*

John F. Donahue,     $-0-                  $-0- for the Fund
Chairman and Trustee                       Complex
Thomas G. Bigley,    $401.00               $2,480 for the Fund
Trustee                                    Complex
John T. Conroy, Jr., $429.00               $2,657 for the Fund
                                       69


Trustee                                    Complex
William J. Copeland, $429.00               $2,657 for the Fund
Trustee                                    Complex
James E. Dowd,       $429.00               $2,657 for the Fund
Trustee                                    Complex
Lawrence D. Ellis,   $401.00               $2,480 for the Fund
M.D., Trustee                              Complex
Edward L. Flaherty,  $429.00               $2,657 for the Fund
Jr., Trustee                               Complex
Edward C. Gonzales,  $-0-                  $-0- for the Fund
President, Trustee                         Complex
and Treasurer
Peter E. Madden,     $401.00               $2,480 for the Fund
Trustee                                    Complex
Gregory F. Meyer,    $401.00               $2,480 for the Fund
Trustee                                    Complex
John E. Murray, Jr., $401.00               $2,480 for the Fund
J.D., S.J.D.,                              Complex
Trustee
Wesley W. Posvar,    $401.00               $2,480 for the Fund
Trustee                                    Complex
Marjorie P. Smuts,   $401.00               $2,480 for the Fund
Trustee                                    Complex


(1)  The aggregate compensation is provided for the Funds which was comprised of
eleven portfolios on
     December 31, 1995. Information is furnished for the period from May 2,
1995, date of election of
                                       70


     Trustees, to December 31, 1995.
*    The total compensation is provided for the Fund Complex, which consists of
     Blanchard Precious Metals Fund, Inc., The Virtus Funds and the Trust for
     the calendar year ended December 31, 1995.



     Set forth below is information regarding compensation paid or accrued
during the fiscal year ended October 31, 1995 for each Trustee of the Trust:


                                      Pension or       Total
                        Growth and    Retirement    Compensation
                          Income       Benefits      from "Fund
                       Portfolio(1)     Accrued     Complex"(2)
                                        as Fund
                                       Expenses
Fergus Reid, III,       $14,393.16         0          $78,456.65
Trustee
Richard E. Ten Haken,    9,595.45          0           52,304.39
Trustee
William J. Armstrong,    9,595.45          0           46,632.34
Trustee
John R.H. Blum,          9,595.45          0           51,304.37
Trustee
Joseph J. Harkins,       9,376.63          0           52,304.39
Trustee
H. Richard              18,159.13          0           74,804.44
Vartabedian, Trustee
                                       71


Stuart W. Cragin,        9,595.45          0           52,304.39
Jr., Trustee
Irving L. Thode,         9,595.45          0           52,304.39
Trustee

(1)  Prior to January 1, 1996, the Portfolio did not pay the Trustees expenses
     directly. Rather, the Trustees payments accrued against the underlying
     Fund, the Vista Growth and Income Fund. Data reflects Trustee compensation
     as if the Portfolio had paid such expenses directly. As of January 1, 1996,
     Trustee compensation will be paid by the Portfolio directly. Mr.
     Vartabedian received a 50% increment over regular Trustee compensation for
     serving as Chairman of the Portfolio. This incremental amount was paid by
     the Portfolio directly.

(2)  Data reflects total compensation earned during the period January 1, 1995
     to December 31, 1995 for service as a Trustee to all thirty-two
     (Portfolios) Funds advised by the Portfolio Adviser.

VISTA FUNDS RETIREMENT PLAN FOR ELIGIBLE TRUSTEES

     Effective August 21, 1995, the Trustees also instituted a Retirement Plan
for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is not an
employee of any of the Portfolios, the Portfolio Adviser, Administrator or
distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board of Trustees. Pursuant to the Plan, the normal
retirement date is the date on which the eligible Trustee has attained age 65
and has completed at least five years of continuous service with one or more of
the investment companies advised by the Portfolio Adviser (collectively, the
"Covered Portfolios"). Each Eligible Trustee is entitled to receive from the
                                       72


Covered Portfolios an annual benefit commencing on the first day of the calendar
quarter coincident with or following his date of retirement equal to 10% of the
highest annual compensation received from the Covered Portfolios multiplied by
the number of such Trustee's years of service (not in excess of 10 years)
completed with respect to any of the Covered Portfolios. Such benefit is payable
to each eligible Trustee in monthly installments for the life of the Trustee.


