FEDERATED INVESTMENT TRUST, 497, 1996-09-30

FEDERATED INVESTMENT TRUST
497, 1996-09-30

Previous: DIGITAL TRANSMISSION SYSTEMS INC \DE\, 10KSB, 1996-09-30

Next: DIME COMMUNITY BANCORP INC, 10-K405, 1996-09-30

FEDERATED BOND INDEX FUND
(A PORTFOLIO OF FEDERATED INVESTMENT TRUST)
INSTITUTIONAL SHARES
PROSPECTUS

The Institutional Shares of Federated Bond Index Fund (the "Fund") offered by
this prospectus represent interests in a diversified portfolio of securities
which is an investment portfolio of Federated Investment Trust (the "Trust"), an
open-end management investment company (a mutual fund). Institutional Shares are
sold at net asset value.

The investment objective of the Fund is to provide investment results that
correspond to the investment performance of the Lehman Brothers Aggregate Bond
Index, a broad market-weighted index which encompasses U.S. Treasury and agency
securities, corporate investment grade bonds, and mortgage-backed securities.

UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS ("ASSETS") IN BOND INDEX PORTFOLIO (THE "PORTFOLIO"), A
DIVERSIFIED SERIES OF FEDERATED INVESTMENT PORTFOLIOS (THE "FEDERATED
PORTFOLIOS"), AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE PORTFOLIO HAS THE
SAME INVESTMENT OBJECTIVE AND POLICIES AS THE FUND. THEREFORE, THE FUND'S
INVESTMENT EXPERIENCE WILL CORRESPOND DIRECTLY WITH THAT OF THE PORTFOLIO. THE
FUND INVESTS IN THE PORTFOLIO THROUGH A TWO-TIER MASTER/FEEDER FUND STRUCTURE.
SEE "SPECIAL INFORMATION CONCERNING HUB AND SPOKE. "

Federated Research Corp. is the Portfolio's investment adviser. Federated
Research Corp. has delegated the daily management of the security holdings of
the Portfolio to United States Trust Company of New York ("U.S. Trust Company"),
acting as sub-adviser. U.S. Trust Company and Federated Research Corp. may
hereinafter be referred to collectively as the "Investment Managers." For more
information on the Investment Managers of the Fund, please refer to the
prospectus section herein entitled "Management of the Trust and Federated
Portfolios."

THE INSTITUTIONAL SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK (INCLUDING U.S. TRUST COMPANY), ARE NOT ENDORSED OR
GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.

This prospectus contains the information you should read and know before you
invest in Institutional Shares of the Fund. Keep this prospectus for future
reference.

The Fund has also filed a Statement of Additional Information for Institutional
Shares and Institutional Service Shares dated September 30, 1996, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-245-4270. To obtain other
information or make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus.
The Statement of Additional Information, material incorporated by reference into
this document, and other
information regarding the Trust is maintained electronically with the SEC at
Internet Web site
(http://www.sec.gov).

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

Prospectus dated September 30, 1996

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

SUMMARY OF FUND EXPENSES--
INSTITUTIONAL SHARES 1
- ------------------------------------------------------

FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SHARES 2
- ------------------------------------------------------

GENERAL INFORMATION 3
- ------------------------------------------------------

INVESTMENT INFORMATION 3
- ------------------------------------------------------

Investment Objective 4
Investment Policies 4
Additional Investment Strategies
and Techniques; Risk Factors 7
Investment Limitations 13
Special Information Concerning Hub
and Spoke 14

INFORMATION ABOUT THE TRUST AND
FEDERATED PORTFOLIOS 15
- ------------------------------------------------------

Management of the Trust and Federated
Portfolios 15
Distribution of Institutional Shares 18
Administration of the Trust 19
Service Providers of the Portfolio 20

NET ASSET VALUE 20
- ------------------------------------------------------

INVESTING IN INSTITUTIONAL SHARES 20
- ------------------------------------------------------

Share Purchases 20
Minimum Investment Required 21
What Shares Cost 21
Certificates and Confirmations 22
Dividends 22
Capital Gains 22
Retirement Plans 22

REDEEMING INSTITUTIONAL SHARES 23
- ------------------------------------------------------

Telephone Redemption 23
Written Requests 23
Accounts With Low Balances 24

SHAREHOLDER INFORMATION 24
- ------------------------------------------------------

Voting Rights 24

EFFECT OF BANKING LAWS 25
- ------------------------------------------------------

TAX INFORMATION 25
- ------------------------------------------------------

PERFORMANCE INFORMATION 27
- ------------------------------------------------------

OTHER CLASSES OF SHARES 27
- ------------------------------------------------------

MISCELLANEOUS 27
- ------------------------------------------------------

ADDRESSES 29
- ------------------------------------------------------

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

The following table provides (i) a summary of estimated expenses related to
purchases and sales of Fund Shares and the aggregate annual operating expenses
of Fund Shares and the Portfolio as a percentage of their average daily net
assets, and (ii) an example illustrating the dollar cost of such expenses on a
$1,000 investment in Fund Shares.
<TABLE>
<S> <C> <C>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)............................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price).................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable).............................................................. None
Redemption Fee (as a percentage of amount redeemed, if applicable).......................................... None
Exchange Fee................................................................................................ None
ANNUAL INSTITUTIONAL SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)........................................................................... 0.00%
12b-1 Fee................................................................................................... None
Total Other Expenses (after expense reimbursement by the Investment Managers and administrator)............. 0.29%
Shareholder Services Fee (after waiver) (2).................................................. 0.00%
Total Institutional Shares Operating Expenses (after waivers and reimbursements ) (3)............... 0.29%
</TABLE>

(1) The management fee has been reduced to reflect the anticipated voluntary
waiver of the management fee. While the Fund does not pay any fee directly
to an investment adviser, it bears indirectly, as an investor in the
Portfolio, any fees paid by the Portfolio to its investment adviser. The
Portfolio has entered into an investment advisory agreement with Federated
Research Corp. and agrees to pay an annual fee of up to 0.25% of the
Portfolio's average net assets. Federated Research Corp. can terminate this
voluntary waiver at any time at its sole discretion.

(2) The shareholder services fee has been reduced to reflect the voluntary
waiver of the shareholder services fee. The shareholder service provider can
terminate this voluntary waiver at any time at its sole discretion. The
maximum shareholder service fee is 0.25%.

(3) The Total Institutional Shares Operating Expenses are estimated to be 2.47%
absent the anticipated voluntary waivers of the management fee and the
shareholder services fee and the anticipated voluntary reimbursement of
certain other operating expenses by the Investment Managers and
administrator.

Total Institutional Shares Operating Expenses include the Fund's pro rata share
of the aggregate annual operating expenses of the Portfolio, in which all of the
investable assets of the Fund are invested. The Trustees of the Trust considered
the aggregate per share expenses of the Fund, the Fund's pro rata shares of the
expenses for the Portfolio and the potential economies of scale the Fund could
achieve by investing its assets in the Portfolio. As a result, the Trustees
believe that the aggregate per share expenses of the Fund and the Fund's pro
rata share of the expenses for the Portfolio will be less than or approximately
equal to the expenses which the Fund would incur if it retained the services of
an investment adviser and the assets of the Fund were invested directly in the
type of securities held by the Portfolio. Federated Investors has agreed to
maintain total operating expenses (after waivers and reimbursements) of the
Portfolio at no greater than 0.20% of average net assets of the Portfolio for
the twelve month period following January 2, 1996.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS
COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SHARES OF THE FUND WILL
BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE
VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SHARES" AND
"INFORMATION ABOUT THE TRUST AND FEDERATED PORTFOLIOS." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period.................................................................. $3 $9 $16 $37
</TABLE>

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

FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES

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

(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Ernst & Young, LLP, the Fund's
independent auditors. Their report, dated July 18, 1996, on the Fund's financial
statements for the period ended May 31, 1996, and on the following table for the
period presented, is included in the Fund's Annual Report, which is incorporated
herein by reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, contained in the Fund's Annual Report,
which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1996(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.25
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------
Net investment income 0.12
- -----------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.29)
- ----------------------------------------------------------------------------------------------- ------
Total from investment operations (0.17)
- ----------------------------------------------------------------------------------------------- ------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------
Distributions from net investment income (0.12)
- ----------------------------------------------------------------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $ 6.96
- ----------------------------------------------------------------------------------------------- ------
TOTAL RETURN (b) (2.32%)
- -----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS*
- -----------------------------------------------------------------------------------------------
Expenses 0.09%
- -----------------------------------------------------------------------------------------------
Net investment income 7.01%
- -----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 8.18%
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted)
$7,409
- -----------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from February 22, 1996 (start of
performance) to May 31, 1996.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

Further information about the Fund's performance is contained in the Annual
Report dated May 31, 1996, which can be obtained free of charge.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated October 3, 1995. The Declaration of Trust permits the Trust to
offer separate series of shares of beneficial interest representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. As of the date of this prospectus, the Board of
Trustees of the Trust (the "Trustees") has established two classes of shares of
the Fund, known as Institutional Shares and Institutional Service Shares. This
prospectus relates only to Institutional Shares.

Institutional Shares ("Shares") are sold primarily to accounts for which
financial institutions act in a fiduciary or agency capacity, or other accounts
where the financial institution maintains master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors. Shares are also made available
to financial intermediaries, as well as public and private organizations. An
investment in the Fund serves as a convenient means of accumulating an interest
in a professionally managed, diversified portfolio of U.S. investment grade
fixed income securities that attempt to provide investment results that
correspond to the Lehman Brothers Aggregate Bond Index, a broad market-weighted
index which encompasses U.S. Treasury and agency securities, corporate
investment grade bonds and mortgage-backed securities, each with maturities
greater than one year. A minimum initial investment of $25,000 over a 90-day
period is required, unless the investment is in a retirement program, in which
case the minimum initial investment is $50. Subsequent investments must be in
amounts of at least $100, or $50 for retirement programs.

Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.

The Fund invests through the Portfolio, a series of Federated Portfolios, which
is a business trust organized under the laws of the Commonwealth of
Massachusetts. Federated Portfolios was established as a Massachusetts business
trust under a Declaration of Trust dated as of September 29, 1995.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

Unless otherwise stated, all of the investment objectives, policies and
strategies discussed herein and in the Statement of Additional Information are
deemed "non-fundamental," i.e., the approval of the Fund's shareholders is not
required to change its investment objective or any of its investment policies
and strategies. Likewise, the approval of the Fund and other investors in the
Portfolio is not required to change the Portfolio's investment objective or any
of the Portfolio's investment policies and strategies. Any changes in the Fund's
or the Portfolio's investment objective, policies or strategies could result in
the Fund having investment objectives, policies and strategies different from
those applicable at the time of a shareholder's investment in the Fund.

INVESTMENT OBJECTIVE

The investment objective of the Fund is to provide investment results that
correspond to the investment performance of the Lehman Brothers Aggregate Bond
Index (the "Aggregate Bond Index"), a broad market-weighted index which
encompasses U.S. Treasury and agency securities, corporate investment grade
bonds, and mortgage-backed securities, each with maturities greater than one
year.

The Fund seeks to achieve its investment objective by investing all of its
Assets in the Portfolio, which is a diversified open-end management investment
company that has the same investment objective, policies and limitations as the
Fund. The Portfolio seeks to achieve its investment objective by replicating the
yield and total return of the Aggregate Bond Index through a statistically
selected sample of debt instruments. The Aggregate Bond Index is a broad market-
weighted index of U.S. investment grade fixed income securities.

While there is no assurance that the Fund (or the Portfolio) will achieve its
investment objective, the Fund (and the Portfolio) endeavor to do so by
following the investment policies described in this prospectus. Shareholder
approval is not required to change the Fund's investment objective. Likewise,
the approval of the investors in the Portfolio is not required to change the
Portfolio's investment objective. Shareholders will be given 30 days' prior
notice before any material change becomes effective. If there is a change in the
Fund's (or the Portfolio's) investment objective, such change could result in
the Fund (or the Portfolio) having an investment objective that is different
than the objective a shareholder considered applicable at the time of
investment. If the Fund's (or the Portfolio's) investment objective is changed,
shareholders should consider whether the Fund remains an appropriate investment
in light of their then-current financial position and needs.

Since the investment policies and limitations of the Fund will correspond
directly to those of the Portfolio, the following is a discussion of the various
investment policies and limitations of the Portfolio. Further information about
the investment policies and limitations of the Portfolio, including a list of
those investment limitations that are fundamental (i.e., that cannot be changed
without shareholder approval) appears in the Statement of Additional
Information.

INVESTMENT POLICIES

Unless indicated otherwise, the investment policies discussed below may be
changed without the approval of the Fund's shareholders (or the investors of the
Portfolio). Shareholders will be given 30 days' prior notice before any material
change becomes effective.

INVESTMENT PHILOSOPHY AND STRATEGIES. U.S. Trust Company, the sub-adviser for
the Portfolio, is a state-chartered bank and trust company which offers a
variety of specialized fiduciary and financial services to high net worth
individuals, institutions and corporations. As one of the largest institutions
of its type, U.S. Trust Company prides itself in offering an attentive and high
level of service to each of its clients.

utilizing a passive or indexing investment approach, will attempt to
duplicate the investment performance of the Aggregate Bond Index.

The Portfolio seeks to duplicate the investment performance of the
Aggregate Bond Index through statistical sampling procedures, that is, the
Portfolio will invest in a selected group-- not the entire universe--of
securities in the Aggregate Bond Index. This group of securities, when
taken together, is expected to perform similarly to the Aggregate Bond
Index as a whole. The sampling technique is expected to enable the
Portfolio to track the price movements and performance of the Aggregate
Bond Index, while minimizing brokerage, custodial and accounting costs.

The Trust expects that there will be a close correlation between the
Portfolio's performance and that of the Aggregate Bond Index in both rising
and falling markets. The Portfolio will attempt to maximize the correlation
between its performance and that of the Aggregate Bond Index. The
Investment Managers seek a correlation of 0.95 or better. In the event that
a correlation of 0.95 or better is not achieved, the Trustees of Federated
Portfolios will review methods for increasing such correlation with the
Investment Managers, such as through adjustments in securities holdings of
the Portfolio. A correlation of 1.0 would indicate a perfect correlation,
which would be achieved when the Portfolio's net asset value, including the
value of its dividend and capital gains distributions, increases or
decreases in exact proportion to changes in the Aggregate Bond Index. The
Portfolio's Investment Managers monitor the correlation between the
performance of the Portfolio and the Aggregate Bond Index on a regular
basis. Factors such as the size of the Portfolio's securities holdings,
transaction costs, management fees and expenses, brokerage commissions and
fees, the extent and timing of cash flows into and out of the Portfolio,
and changes in the securities markets and the Index itself, are expected to
account for any differences between the Portfolio's performance and that of
the Aggregate Bond Index.

The Portfolio invests at least 80% of its assets in a portfolio of
securities consisting of a representative selection of debt instruments
included in the Aggregate Bond Index. The Portfolio intends to remain fully
invested, to the extent practicable, in a pool of securities that match the
yield and total return of the Aggregate Bond Index.

LEHMAN BROTHERS AGGREGATE BOND INDEX. The Aggregate Bond Index is a broad
market-weighted index which encompasses three major classes of United States
investment grade fixed income securities with maturities greater than one year:
U.S. Treasury and agency securities, corporate bonds, and mortgage-backed
securities. The Index measures the total investment return (capital change plus
income) provided by a universe of fixed income securities, weighted by the
market value outstanding of each security. The securities included in the Index
generally meet the following criteria, as defined by Lehman Brothers: an
outstanding market value of at least $100 million and investment grade quality
(rated a minimum of Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by
Standard & Poor's Ratings Group ("S&P")).

The Aggregate Bond Index is composed of the following kinds of securities:
public obligations of the U.S. Government; publicly issued debt of U.S.
Government agencies and quasi-federal corporations; corporate debt guaranteed by
the U.S. Government; fixed rate nonconvertible dollar-
denominated corporate debt; 15-year and 30-year fixed rate securities backed by
mortgage pools of the Government National Mortgage Association (GNMA), the
Federal Home Loan Mortgage Corporation (FHLMC), and the Federal National
Mortgage Association (FNMA); and asset-backed pass-through securities
representing pools of credit card receivables and auto or home equity loans.

As of June 30, 1996, the following classes of fixed income securities
represented the stated proportions of the total market value of the Aggregate
Bond Index:
<TABLE>
<S> <C>
U.S. Treasury and government agency securities 51.68%
Corporate Bonds 17.45%
Mortgage- and asset-backed securities 30.87%
</TABLE>

The Portfolio has a policy of weighting its holdings so as to approximate the
relative composition of the securities contained in the Aggregate Bond Index,
under normal circumstances. Therefore, for each of the three classes of debt
instruments listed above, the variation in weighting between the assets held by
the Portfolio and the assets in the Aggregate Bond Index is not expected to be
greater than plus or minus 5%. These weightings will be monitored at the time
securities are purchased by the Portfolio. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.

U.S. GOVERNMENT AND AGENCY SECURITIES. The Portfolio may invest in U.S.
Government securities and securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ only in their interest rates, maturities and times of
issuance: Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, such as Government
National Mortgage Association pass-through certificates, are supported by the
full faith and credit of the U.S. Treasury; other securities, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury. Securities issued by the Federal National Mortgage
Association are supported by discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality; other securities,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. The Portfolio and the Fund and their respective net
asset values and yields are not guaranteed by the U.S. Government or any federal
agency or instrumentality.

CORPORATE BONDS. The Portfolio may purchase debt securities of United States
corporations only if they are deemed investment grade, that is, they carry a
rating of at least Baa from Moody's or BBB from S&P or, if not rated by these
rating agencies, are judged by the Investment Managers to be of comparable
quality. With respect to securities rated Baa by Moody's and BBB by S&P,
interest and principal payments are regarded as adequate for the present;
however, securities with these ratings may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make interest and principal payments than is the

case with higher grade bonds. The Portfolio intends to dispose of, in an orderly
manner, any security which is downgraded below investment grade subsequent to
its purchase. See the Appendix to the Statement of Additional Information for a
more detailed explanation of these ratings.

Corporate bonds are subject to call risk during periods of falling interest
rates. Securities with high stated interest rates may be prepaid (or called)
prior to maturity, requiring the Portfolio to invest the proceeds at generally
lower interest rates. Call provisions, common in many corporate bonds, allow
bond issuers to redeem bonds prior to maturity (at a specific price). When
interest rates are falling, bond issuers often exercise these call provisions,
paying off bonds that carry high stated interest rates and often issuing new
bonds at lower rates. For the Portfolio, the result would be that bonds with
high interest rates are called and must be replaced with lower-yielding
instruments. In these circumstances, the income of the Portfolio would decline.

MORTGAGE PASS-THROUGHS AND COLLATERALIZED MORTGAGE OBLIGATIONS. The Portfolio
may purchase mortgage and mortgage-related securities such as pass-throughs and
collateralized mortgage obligations that meet the Portfolio's selection criteria
and are investment grade or of comparable quality (collectively, "Mortgage
Securities"). Mortgage pass-throughs are securities that pass through to
investors an undivided interest in a pool of underlying mortgages. These are
issued or guaranteed by U.S. government agencies such as GNMA, FNMA, and FHLMC.
Other mortgage pass-throughs consist of whole loans originated and issued by
private limited purpose corporations or conduits. Collateralized mortgage
obligation bonds are obligations of special purpose corporations that are
collateralized or supported by mortgages or mortgage securities such as
pass-throughs.