        Set forth below in the table below are the estimated annual benefits
payable to an eligible Trustee upon retirement assuming various compensation and
years of service classifications. The estimated credited years of service for
Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian, Cragin, Thode,
Neff, Epply and MacCallan are 11, 11, 8, 11, 3, 3, 3, 6, 7 and 6, respectively.
    


Years of     Highest Annual Compensation Paid by all Vista
Serive                    Funds

             40,000       45,000       50,000       55,000
10           40,000       45,000       50,000       55,000
9            36,000       40,500       45,000       49,500
8            32,000       36,000       40,000       44,000
7            28,000       31,500       35,000       38,500
6            24,000       27,000       30,000       33,000
5            20,000       22,500       25,000       27,500

DEFERRED COMPENSATION PLAN

                                       73


     Effective August 21, 1995, the Trustees instituted a Deferred Compensation
Plan for Eligible Trustees (the "Deferred Compensation Plan") pursuant to which
each Trustee (who is not an employee of any of the Funds, the Portfolio Adviser,
Administrator or Distributor or any of their affiliates) may enter into
agreements with the Funds whereby payment of the Trustees' fees are deferred
until the payment date elected by the Trustee (or the Trustee's termination of
service). The deferred amounts are deemed invested in shares of the Fund on
whose Board the Trustee sits. The deferred amounts are paid out in a lump sum or
over a period of several years as elected by the Trustee at the time of
deferral. If a deferring Trustee dies prior to the distribution of amounts held
in the deferral account, the balance of the deferral account will be distributed
to the Trustee's designated beneficiary in a single lump sum payment as soon as
practicable after such deferring Trustee's death. The following Eligible
Trustees have executed a deferred compensation agreement for the 1996 calendar
year: Messrs. Ten Haken, Thode and Vartabedian.


                              MANAGEMENT SERVICES


Manager to the Trust

     The Trust's manager is Virtus Capital Management, Inc. (``CM''), which is
a division of Signet Trust Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls maintained by Signet Banking
Corporation to restrict the flow of non-public information, Fund investments are
typically made without any knowledge of Signet Banking Corporation or its
affiliates' lending relationships with an issuer.

                                       74


     The manager 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.



Management Fees

     For its services, VCM receives an annual management fee as described in the
prospectus. For the period July 12, 1995, to October 31, 1995, the amount paid
or accrued by the FUND to VCM was $6,416, all of which was waived. For the
period November 1, 1994, to July 11, 1995, the amount paid or accrued by the
FUND to Sheffield Management Corporation was $14,683, all of which was waived.


                            ADMINISTRATIVE SERVICES


     Federated Administrative Services, which is a subsidiary of Federated
Investors, provides administrative personnel and services to the Funds for the
fees set forth in the prospectus. For the period July 12, 1995 to October 31,
1995, the amount paid or accrued by the FUND to Federated Administrative
Services was $23,014.

Transfer Agent & Dividend Disbursing Agent


                                       75


     Federated Shareholder Services Company serves as transfer agent and
dividend disbursing agent for the FUND. The fee paid to the transfer agent is
based upon the size, type and number of accounts and transactions made by
shareholders.

     Federated Shareholder Services Company also maintains FUND accounting
records. The fee paid for this service is based upon the level of the FUND's
average net assets for the period plus out-of-pocket expenses.


                               DISTRIBUTION PLAN


     The Trust has adopted a Plan for Shares of the FUND pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that the FUND's Distributor
shall act as the Distributor of shares, and it permits the payment of fees to
brokers and dealers for distribution and administrative services and to
administrators for administrative services. The Plan is designed to (i)
stimulate brokers and dealers to provide distribution and administrative support
services to the FUND and its shareholders and (ii) stimulate administrators to
render administrative support services to the FUND and its shareholders. These
services are to be provided by a representative who has knowledge of the
shareholders' particular circumstances and goals, and include, but are not
limited to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
                                       76


FUND; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.

     Other benefits which the FUND hopes to achieve through the Plan include,
but are not limited to the following:  (1) an efficient and effective
administrative system; (2) a more efficient use of assets of shareholders by
having them rapidly invested in the FUND with a minimum of delay and
administrative detail; and (3) an efficient and reliable records system for
shareholders and prompt responses to shareholder requests and inquiries
concerning their accounts.

     By adopting the Plan, the then Board of Trustees expected that the FUND
will be able to achieve a more predictable flow of cash for investment purposes
and to meet redemptions. This will facilitate more efficient portfolio
management and assist the FUND in seeking to achieve its investment objectives.
By identifying potential investors in shares whose needs are served by the
FUND's objectives, and properly servicing these accounts, the FUND may be able
to curb sharp fluctuations in rates of redemptions and sales.