As a result of its investments in Mortgage Securities, the mortgage-backed
securities in the Portfolio may be subject to a greater degree of market
volatility as a result of unanticipated prepayments of principal. During periods
of declining interest rates, the principal invested in mortgage-backed
securities with high interest rates may be repaid earlier than scheduled, and
the Portfolio will be forced to reinvest the unanticipated payments at generally
lower interest rates. When interest rates fall and principal prepayments are
reinvested at lower interest rates, the income that the Portfolio derives from
mortgage-backed securities is reduced. In addition, like other fixed income
securities, Mortgage Securities generally decline in price when interest rates
rise.

Because the Portfolio will seek to represent all major sectors of the investment
grade fixed income securities market, the Fund may be a suitable vehicle for
those investors seeking ownership in the "bond market" as a whole, without
regard to particular sectors. The Fund is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of speculating on
short-term bond market movements. Because of potential share price fluctuations,
the Fund may be inappropriate for investors who have short-term objectives or
who require stability of principal. Investors should not consider the Fund a
complete investment program.

ADDITIONAL INVESTMENT STRATEGIES AND TECHNIQUES; RISK FACTORS

The Portfolio may utilize the investment strategies and techniques described
below.

SAMPLING AND TRADING IN THE PORTFOLIO. The Portfolio does not expect to hold
all of the individual issues which comprise the Aggregate Bond Index because of
the large number of securities involved. Instead, the Portfolio will hold a
representative sample of securities, selecting one or two issues to represent
entire classes or types of securities in the Index. This sampling technique is
expected to be an effective means of substantially duplicating the income and
capital returns provided by the Index.

To reduce transaction costs, the Portfolio's securities holdings will not be
automatically traded or re-balanced to reflect changes in the Aggregate Bond
Index. The Portfolio will seek to buy round lots of securities and may trade
large blocks of securities. These policies may cause a particular security to be
over- or under-represented in the Portfolio relative to its Index weighting or
result in its continued ownership by the Portfolio after its deletion from the
Index, thereby reducing the correlation between the Portfolio and the Index. The
Portfolio is not required to buy or sell securities solely because the
percentage of its assets invested in Index securities changes when their market
values increase or decrease. In addition, in order to more closely correlate to
the Index, the Portfolio may omit or remove Index securities from its portfolio
and substitute other Index securities if the Investment Managers believe the
removed security to be insufficiently liquid or believe the merit of the
investment has been substantially impaired by extraordinary events or financial
conditions. The Investment Managers seek a correlation of 0.95 or better between
the performance of the Portfolio and that of the Aggregate Bond Index. See
"Investment Philosophy and Strategies" above.

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. These transactions involve a commitment by the
Portfolio to purchase or sell particular securities with payment and delivery
taking place in the future, beyond the normal settlement date, at a stated price
and yield. Securities purchased on a forward commitment or when-issued basis are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. When such transactions are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at a
later date. Accordingly, the Portfolio may pay more/less than the market value
of the securities on the settlement date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Portfolio will
enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. However,
the Portfolio may dispose of a commitment prior to settlement if the Investment
Managers deem it appropriate to do so. In addition, the Portfolio may enter into
transactions to sell its purchase commitments to third parties at current market
values and simultaneously acquire other commitments to purchase similar
securities at later dates. The Portfolio may realize short-term profits or
losses upon the sale of such commitments. At the time the Portfolio enters into
a transaction on a when-issued or forward commitment basis, a segregated account
consisting of cash or high grade liquid debt securities equal to the value of
the when-issued or forward commitment securities will be established and
maintained. There is a risk that the securities may not be delivered and that
the Portfolio may incur a loss.

REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees of Federated Portfolios. In a repurchase agreement,
the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest, and this value is maintained during
the term of the agreement. If the seller defaults and the collateral value
declines, the Portfolio might incur a loss. If bankruptcy proceedings are
commenced with respect to the seller, the Portfolio's realization upon the
disposition of collateral may be delayed or limited. Investments in certain
repurchase agreements and certain other investments which may be considered
illiquid are limited. See "Illiquid Investments; Privately Placed and other
Unregistered Securities" below.

REVERSE REPURCHASE AGREEMENTS. The Portfolio may borrow funds, in an amount up
to one-third of the value of its total assets, for temporary or emergency
purposes, such as meeting larger than anticipated redemption requests, and not
for leverage. The Portfolio may also agree to sell portfolio securities to
financial institutions such as banks and broker-dealers and to repurchase them
at a mutually agreed date and price (a "reverse repurchase agreement"). The
Securities and Exchange Commission ("SEC") views reverse repurchase agreements
as a form of borrowing. At the time the Portfolio enters into a reverse
repurchase agreement, it will place in a segregated custodial account cash, U.S.
Government securities or high-grade debt obligations having a value equal to the
repurchase price, including accrued interest. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Portfolio
may decline below the repurchase price of those securities.

INVESTMENT COMPANY SECURITIES. In connection with the management of its daily
cash position, the Portfolio may invest in securities issued by other investment
companies which invest in high quality, short-term debt securities and which
determine their net asset value per share based on the amortized cost or
penny-rounding method. In addition to the advisory and sub-advisory fees and
other expenses the Portfolio bears directly in connection with its own
operations, as a shareholder of another investment company the Portfolio would
bear its pro rata portion of the other investment company's advisory fees and
other expenses. As such, the Fund's shareholders would indirectly bear the
expenses of the other investment company, some or all of which would be
duplicated. Securities of other investment companies may be acquired by the
Portfolio to the extent permitted under the 1940 Act, that is, the Portfolio may
invest a maximum of up to 10% of its total assets in securities of other
investment companies so long as not more than 3% of the total outstanding voting
stock of any one investment company is held by the Portfolio. In addition, not
more than 5% of the Portfolio's total assets may be invested in the securities
of any one investment company.

securities. Moreover, the Portfolio may sell futures and options to "close out"
futures and options it may have purchased or to protect against a decrease in
the price of securities it owns but intends to sell. The Portfolio will not
invest in futures or options as part of a defensive strategy to protect against
potential market declines. See "Futures Contracts and Options on Futures
Contracts" in the Statement of Additional Information.

The Portfolio may (a) purchase exchange-traded and over the counter (OTC) put
and call options on securities and indices of securities, (b) purchase and sell
futures contracts on securities and indices of securities and (c) purchase put
and call options on futures contracts on securities and indices of securities.
In addition, the Portfolio may sell (write) exchange-traded and OTC put and call
options on securities and indices of securities and on futures contracts on
securities and indices of securities. The staff of the SEC has taken the
position that OTC options are illiquid and, therefore, together with other
illiquid securities held by the Portfolio, cannot exceed 15% of the Portfolio's
net assets. The Portfolio intends to comply with this limitation.

The use of options and futures is a highly specialized activity which involves
investment strategies and risks different from those associated with ordinary
portfolio securities transactions, and there can be no guarantee that their use
will increase the Portfolio's return. While the use of these techniques by the
Portfolio may reduce certain risks associated with owning its portfolio
securities, these investments entail certain other risks. If the Investment
Managers apply a strategy at an inappropriate time or judge market conditions or
trends incorrectly, options and futures strategies may lower the Portfolio's
return. Certain strategies limit the Portfolio's potential to realize gains as
well as limit its exposure to losses. The Portfolio could also experience losses
if the prices of its options and futures positions were poorly correlated with
its other investments, or if it could not close out its positions because of an
illiquid secondary market. In addition, the Portfolio will incur transaction
costs, including trading commissions and option premiums, in connection with its
futures and options transactions and these transactions could significantly
increase the Portfolio's turnover rate. For more information on these investment
techniques, see the Statement of Additional Information.

The Portfolio may purchase and sell put and call options on securities, indices
of securities and futures contracts, or purchase and sell futures contracts,
only if such options are written by other persons and if (i) the aggregate
premiums paid on all such options which are held at any time do not exceed 20%
of the Portfolio's total net assets, and (ii) the aggregate margin deposits
required on all such futures and premium on options thereon held at any time do
not exceed 5% of the Portfolio's total assets. The Portfolio may also be subject
to certain limitations pursuant to the regulations of the Commodity Futures
Trading Commission. The Portfolio does not have any current intention of
purchasing futures contracts or investing in put and call options on securities,
indices of securities, or futures contracts if more than 5% of its net assets
would be at risk from such transactions.

course of business at approximately the amount at which it is valued by the
Portfolio. The price the Portfolio pays for illiquid securities or receives upon
resale may be lower than the price paid or received for similar securities with
a more liquid market. Accordingly the valuation of these securities will reflect
any limitations on their liquidity.

Acquisitions of illiquid investments by the Portfolio are subject to the
following non-fundamental policies. The Portfolio may not invest in additional
illiquid securities if, as a result, more than 15% of the market value of its
net assets would be invested in illiquid securities. The Portfolio may also
purchase Rule 144A securities sold to institutional investors without
registration under the 1933 Act. These securities may be determined to be liquid
in accordance with guidelines established by the Investment Managers and
approved by the Trustees of Federated Portfolios. The Trustees of Federated
Portfolios will monitor the implementation of these guidelines on a periodic
basis. Because Rule 144A is relatively new, it is not possible to predict how
markets in Rule 144A securities will develop. If trading in Rule 144A securities
were to decline, these securities could become illiquid after being purchased,
increasing the level of illiquidity of the Portfolio. As a result, the Portfolio
might not be able to sell these securities when the Investment Managers wish to
do so, or might have to sell them at less than fair value.

SHORT-TERM INSTRUMENTS. The Portfolio may invest in short-term income
securities in accordance with its investment objective and policies as described
above. The Portfolio may also make money market investments pending other
investments or settlement, or to maintain liquidity to meet shareholder
redemptions. Although the Portfolio normally seeks to remain substantially fully
invested in securities selected to match the Aggregate Bond Index consistent
with seeking a correlation of 0.95 or better between the Portfolio's performance
and that of the Aggregate Bond Index, the Portfolio may invest temporarily up to
20% of its assets in certain short-term fixed income securities. The Portfolio
will not invest in short-term instruments as part of a defensive strategy to
protect against potential market declines.