     For the fiscal year ended October 31, 1995, the FUND paid $12,203 in
distribution services fees.


                            DESCRIPTION OF THE FUND


     Shareholder and Trustee Liability. The FUND is a series of an entity of the
type commonly known as a `Massachusetts business trust''. Under Massachusetts
law, shareholders of such a trust may, under certain circumstances, be held
                                       77


personally liable for the obligations of the trust. The FUND's Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations for the FUND and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the FUND
or the Trustees. The Declaration of Trust provides for indemnification out of
the FUND property of any shareholder held personally liable for the obligations
of the FUND.

     The Declaration of Trust also provides that the FUND shall, upon request,
assume the defense of any claim made against any shareholders for any act or
obligation of the FUND and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the FUND itself would be unable to meet its
obligations. VCM believes that, in view of the above, the risk of personal
liability to shareholders is remote. The Declaration of Trust further provides
that the Trustees will not be liable for errors of judgment or mistakes of fact
or law, but nothing in the Declaration of Trust protects a Trustee against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.

     Voting Rights. The FUND's capital consists of shares of beneficial
interest. Shares of the FUND entitle the holders to one vote per share. The
shares have no preemptive or conversion rights. The voting and dividend rights
and the right of redemption are described in the Prospectus. Shares are fully
paid and nonassessable, except as set forth under `Shareholder and Trustee
Liability''above. The shareholders have certain rights, as set forth in the
Declaration of Trust, to call a meeting for any purpose, including the purpose
of voting on removal of one or more Trustees.
                                       78



     The FUND may be terminated upon the sale of its assets to another open-end
management company if approved by the vote of the holders of a majority of the
outstanding shares of the FUND. The FUND may also be terminated upon liquidation
and distribution of its assets, if approved by a majority shareholder
vote of the FUND. Shareholders of the FUND shall be entitled to receive
distributions as a class of the assets belonging to the FUND. The assets of the
FUND received for the issue or sale of the shares of the FUND and all income
earnings and the proceeds thereof, subject only to the rights of creditors, are
specially allocated to the FUND, and constitute the underlying assets of the
FUND.


                              SHAREHOLDER REPORTS


     Shareholders received an Annual Report containing financial statements
audited by the FUND's independent accountants for the fiscal year ended October
31, 1995. The Financial Statements for the fiscal year ended October 31, 1995
are incorporated herein by reference to the Annual Report of the FUND filed with
the U.S. Securities and Exchange Commission (File Nos. 33-3165 and 811-4579). A
copy of the Annual Report may be obtained without charge by contacting the FUND
at 1-800-829-3863.






                                       79
                                    APPENDIX A

                       DESCRIPTION OF CERTAIN OBLIGATIONS
                    ISSUED OR GUARANTEED BY U.S. GOVERNMENT
                         AGENCIES OR INSTRUMENTALITIES

      FEDERAL FARM CREDIT SYSTEM NOTES AND BONDS -- are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S. Government.
These bonds are not guaranteed by the U.S. Government.

      MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.

      FNMA BONDS -- are bonds guaranteed by the Federal National Mortgage
Association.  These bonds are not guaranteed by the U.S. Government.

      FHA DEBENTURES -- are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.

      FHA INSURED NOTES -- are bonds issued by the Farmers Home Administration,
the U.S. Government and are guaranteed by the U.S. Government.

      GNMA CERTIFICATES -- are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations.  Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government.  As a consequence of the fees Paid to GNMA
and the issuer of GNMA Certificates, the coupon rate of interest of GNMA


Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates.  The average life of a GNMA Certificate
is likely to be substantially less than the original maturity of the mortgage
pools underlying the securities.  Prepayments of principal by mortgagors and
mortgage foreclosures may result in the return of the greater part of principal
invested far in advance of the maturity of the mortgages in the pool.
Foreclosures impose no risk to principal investment because of the GNMA
guarantee.  As the prepayment rate of individual mortgage pools will vary
widely, it is not possible to accurately predict the average life of a
particular issue of GNMA Certificates.  The yield which will be earned on GNMA
Certificates may vary from their coupon rates for the following reasons:  (i)
Certificates may be issued at a premium or discount, rather than at par; (ii)
Certificates may trade in the secondary market at a premium or discount after
issuance; (iii) interest is earned and compounded monthly which has the effect
of raising the effective yield earned on the Certificates; and (iv) the actual
yield of each Certificate is affected by the prepayment of mortgages included in
the mortgage pool underlying the Certificates.  Principal which is so prepaid
will be reinvested although possibly at a lower rate.  In addition, prepayment
of mortgages included in the mortgage pool underlying a GNMA Certificate
purchased at a premium could result in a loss to the Portfolio.  Due to the
large amount of GNMA Certificates outstanding and active participation in the
secondary market by securities dealers and investors, GNMA Certificates are
highly liquid instruments.  Prices of GNMA Certificates are readily available
from securities dealers and depend on, among other things, the level of market
rates, the Certificate's coupon rate and the prepayment experience of the pool
of mortgages backing each Certificate.  If agency securities are purchased at a
premium above principal, the premium is not guaranteed by the issuing agency and
a decline in the market value to par may result in a loss of the premium, which