Short-term investments include: obligations of the U.S. Government and its
agencies or instrumentalities; commercial paper and other debt securities;
variable and floating rate securities; bank obligations; repurchase agreements
collateralized by these securities; and shares of other investment companies
that primarily invest in any of the above referenced securities. Commercial
paper consists of short-term, unsecured promissory notes issued to finance
short-term credit needs. Other corporate obligations in which the Portfolio may
invest consist of high quality, U.S. dollar-denominated short-term bonds and
notes (including variable amount master demand notes) issued by domestic and
foreign corporations. The Portfolio may invest in commercial paper issued by
major corporations in reliance on the exemption from registration afforded by
Section 3(a)(3) of the 1933 Act. Such commercial paper may be issued only to
finance current transactions and must mature in nine months or less. Trading of
such commercial paper is conducted primarily by institutional investors through
investment dealers, and individual investor participation in the commercial
paper market is very limited.

instruments include Yankee Certificates of Deposit ("Yankee CDs"), which are
certificates of deposit denominated in U.S. dollars and issued in the United
States by the domestic branch of a foreign bank. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by the
Portfolio are not insured by the Federal Deposit Insurance Corporation or any
other agency of the U.S. Government. The Portfolio will not invest more than 15%
of the value of its net assets in time deposits maturing in longer than seven
days and other instruments which are deemed illiquid or not readily marketable.
Bankers' acceptances are credit instruments evidencing the obligation of a bank
to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations in which the
Portfolio may invest include uninsured, direct obligations which have either
fixed, floating or variable interest rates.

The Portfolio will limit its short-term investments to those U.S.
dollar-denominated instruments which are determined by or on behalf of the
Trustees of Federated Portfolios to present minimal credit risks and which are
of "high quality" as determined by a major rating service (i.e., rated P-1 by
Moody's or A-1 by S&P) or, in the case of instruments which are not rated, are
deemed to be of comparable quality pursuant to procedures established by the
Trustees of Federated Portfolios. The Portfolio may invest in obligations of
banks which at the date of investment have capital, surplus and undivided
profits (as of the date of their most recently published financial statements)
in excess of $100 million. Investments in high quality short-term instruments
may, in many circumstances, result in a lower yield than would be available from
investments in instruments with a lower quality or longer term.

SECURITIES LENDING. The Portfolio may seek to increase its income by lending
securities to banks, brokers or dealers and other recognized institutional
investors. Such loans 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, U.S. Government or other high quality securities,
irrevocable letters of credit issued by a bank, or any combination thereof. Such
collateral will be maintained at all times in an amount equal to at least 100%
of the current market value of the loaned securities. The Portfolio can increase
its income through the investment of any such collateral consisting of cash. The
Portfolio continues to be entitled to payments in amounts equal to the interest
or dividends payable on the loaned security and in addition, if the collateral
received is other than cash, receives a fee based on the amount of the loan.
Such loans will be terminable at any time upon specified notice. The Portfolio
might experience risk of loss if the institution with which it has engaged in a
portfolio loan transaction breaches its agreement with the Portfolio. For
example, the loaned securities may not be available to the Portfolio on a timely
basis and the Portfolio may, therefore, lose the opportunity to sell the
securities at a desirable price.

SHORT SALES "AGAINST THE BOX.' ' In a short sale, the Portfolio sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The Portfolio may engage in short sales only if at the time
of the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." The Portfolio may make a short sale as
a hedge, when it believes that the value of a security owned by it (or a
security convertible or exchangeable for such security) may

decline, or when the Portfolio wants to sell the security at an attractive
current price but wishes to defer recognition of gain or loss for tax purposes.
Not more than 40% of the Portfolio's total assets would be involved in short
sales "against the box."

CERTAIN OTHER OBLIGATIONS. Consistent with its investment objectives, policies
and restrictions, the Portfolio may also invest in participation interests,
guaranteed investment contracts and zero coupon obligations. See the Statement
of Additional Information. In order to allow for investments in new instruments
that may be created in the future, upon supplementing this prospectus, the
Portfolio may invest in obligations other than those listed previously, provided
such investments are consistent with the Portfolio's and Fund's investment
objective, policies and restrictions.

DERIVATIVE CONTRACTS AND SECURITIES. The term "derivative" has traditionally
-
been applied to certain contracts (including, futures, forward, option and swap
contracts) that "derive" their value from changes in the value of an underlying
security, currency, commodity or index. Certain types of securities that
incorporate the performance characteristics of these contracts are also referred
to as "derivatives." The term has also been applied to securities "derived" from
the cash flows from underlying securities, mortgages or other obligations.

Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stocks and bonds, derivatives do not
necessarily present greater market risks than traditional investments. The
Portfolio will only use derivative contracts for the purposes disclosed in the
applicable sections above. To the extent that the Portfolio invests in
securities that could be characterized as derivatives, such as mortgage pass-
throughs and collateralized mortgage obligations, it will only do so in a manner
consistent with its investment objectives, policies and limitations.

INVESTMENT LIMITATIONS

The Statement of Additional Information includes a further discussion of
investment strategies and techniques, and a listing of other fundamental
investment restrictions and non-fundamental investment policies which govern the
investment policies of the Fund and the Portfolio. Fundamental investment
restrictions may not be changed, in the case of the Fund, without the approval
of the shareholders of the Fund or, in the case of the Portfolio, without the
approval of the investors (including the Fund) in the Portfolio. If a percentage
restriction (other than a restriction as to borrowing) or a rating restriction
on investment or utilization of assets is adhered to at the time

an investment is made or assets are so utilized, a later change in percentage
resulting from changes in the value of the securities held by the Portfolio or a
later change in the rating of a security held by the Portfolio is not considered
a violation of the policy.

SPECIAL INFORMATION CONCERNING HUB AND SPOKE

Unlike other mutual funds that directly acquire and manage their own portfolios
of securities, the Fund seeks to achieve its investment objective by investing
all of its Assets in the Portfolio. The Fund invests in the Portfolio through
Signature Financial Group, Inc.'s two-tier structure master/ feeder fund known
as the Hub and Spoke financial services method. Hub and Spoke is a registered
service mark of Signature Financial Group, Inc. and is licensed to Federated
Services Company. The Fund has the same investment objective and policies as the
Portfolio. In addition to selling a beneficial interest to the Fund, the
Portfolio may sell beneficial interests to other mutual funds or institutional
investors. Such investors will invest in the Portfolio on the same terms and
conditions and will pay a proportionate share of the Portfolio's expenses.
However, the other investors investing in the Portfolio are not required to
issue their shares at the same public offering price as the Fund due to
variations in sales commissions and other operating expenses. Investors in the
Fund should be aware that these differences may result in differences in returns
experienced by investors in the different funds that invest in the Portfolio.
Such differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests (e.g., other spokeSM or feeder
funds) in the Portfolio is available from Federated Services Company at
1-800-245-4270.

The investment objective of the Fund may be changed without the approval of the
Fund's shareholders but not without written notice thereof to the Fund's
shareholders thirty days prior to implementing the change. If there were a
change in the Fund's investment objective, shareholders should consider whether
the Fund remains an appropriate investment in light of their then-current
financial position and needs. The investment objective of the Portfolio may be
changed without the approval of the investors in the Portfolio, but not without
written notice thereof to the Portfolio's investors (and notice by the Fund to
its shareholders) thirty days prior to implementing the change. There can, of
course, be no assurance that the investment objective of the Fund or the
Portfolio will be achieved. See "Investment Limitations" in the Statement of
Additional Information for a description of the fundamental investment policies
and restrictions of the Portfolio and the Fund that cannot be changed without
approval by the holders of a "majority of the outstanding voting securities" (as
defined in the Investment Company Act of 1940 ("1940 Act")) of the Portfolio or
Fund. Except as stated otherwise, the investment objective, policies, strategies
and restrictions described herein and in the Statement of Additional Information
are non-fundamental.

the proposal is one, if which made with respect to the Fund, would not require
the vote of Fund shareholders, as long as such action is permissible under
applicable statutory and regulatory requirements. Conversely, except as
permitted by the SEC, whenever the Fund is requested to vote as an investor in
the Portfolio on matters pertaining to the Portfolio because the 1940 Act
requires approval of the matter by an investment company's shareholders, the
Fund will hold a meeting of its shareholders and will cast all of its votes as
an investor in the Portfolio in the same proportion as directed by the votes of
the Fund's shareholders. Fund shareholders who do not vote will not affect the
votes cast by the Fund at the meeting of the Portfolio investors. The percentage
of votes representing the Fund's shareholders will be voted by the Fund in the
same proportion as the Fund's shareholders who do, in fact, vote. Certain
changes in the Portfolio's investment objective, policies or limitations may
require the Fund to withdraw its investment in the Portfolio. Any such
withdrawal could result in a distribution in kind of portfolio securities (as
opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
shareholder redemption requests, such as borrowing.

The Fund may withdraw its investment in the Portfolio at any time, if the
Trustees of the Trust determine that it is in the best interests of the Fund to
do so. Upon any such withdrawal, the Trustees of the Trust would consider what
action might be taken, including investing the Fund's Assets in another pooled
investment entity having the same investment objective and policies as the Fund
or retaining an investment adviser to manage the Fund's assets in accordance
with the investment policies described above with respect to the Portfolio.

For descriptions of the investment objective, policies and limitations of the
Portfolio, see "Investment Objective," "Investment Policies," and "Investment
Limitations" herein and in the Statement of Additional Information. For
descriptions of the management of the Portfolio, see "Management of the Trust
and Federated Portfolios" herein and in the Statement of Additional Information.
For descriptions of the expenses of the Portfolio, see "Management of the Trust
and Federated Portfolios" and "Expenses" below.