                                      A-2


may be particularly likely in the event of a prepayment.  When and if available,
U.S. Government obligations may be purchased at a discount from face value.

      GNMA FHLMC BONDS and GNMA FNMA BONDS -- are mortgage-backed bonds issued
by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage
Association, respectively, and are guaranteed by the U.S. Government.

      GSA PARTICIPATION CERTIFICATES -- are participation certificates issued by
the General Services Administration of the U.S. Government and are guaranteed by
the U.S. Government.

      NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.

      PUBLIC HOUSING BONDS -- are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.

      PENN CENTRAL TRANSPORTATION CERTIFICATES -- are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.

      SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.



                                      A-3


      WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds issued
by the Washington Metropolitan Area Transit Authority and are guaranteed by the
U.S. Government.

      FHLMC BONDS -- are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation.  These bonds are not guaranteed by the U.S. Government.

      FEDERAL HOME LOAN BANK NOTES AND BONDS -- are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S. Government.

      STUDENT LOAN MARKETING ASSOCIATION ("SALLIE MAE") NOTES AND BONDS -- are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.

      D.C. ARMORY BOARD BONDS -- are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.

      EXPORT-IMPORT BANK CERTIFICATES -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the U.S. and are guaranteed by the U.S. Government.

      In the case of securities not backed by the "full faith and credit" of the
U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.

      Investments may also be made in obligations of U.S. Government agencies or
instrumentalities other than those listed above.     
                                      A-4




                                    APPENDIX B

DESCRIPTION OF RATINGS

      A description of the rating policies of Moody's, S&P and Fitch with
respect to bonds and commercial paper appears below.

MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS

      Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and
carry the smallest degree of investment risk.  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 qualities
and are to be considered as upper medium grade obligations.  Factors giving

                                      A-5


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 a desirable
investment.  Assurance of interest and principal payments or of maintenance and
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 high degree.

      Such issues are often in default or have other marked shortcomings.

                                      A-6


      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" to certain of its
rating classifications.  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.


STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS

      AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.

      AA--Bonds rated "AA" also qualify as high quality debt obligations.
Capacity to pay principal and interest is very strong, and differs from "AAA"
issues only in small degree.

      A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

      BBB--Bonds rated "BBB" are regarded as having an adequate capacity to
repay principal and pay interest.  Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
                                      A-7


more likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for higher rated categories.

      BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations.  BB indicates the lowest degree of speculation and C the highest
degree of speculation.  While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

      CI--Bonds rated "CI" are income bonds on which no interest is being paid.

      D--Bonds rated "D" are in default.  The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period.  The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.

      The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.

MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS

      Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics:  leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
                                      A-8


moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.

      Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt 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 alternative liquidity is
maintained.

      Prime-3--Issuers (or related supporting institutions) rated "Prime-3" 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 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.

STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS

      A S&P commercial paper rating is current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.

                                      A-9


Ratings are graded in several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest.  The four categories are as follows:

      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, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the bigger 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.

FITCH BOND RATINGS


                                      A-10


      AAA--Bonds rated AAA by Fitch are 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 rated AA by Fitch are 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 issues
is generally rated F-1+ by Fitch.

      A--Bonds rated A by Fitch are 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 rated BBB by Fitch are 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 consequences 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.

      Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category.  Plus and minus signs, however, are not
used in the AAA category.

                                      A-11



FITCH SHORT-TERM RATINGS

      Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

      The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

Fitch's short-term ratings are as follows:

      F-1+--Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.

      F-1--Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.

      F-2--Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.

      F-3--Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.


                                      A-12


      LOC--The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.

      Like higher rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest.  However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.

      After purchase by the Portfolio, a security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio.  However,
the Portfolio's investment manager will consider such event in its determination
of whether the Portfolio should continue to hold the security.  To the extent
the ratings given by Moody's, S&P or Fitch may change as a result of changes in
such organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained the Prospectus and statement of additional
information.     









                                      A-13





   G01386-07 (10/96)     
093265304