INFORMATION ABOUT THE TRUST AND FEDERATED PORTFOLIOS
- --------------------------------------------------------------------------------

MANAGEMENT OF THE TRUST AND FEDERATED PORTFOLIOS

BOARD OF TRUSTEES. Each of the Trust and Federated Portfolios is managed by its
Board of Trustees. The respective Trustees are responsible for managing the
business affairs of the Trust and Federated Portfolios and for exercising all
the powers of the Trust and Federated Portfolios except those reserved for the
shareholders and investors, respectively. The Executive Committee of each Board
of Trustees handles the Board's responsibilities between meetings of the Board.

trustees. See "Management of the Trust and of Federated Portfolios" in the
Statement of Additional Information for more information about the Trustees and
officers of the Trust and of Federated Portfolios.

INVESTMENT ADVISER. The Fund seeks to achieve its investment objective by
investing all of its Assets in the Portfolio, which has the same investment
objective, policies, and limitations as the Fund. Federated Research Corp. (the
"Adviser") is responsible for the management of the assets of the Portfolio,
pursuant to an investment advisory agreement (the "Advisory Agreement") with
Federated Portfolios on behalf of the Portfolio. As of September 30, 1996,
Federated Management was replaced as adviser to the Portfolio by Federated
Research Corp. In all other respects, the advisory arrangements are identical.
Both advisers are subsidiaries of Federated Investors, are registered investment
advisers and have common directors/trustees, officers and employees. Federated
Research Corp. has delegated the daily management of the security holdings of
the Portfolio to U.S. Trust Company, acting as sub-adviser.

Subject to the general guidance and policies set by the Trustees of Federated
Portfolios, the Adviser provides general supervision over the investment
management functions performed by U.S. Trust Company. The Adviser closely
monitors U.S. Trust Company's application of the Portfolio's investment policies
and strategies, and regularly evaluates U.S. Trust Company's investment results
and trading practices.

ADVISORY FEES. For its services under the Advisory Agreement, the Adviser is
entitled to receive from the Portfolio a fee accrued daily and paid monthly at
an annual rate equal to .25% of the Portfolio's average daily net assets. The
Adviser has agreed to currently waive all investment advisory fees with respect
to the Portfolio. This waiver may be terminated at any time. The Adviser has
also undertaken to reimburse the Portfolio for operating expenses in excess of
limitations established by certain states.

Federated Research Corp. and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.

Susan M. Nason has been the Portfolio's portfolio manager since its inception.
Ms. Nason joined Federated Investors in 1987 and has been a Vice President of
the Adviser since 1993. Ms. Nason

served as an Assistant Vice President of the Adviser from 1990 until 1992. Ms.
Nason is a Chartered Financial Analyst and received her M.B.A. in Finance from
Carnegie Mellon University.

SUB-ADVISER. Federated Research Corp. has delegated the daily management of the
Portfolio's security holdings to U.S. Trust Company. U.S. Trust Company is
located at 114 West 47th Street, New York, New York. Subject to the general
guidance and policies set by the Trustees of Federated Portfolios, Federated
Research Corp. closely monitors U.S. Trust Company's application of the
Portfolio's investment policies and strategies, and regularly evaluates U.S.
Trust Company's investment results and trading practices.

SUB-ADVISORY FEES. Pursuant to a Sub-Advisory Agreement (the "Sub-Advisory
Agreement") between the Adviser and U.S. Trust Company, U.S. Trust Company makes
the day-to-day investment decisions and portfolio selections for the Portfolio,
consistent with the general guidelines and policies established by the Adviser
and the Trustees of Federated Portfolios. For the investment management services
it provides to the Portfolio, U.S. Trust Company is compensated only by the
Adviser, and receives no fees directly from the Fund or the Portfolio. For its
services under the Sub-Advisory Agreement, U.S. Trust Company is entitled to
receive from the Adviser a fee accrued daily and paid monthly at an annual rate
equal to .12% of the Portfolio's average daily net assets. U.S. Trust Company
has agreed to currently waive all sub-advisory fees with respect to the
Portfolio, although this waiver may be terminated at any time. U.S. Trust
Company furnishes at its own expense all services, facilities and personnel
necessary in connection with managing the Portfolio's investments and effecting
securities transactions for the Portfolio.

SUB-ADVISER'S BACKGROUND. U.S. Trust Company is a state-chartered bank and
trust company which provides trust and banking services to individuals,
corporations and institutions, both nationally and internationally, including
investment management, estate and trust administration, financial planning,
corporate trust and agency services, and personal and corporate banking. U.S.
Trust Company is a member bank of the Federal Reserve System and the Federal
Deposit Insurance Corporation and is one of the twelve members of the New York
Clearing House Association. On June 30, 1996, U.S. Trust Company's Asset
Management Group had approximately $50.3 billion in assets under management.
U.S. Trust Company, which has its principal offices at 114 West 47th Street, New
York, New York, is a subsidiary of U.S. Trust Corporation, a registered bank
holding company. U.S. Trust Company also serves as investment adviser to
Excelsior Funds, Inc. (formerly known as UST Master Funds, Inc.), Excelsior
Tax-Exempt Funds, Inc. (formerly known as UST Master Tax-Exempt Funds, Inc.),
and Excelsior Institutional Trust, all of which are registered investment
companies. U.S. Trust Company also serves as investment adviser to the UST
Variable Series, Inc.

It is the responsibility of U.S. Trust Company in its capacity as sub-adviser to
make the day-to-day investment decisions for the Portfolio and to place the
purchase and sales orders for securities transactions of the Portfolio, subject
to the general supervision of Federated Research Corp. U.S. Trust Company
furnishes at its own expense all services, facilities and personnel necessary in
connection with managing the Portfolio's investments and effecting securities
transactions for the Portfolio.

Bruce Tavel, Senior Vice President, and Cyril M. Theccanat, Vice President, of
U.S. Trust Company, Structured Investment Management Department, have been
portfolio managers of the Portfolio since its inception and are responsible for
the day-to-day management of the Portfolio.

Mr. Theccanat has been managing structured investment portfolios at U.S. Trust
Company since January, 1990. Mr. Tavel designs, develops and implements analytic
procedures and services utilizing quantitative and financial information. He has
over 18 years of experience in the execution of decision support systems at U.S.
Trust Company and previously at Lehman Asset Management, where he was Director
of Institutional Computer Services.

The Trust, Federated Portfolios, the Adviser and the Sub-Adviser each has
adopted strict codes of ethics governing the conduct of all employees who manage
the Fund, the Portfolio and their portfolio securities. These codes recognize
that such persons owe a fiduciary duty to the Fund's shareholders and the
Portfolio's investors and must place their interests ahead of the employees' own
interest. Among other things, the code governing the Trust, the Federated
Portfolios and the Adviser: requires preclearance and periodic reporting of
personal securities transactions; prohibits personal transactions in securities
being purchased or sold, or being considered for purchase or sale, by the Fund
and Portfolio; prohibits purchasing securities in initial public offerings; and
prohibits taking profits on securities held for less than sixty days. The code
governing the Sub-Adviser: requires preclearance and periodic reporting of
personal securities transactions; prohibits personal transactions in securities
being purchased or sold, or being considered for purchase or sale, by the Fund
and Portfolio; and prohibits purchasing securities in initial public offerings
for 30 days. Violations of the codes are subject to review by the Trustees, and
could result in severe penalties.

CERTAIN RELATIONSHIPS AND ACTIVITIES. U.S. Trust Company and its affiliates may
have deposit, loan and other commercial banking relationships with the issuers
of securities which may be purchased on behalf of the Portfolio, including
outstanding loans to such issuers which could be repaid in whole or in part with
the proceeds of securities so purchased. U.S. Trust Company has informed the
Portfolio that, in making investment decisions, it does not obtain or use
material inside information in its possession or in the possession of any of its
affiliates. In making investment recommendations for the Portfolio, U.S. Trust
Company will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by the Portfolio is a customer of U.S.
Trust Company, its parents or its subsidiaries or affiliates. When dealing with
its customers, U.S. Trust Company, its parents, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by any fund managed by U.S. Trust Company or any such affiliate.

DISTRIBUTION OF INSTITUTIONAL SHARES

Federated Securities Corp. is the principal distributor for Shares. It is a
Pennsylvania corporation organized on November 14, 1969, and is the principal
distributor for a number of investment companies. Federated Securities Corp. is
a subsidiary of Federated Investors.

SHAREHOLDER SERVICES. The Fund has entered into a Shareholder Services
Agreement with Federated Shareholder Services, a subsidiary of Federated
Investors, under which the Fund may make payments up to 0.25% of the average
daily net asset value of Shares of the Fund, computed at
an annual rate, to obtain certain personal services for shareholders and to
maintain shareholder accounts ("Shareholder Services"). From time to time and
for such periods as deemed appropriate, the amount stated above may be reduced
voluntarily. Under the Shareholder Services Agreement, Federated Shareholder
Services will either perform Shareholder Services directly or will select
financial institutions to perform Shareholder Services. Financial institutions
will receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments made
pursuant to the Shareholder Services Agreement, Federated Securities Corp. and
Federated Shareholder Services, from their own assets, may also pay financial
institutions supplemental fees for the performance of substantial sales
services, distribution-related support services or shareholder services. The
support may include sponsoring sales, educational and training seminars for
employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such financial assistance
will be predicated upon the amount of Shares the financial institution sells or
may sell and/or upon the type and nature of sales or marketing support furnished
by the financial institution. Any payments made by the distributor may be
reimbursed by the Adviser or its affiliates.

The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or a savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.

State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.

ADMINISTRATION OF THE TRUST

Federated Services Company provides these services at an annual rate, accrued
daily and paid monthly, which relates to the average aggregate daily net assets
of the Fund as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE FUND
<S> <C>
0.1000% on the first $250 million
0.0875% on the next $250 million
0.0750% on the next $250 million
0.0700% on assets in excess of $750 million
</TABLE>

The administrative fee received during any fiscal year shall be at least $60,000
per fund and $30,000 per each additional class of shares. Federated Services
Company may choose voluntarily to waive a portion of its fee.

SERVICE PROVIDERS OF THE PORTFOLIO

Federated Securities Corp. is the placement agent for investments in the
Portfolio but receives no fee for such services.

Federated Services Company, through its subsidiary Federated Administrative
Services, Inc., provides administrative personnel and services (including
certain legal and financial reporting services) necessary to operate the
Portfolio. Federated Services Company is entitled to receive a fee from the
Portfolio accrued daily and paid monthly at an annual rate of up to 0.05% of the
average daily net assets of the Portfolio, subject to a minimum of $60,000 for
the Portfolio (unless waived). From time to time, Federated Services Company may
waive all or a portion of the administrative fee. Federated Services Company,
through Federated Administrative Services, Inc., also maintains the Portfolio's
accounting records and records of investors. Federated Investors and its
subsidiaries have agreed to waive fees and reimburse expenses in order to
maintain total operating expenses (after waivers and reimbursements) of the
Portfolio at no greater than 0.20% of average net assets for the twelve month
period following January 2, 1996.

NET ASSET VALUE
- --------------------------------------------------------------------------------

The Fund's net asset value per share fluctuates. The net asset value per share
for Shares is determined by adding the interest of the Shares in the market
value of all securities and other assets of the Fund, subtracting the interest
of the Shares in the liabilities of the Fund and those attributable to Shares,
and dividing the remainder by the total number of Shares outstanding. Since the
Fund will invest all of its Assets in the Portfolio, the value of the Fund's
Assets will be equal to the value of its beneficial interest in the Portfolio.

INVESTING IN INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.

To purchase Shares, open an account by calling Federated Securities Corp.
Information needed to establish an account will be taken over the telephone. The
Fund reserves the right to reject any purchase request.

Federated Bond Index Fund--Institutional Shares; Fund Number (this number can be
found on the account statement or by contacting the Fund); Group Number or Wire
Order Number; Nominee or Institution Name; and ABA Number 011000028. Shares
cannot be purchased by wire on holidays when wire transfers are restricted.
Questions on wire purchases should be directed to your shareholder services
representative at the telephone number listed on your account statement.

BY MAIL. To purchase Shares by mail, send a check made payable to Federated
Bond Index Fund-- Institutional Shares to Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are
considered received after payment by check is converted by the transfer agent's
bank, State Street Bank, into federal funds. This is generally the next business
day after State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $25,000. However, an account may be
opened with a smaller amount as long as the $25,000 minimum is reached within 90
days. Subsequent investments must be in amounts of at least $100. The minimum
initial investment in Shares is $50 if the investment is in a retirement
program, for which subsequent investments must be in amounts of at least $50. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Trust. Accounts established through a
non-affiliated bank or broker may be subject to a smaller minimum investment.

WHAT SHARES COST

Shares are sold at their net asset value per Share next determined after an
order is received. There is no sales charge imposed by the Fund. Investors who
purchase Shares through a non-affiliated bank or broker may be charged an
additional service fee by that bank or broker.

The net asset value of the Fund is determined as of the close of trading
(normally 4:00 p.m., Eastern time) (the "Valuation Time") on the New York Stock
Exchange, Monday through Friday, except on (i) days on which there are not
sufficient changes in the value of the Portfolio's portfolio securities such
that its net asset value might be materially affected; (ii) days during which no
Shares are tendered for redemption and no orders to purchase Shares are
received; and (iii) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Any day on which the Fund may determine its net asset value, as
described above, may be referred to herein as a "Business Day."

Assets in the Portfolio which are traded on a recognized domestic exchange or
are quoted on a national securities market are valued at the last sale price on
the securities exchange on which such securities are primarily traded or at the
last sale price on such national securities market. Securities traded only on
over-the-counter markets are valued on the basis of closing over-the-counter bid
prices. Restricted securities, securities for which market quotations are not
readily available, and other assets are valued at fair value, pursuant to
guidelines adopted by the Trustees of Federated Portfolios. Absent unusual
circumstances, debt securities maturing in 60 days or less are valued at
amortized cost. Some of the securities acquired by the Portfolio may be traded
on over-the-counter markets on days which are not Business Days. In such cases,
the net asset value per share of Fund Shares may be significantly affected on
days when shareholders neither purchase nor redeem their

shares of beneficial interest in the Fund. The Portfolio may use one or more
independent pricing services in connection with the pricing of its portfolio
securities.

CERTIFICATES AND CONFIRMATIONS

As transfer agent for the Fund, Federated Shareholder Services Company maintains
a share account for each shareholder. Certificates for Shares of the Fund are
not issued unless requested by contacting the Fund or Federated Shareholder
Services Company in writing.

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.

DIVIDENDS

Dividends equal to all or substantially all of the Fund's net investment income
allocable to Shares are declared daily and paid monthly. The Fund's net income
for dividend purposes consists of (i) all accrued income, whether taxable or
tax-exempt, plus discount earned on the Fund's assets, less (ii) amortization of
premium on such assets, accrued expenses directly attributable to the Fund and
the general expenses of the Trust (e.g., legal, administrative, accounting, and
Trustees' fees). Dividends and distributions will reduce the net asset value of
the Fund by the amount of the dividend or distribution. Dividends are declared
just prior to determining net asset value. If an order for Shares is placed on
the preceding Business Day, Shares purchased by wire begin earning dividends on
the Business Day wire payment is received by State Street Bank. If the order for
Shares and payment by wire are received on the same day, Shares begin earning
dividends on the next Business Day. Shares purchased by check begin earning
dividends on the Business Day after the check is converted by the transfer agent
into federal funds. Dividends are automatically reinvested on payment dates in
additional Shares unless cash payments are requested by contacting the Fund.

CAPITAL GAINS

Long-term capital gains realized by the Fund, if any, will be distributed once a
year, usually in December, if the Fund's profits during that year from the sale
of securities held for longer than the applicable period exceed losses during
such year from the sale of securities together with any net capital losses
carried forward from prior years (to the extent not used to offset short-term
capital gains). Net short-term capital gains realized during the Fund's fiscal
year will also be distributed during such year.

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact Federated Securities Corp. and
consult a tax adviser.

REDEEMING INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------

The Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
Fund computes its net asset value. Redemption requests must be received in
proper form and can be made by telephone request or by written request.

TELEPHONE REDEMPTION

Shareholders may redeem their Shares by telephoning the Fund before 4:00 p.m.
(Eastern time). Telephone redemption instructions may be recorded. All proceeds
will normally be wire transferred the following business day, but in no event
more than seven days, to the shareholder's account at a domestic commercial bank
that is a member of the Federal Reserve System. Proceeds from redemption
requests received on holidays when wire transfers are restricted will be wired
the following Business Day. Questions about telephone redemptions on days when
wire transfers are restricted should be directed to your shareholder services
representative at the telephone number listed on your account statement. If at
any time the Fund shall determine it necessary to terminate or modify this
method of redemption, shareholders would be promptly notified.

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as written requests, should be considered. If
reasonable procedures are not followed by the Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.

WRITTEN REQUESTS
Shares may also be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. If Share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.

The written request should state: the Fund name and class of shares name; the
account number; and the number of shares to be redeemed or the dollar amount
requested. All owners of the account must sign the request exactly as the Shares
are registered. Normally, a check for the proceeds is mailed within one business
day, but in no event more than seven days, after the receipt of a proper written
redemption request. Dividends are paid up to and including the day that a
redemption request is processed.

Shareholders requesting a redemption of any amount to be sent to an address
other than that on record with the Fund, or a redemption payable other than to
the shareholder of record must have their signatures guaranteed by a commercial
or savings bank, trust company or savings association whose deposits are insured
by an organization which is administered by the Federal Deposit Insurance
Corporation; a member firm of a domestic stock exchange; or any other "eligible

guarantor institution," as defined in the Securities Exchange Act of 1934. The
Fund does not accept signatures guaranteed by a notary public.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $25,000. This
requirement does not apply, however, if the balance falls below $25,000 because
of changes in the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

Each Share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each series in the Trust have equal voting rights except that in matters
affecting only a particular series or class, only shares of that series or class
are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the Fund's operation (e.g., to approve a
change in the Fund's fundamental investment policies or limitations) and for the
election of Trustees under certain circumstances. For additional information on
voting by the Fund and its shareholders on matters relating to the Portfolio,
see "Special Information Concerning Hub and Spoke."

Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders for this purpose shall be called by the
Trustees upon the written request of shareholders owning at least 10% of the
outstanding shares of the Trust entitled to vote. Shareholders of all series of
the Trust will vote together to elect Trustees of the Trust and for certain
other matters. Under certain circumstances, the shareholders of one or more
series of the Trust could control the outcome of these votes. As of September 3,
1996, Frojack Co., who was the owner of record of 728,686 (49.44%) of the
Institutional Shares of the Fund and Menomin Co., who was the owner of record of
698 (96.08%) of the Institutional Service Shares of the Fund may for certain
purposes be deemed to control the Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
The Fund invests in the Portfolio, a series of Federated Portfolios, which is a
business trust organized under the laws of the Commonwealth of Massachusetts.
The interests in Federated Portfolios are divided into separate series or
portfolios. Investors in each series of Federated Portfolios will vote
separately or together in the same manner as shareholders of the Trust's series.
Federated Portfolios' Declaration of Trust provides that the Fund and other
entities investing in the Portfolio and the other series of Federated Portfolios
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
the series in which they invest (and of no other series) and of the overall
obligations

of Federated Portfolios. However, the Trustees of the Trust believe that the
risk of the Fund incurring financial loss on account of such liability is
limited to circumstances in which neither the Portfolio nor Federated Portfolios
are able to meet their obligations, and that neither the Fund nor its
shareholders will be exposed to a material risk of liability by reason of the
Fund's investment in the Portfolio.

For more information regarding the Trustees of the Trust and of Federated
Portfolios, see "Management of Trust and Federated Portfolios" in the Statement
of Additional Information.

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956,
such as U.S. Trust Company, or any affiliate thereof, from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, and from issuing, underwriting, selling
or distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customers. Based on
advice of its counsel, it is the position of U.S. Trust Company that it may
perform the investment sub-advisory services it performs under the Sub-Advisory
Agreement with the Adviser without violating the Glass-Steagall Act or other
applicable banking laws or regulations. Changes in either federal or state
statutes and regulations relating to the permissible activities of banks and
their subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent a bank from continuing to perform all or part of the above
services. If this happens, changes in the operation of the Portfolio (or the
Fund) may occur and the Trustees would consider alternative sub-advisers and
other means of continuing available investment services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.

States securities laws governing the ability of depository institutions to act
as underwriters or distributors of securities may differ from interpretations
given to the Glass-Steagall Act and, therefore, banks and financial institutions
may be required to register as dealers pursuant to state law.

TAX INFORMATION
- --------------------------------------------------------------------------------

Each year the Trust intends to qualify the Fund and elect that the Fund be
treated as a separate "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Provided the Fund meets all income,
distribution and diversification requirements of the Code, and distributes
substantially all of its net investment income and realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, no
federal income or excise taxes will be required to be paid from the Fund. If the
Fund fails to qualify as a "regulated investment company" in any year, the Fund
would incur a regular corporate federal income tax upon its taxable income.
Whether or not the Fund qualifies as a RIC, the Fund's distributions would
generally be taxable as ordinary dividend income to shareholders. The Portfolio
in which the Fund invests is also not expected to be required to pay any federal
income or excise taxes.

Shareholders of the Fund normally will have to pay federal income taxes and any
state or local taxes on the dividends and net capital gain distributions, if
any, they receive from the Fund. Dividends from ordinary income and any
distributions from net short-term capital gains are taxable to Fund shareholders
as ordinary income for federal income tax purposes. Distributions of net capital
gains are taxable to Fund shareholders as long-term capital gains without regard
to the length of time the Fund shareholders have held their Shares. Dividends
and distributions, if any, paid to shareholders will be treated in the same
manner for federal income tax purposes whether received in cash or reinvested in
additional Shares of the Fund.

Dividends declared in October, November or December of any year payable to Fund
shareholders of record on a specified date in such months will be deemed to have
been received by Fund shareholders and paid by the Fund on December 31 of such
year in the event such dividends are actually paid during January of the
following year.

At the end of each calendar year, each Fund shareholder receives information for
tax purposes on the dividends and other distributions received during that
calendar year, including the portion thereof taxable as ordinary income, the
portion taxable as long-term capital gains, the portion (if any) which
constitutes a return of capital (which is generally free of tax but results in a
basis reduction), and the amount of dividends (if any) which may qualify for the
dividends-received deduction for corporations.

In general, any gain or loss realized upon a taxable disposition of Shares of
the Fund by a shareholder that holds such Shares as a capital asset will be
treated as a long-term capital gain or loss if the Shares have been held for
more than 12 months and otherwise as a short-term capital gain or loss. However,
any loss realized upon a redemption of Shares in the Fund held for six months or
less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain made with respect to those Shares. Any loss
realized upon a disposition of Shares may also be disallowed under rules
relating to wash sales.

The Fund may be required to withhold federal income tax at the rate of 31% from
all taxable distributions and redemption proceeds payable to shareholders who do
not provide the Fund with their correct taxpayer identification number or make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Such withholding is not an
additional tax. Any amounts withheld may be credited against the Fund
shareholder's federal income tax liability.

Under current law, neither the Trust, as a business trust, nor the Fund is
liable for any income or franchise tax in the Commonwealth of Massachusetts as
long as the Fund continues to qualify as a "regulated investment company" under
the Code.

The foregoing discussion is intended for general information only. An investor
should consult with his or her own tax adviser as to the tax consequences of an
investment in the Fund, including the status of distributions from the Fund
under applicable state and local laws.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund advertises its total return and yield for Shares.

Total return represents the change, over a specified period of time, in the
value of an investment in Shares of the Fund after reinvesting all income and
capital gain distributions. It is calculated by dividing that change by the
initial investment and is expressed as a percentage.

The yield of Shares is calculated by dividing the net investment income per
share (as defined by the Securities and Exchange Commission) earned by Shares
over a thirty-day period by the maximum offering price per share of Shares on
the last day of the period. This number is then annualized using semi-annual
compounding. The yield does not necessarily reflect income actually earned by
Shares and, therefore, may not correlate to the dividends or other distributions
paid to shareholders.

The Fund is sold without any sales charge or other similar non-recurring
charges.

Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.

From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Fund also offers another class of shares called Institutional Service
Shares. Institutional Service Shares are sold at net asset value primarily to
retail and private banking customers of financial institutions and are subject
to a minimum initial investment of $5,000. Institutional Shares and
Institutional Service Shares are subject to certain of the same expenses;
however, Institutional Service Shares are distributed under a 12b-1 Plan adopted
by the Fund. This, plus other expense differences between Institutional Shares
and Institutional Service Shares, may affect the performance of each class.

To obtain more information and a prospectus for Institutional Service Shares,
investors may call
1-800-245-4270.

MISCELLANEOUS
- --------------------------------------------------------------------------------

The Fund's Statement of Additional Information bears the same date as this
prospectus and contains more detailed information about the Fund and the
Portfolio, including information related to (i) investment policies and
restrictions of the Fund and the Portfolio, (ii) Trustees and officers of the
Trust and of Federated Portfolios, (iii) portfolio transactions and any
brokerage commissions, (iv) rights and liabilities of shareholders of the Trust
and investors in Federated Portfolios, (v) additional performance information,
including a description of the Fund's calculation of yield
and total return, (vi) determination of the net asset value of Shares of the
Fund, and (vii) financial statements for the Fund and the Portfolio.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Bond Index Fund
Institutional Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Distributor for Federated Bond Index Fund and
Placement Agent for Bond Index Portfolio
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Investment Adviser for Bond Index Portfolio
Federated Research Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Sub-Adviser for Bond Index Portfolio
United States Trust Company of New York 114 West 47th Street
New York, New York 10036
- -----------------------------------------------------------------------------------------------------------------------

Custodian
State Street Bank and Trust Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------------------------------
Administrator
Federated Administrative Services, Inc. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Transfer Agent and Dividend Disbursing Agent
Federated Shareholder Services Company P.O. Box 8600
Boston, Massachusetts 02266-8600
- -----------------------------------------------------------------------------------------------------------------------

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

FEDERATED BOND
INDEX FUND
INSTITUTIONAL SHARES
PROSPECTUS
An Open-End Diversified Management
Investment Company

Prospectus dated September 30, 1996

[LOGO} FEDERATED INVESTORS
Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors

G01556-02-IS (9/96)
Cusip 313909103

FEDERATED BOND INDEX FUND
(A PORTFOLIO OF FEDERATED INVESTMENT TRUST)
INSTITUTIONAL SERVICE SHARES
PROSPECTUS

The Institutional Service Shares of Federated Bond Index Fund (the "Fund")
offered by this prospectus represent interests in a diversified portfolio of
securities which is an investment portfolio of Federated Investment Trust (the
"Trust"), an open-end management investment company (a mutual fund).
Institutional Service Shares are sold at net asset value.
The investment objective of the Fund is to provide investment results that
correspond to the investment performance of the Lehman Brothers Aggregate Bond
Index, a broad market-weighted index which encompasses U.S. Treasury and agency
securities, corporate investment grade bonds, and mortgage-backed securities.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIO
SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING ALL
OF ITS INVESTABLE ASSETS ("ASSETS") IN BOND INDEX PORTFOLIO (THE "PORTFOLIO"), A
DIVERSIFIED SERIES OF FEDERATED INVESTMENT PORTFOLIOS (THE "FEDERATED
PORTFOLIOS"), AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE PORTFOLIO HAS THE
SAME INVESTMENT OBJECTIVE AND POLICIES AS THE FUND. THEREFORE, THE FUND'S
INVESTMENT EXPERIENCE WILL CORRESPOND DIRECTLY WITH THAT OF THE PORTFOLIO. THE
FUND INVESTS IN THE PORTFOLIO THROUGH A TWO-TIER MASTER/FEEDER FUND STRUCTURE.
SEE "SPECIAL INFORMATION CONCERNING HUB AND SPOKE."

THE INSTITUTIONAL SERVICE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF ANY BANK (INCLUDING U.S. TRUST COMPANY), ARE NOT ENDORSED OR
GUARANTEED BY ANY BANK, AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This prospectus contains the information you should read and know before you
invest in Institutional Service Shares of the Fund. Keep this prospectus for
future reference.

The Fund has also filed a Statement of Additional Information for Institutional
Shares and Institutional Service Shares dated September 30, 1996, with the
Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information or
a paper copy of this prospectus, if you have received your prospectus
electronically, free of charge by calling 1-800-245-4270. To obtain other
information or make inquiries about the Fund, contact the Fund at the address
listed in the back of this prospectus. The
Statement of Additional Information, material incorporated by reference into
this document, and other
information regarding the Trust is maintained electronically with the SEC at
Internet Web site
(http://www.sec.gov).

Prospectus dated September 30, 1996

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

SUMMARY OF FUND EXPENSES--
INSTITUTIONAL SERVICE SHARES 1
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS--
INSTITUTIONAL SERVICE SHARES 2
- ------------------------------------------------------

GENERAL INFORMATION 3
- ------------------------------------------------------

INVESTMENT INFORMATION 3
- ------------------------------------------------------

Investment Objective 3
Investment Policies 4
Additional Investment Strategies
and Techniques; Risk Factors 7
Investment Limitations 13
Special Information Concerning Hub
and Spoke 13

INFORMATION ABOUT THE TRUST AND
FEDERATED PORTFOLIOS 15
- ------------------------------------------------------

Management of the Trust and Federated
Portfolios 15
Distribution of Institutional Service
Shares 18
Administration of the Trust 20
Service Providers of the Portfolio 20

NET ASSET VALUE 20
- ------------------------------------------------------

INVESTING IN INSTITUTIONAL SERVICE SHARES 21
- ------------------------------------------------------

Share Purchases 21
Minimum Investment Required 21
What Shares Cost 21
Certificates and Confirmations 22
Dividends 22
Capital Gains 22
Retirement Plans 23

REDEEMING INSTITUTIONAL SERVICE SHARES 23
- ------------------------------------------------------

Telephone Redemption 23
Written Requests 23
Accounts With Low Balances 24

SHAREHOLDER INFORMATION 24
- ------------------------------------------------------

Voting Rights 24

EFFECT OF BANKING LAWS 25
- ------------------------------------------------------

TAX INFORMATION 26
- ------------------------------------------------------

PERFORMANCE INFORMATION 27
- ------------------------------------------------------

OTHER CLASSES OF SHARES 27
- ------------------------------------------------------

MISCELLANEOUS 28
- ------------------------------------------------------

ADDRESSES 29
- ------------------------------------------------------

SUMMARY OF FUND EXPENSES

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

The following table provides (i) a summary of estimated expenses related to
purchases and sales of Fund Shares and the aggregate annual operating expenses
of Fund Shares and the Portfolio as a percentage of their average daily net
assets, and (ii) an example illustrating the dollar cost of such expenses on a
$1,000 investment in Fund Shares.
<TABLE>
<S> <C> <C>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................ None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)..................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, as applicable)........................................................................ None
Redemption Fee (as a percentage of amount redeemed, if applicable)........................................... None
Exchange Fee................................................................................................. None
ANNUAL INSTITUTIONAL SERVICE SHARES OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (1)............................................................................ 0.00%
12b-1 Fee (after waiver) (2)................................................................................. 0.00%
Total Other Expenses (after expense reimbursement by the Investment Managers and administrator).............. 0.54%
Shareholder Services Fee...................................................................... 0.25%
Total Institutional Service Shares Operating Expenses (after waivers and reimbursements) (3)......... 0.54%
</TABLE>

(2) The 12b-1 fee has been reduced to reflect the voluntary waiver of the 12b-1
fee. The distributor can terminate this voluntary waiver at any time at its
sole discretion. The maximum 12b-1 fee is 0.25%.

(3) The Total Institutional Service Shares Operating Expenses are estimated to
be 2.72% absent the anticipated voluntary waivers of the management fee and
the 12b-1 fee and the anticipated voluntary reimbursement of certain other
operating expenses by the Investment Managers and administrator.

Total Institutional Service Shares Operating Expenses include the Fund's pro
rata share of the aggregate annual operating expenses of the Portfolio, in which
all of the investable assets of the Fund are invested. The Trustees of the Trust
considered the aggregate per share expenses of the Fund, the Fund's pro rata
shares of the expenses for the Portfolio and the potential economies of scale
the Fund could achieve by investing its assets in the Portfolio. As a result,
the Trustees believe that the aggregate per share expenses of the Fund and the
Fund's pro rata share of the expenses for the Portfolio will be less than or
approximately equal to the expenses which the Fund would incur if it retained
the services of an investment adviser and the assets of the Fund were invested
directly in the type of securities held by the Portfolio. Federated Investors
has agreed to maintain total operating expenses (after waivers and
reimbursements) of the Portfolio at no greater than 0.20% of average net assets
of the Portfolio for the twelve month period following January 2, 1996.

THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE VARIOUS
COSTS AND EXPENSES THAT A SHAREHOLDER OF INSTITUTIONAL SERVICE SHARES OF THE
FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF
THE VARIOUS COSTS AND EXPENSES, SEE "INVESTING IN INSTITUTIONAL SERVICE SHARES"
AND "INFORMATION ABOUT THE TRUST AND FEDERATED PORTFOLIOS." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.

Long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charges permitted under the rules of the National Association of
Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period.................................................................. $6 $17 $30 $68
</TABLE>

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

FINANCIAL HIGHLIGHTS--INSTITUTIONAL SERVICE SHARES

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated July 18, 1996, on the Funds financial
statements for the period ended May 31, 1996, and on the following table for the
period presented, is included in the Fund's Annual Report, which is incorporated
herein by reference. This table should be read in conjunction with the Fund's
financial statements and notes thereto, contained in the Fund's Annual Report,
which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1996(a)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.25
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.12
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.29)
- ------------------------------------------------------------------------------------------- -------
Total from investment operations (0.17)
- ------------------------------------------------------------------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions from net investment income (0.12)
- ------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 6.96
- ------------------------------------------------------------------------------------------- -------
TOTAL RETURN (b) (2.32%)
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS*
- -------------------------------------------------------------------------------------------
Expenses 0.09%
- -------------------------------------------------------------------------------------------
Net investment income 7.01%
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 8.18%
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 0.2
- -------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from February 22, 1996 (start of
performance) to May 31, 1996.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

Further information about the Fund's performance is contained in the Annual
Report dated
May 31, 1996, which can be obtained free of charge.

GENERAL INFORMATION
- --------------------------------------------------------------------------------

Institutional Service Shares ("Shares") are designed primarily for retail and
private banking customers of financial institutions as a convenient means of
accumulating an interest in a professionally managed, diversified portfolio of
U.S. investment grade fixed income securities that attempt to provide investment
results that correspond to the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index which encompasses U.S. Treasury and agency securities,
corporate investment grade bonds and mortgage-backed securities, each with
maturities greater than one year. A minimum initial investment of $5,000 is
required, unless the investment is in a retirement program, in which case the
minimum initial investment is $50. Subsequent investments must be in amounts of
at least $100, and $50 for retirement programs.

Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund.

The Fund invests through the Portfolio, a series of Federated Portfolios, which
is a business
trust organized under the laws of the Commonwealth of Massachusetts. Federated
Portfolios
was established as a Massachusetts business trust under a Declaration of Trust
dated as of
September 29, 1995.

INVESTMENT INFORMATION
- --------------------------------------------------------------------------------

corporate investment grade bonds, and mortgage-backed securities, each with
maturities greater than one year.

INVESTMENT POLICIES

INVESTMENT PHILOSOPHY. The Portfolio is not managed pursuant to
traditional methods of active investment management, which involve the
buying and selling of securities based upon economic, financial and market
analyses and investment judgment. Instead, the Portfolio, utilizing a
passive or indexing investment approach, will attempt to duplicate the
investment performance of the Aggregate Bond Index.

The Portfolio seeks to duplicate the investment performance of the
Aggregate Bond Index through statistical sampling procedures, that is, the
Portfolio will invest in a selected group-- not the entire universe--of
securities in the Aggregate Bond Index. This group of securities,
when taken together, is expected to perform similarly to the Aggregate Bond
Index as a whole. The sampling technique is expected to enable the
Portfolio to track the price movements and performance of the Aggregate
Bond Index, while minimizing brokerage, custodial and accounting costs.

The Aggregate Bond Index is composed of the following kinds of securities:
public obligations of the U.S. Government; publicly issued debt of U.S.
Government agencies and quasi-federal corporations; corporate debt guaranteed by
the U.S. Government; fixed rate nonconvertible dollar-denominated corporate
debt; 15- and 30-year fixed rate securities backed by mortgage pools of the
Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), and the Federal National Mortgage Association (FNMA); and
asset-backed pass-through securities representing pools of credit card
receivables and auto or home equity loans.

ADDITIONAL INVESTMENT STRATEGIES AND TECHNIQUES; RISK FACTORS

The Portfolio may utilize the investment strategies and techniques described
below.
SAMPLING AND TRADING IN THE PORTFOLIO. The Portfolio does not expect to hold
all of the individual issues which comprise the Aggregate Bond Index because of
the large number of securities involved. Instead, the Portfolio will hold a
representative sample of securities, selecting one or two issues to represent
entire classes or types of securities in the Index. This sampling technique is
expected to be an effective means of substantially duplicating the income and
capital returns provided by the Index.

To reduce transaction costs, the Portfolio's securities holdings will not be
automatically traded or re-balanced to reflect changes in the Aggregate Bond
Index. The Portfolio will seek to buy round lots of securities and may trade
large blocks of securities. These policies may cause a particular security to be
overor under-represented in the Portfolio relative to its Index weighting or
result in its continued ownership by the Portfolio after its deletion from the
Index, thereby reducing the correlation between the Portfolio and the Index. The
Portfolio is not required to buy or sell securities solely because the
percentage of its assets invested in Index securities changes when their market
values increase or decrease. In addition, in order to more closely correlate to
the Index, the Portfolio may omit or remove Index securities from its portfolio
and substitute other Index securities if the Investment Managers believe the
removed security to be insufficiently liquid or believe the merit of the
investment has been substantially impaired by extraordinary events or financial
conditions. The Investment Managers seek a correlation of 0.95 or better between
the performance of the Portfolio and that of the Aggregate Bond Index. See
"Investment Philosophy and Strategies" above.

REPURCHASE AGREEMENTS. The Portfolio may engage in repurchase agreement
transactions with brokers, dealers or banks that meet the credit guidelines
established by the Trustees of Federated Portfolios. In a repurchase agreement,
the Portfolio buys a security from a seller that has agreed to repurchase it at
a mutually agreed upon date and price, reflecting the interest rate effective
for the term of the agreement. The term of these agreements is usually from
overnight to one week. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The Portfolio
always receives securities as collateral with a market value at least equal to
the purchase price plus accrued interest, and this value is maintained during
the term of the agreement.
If the seller defaults and the collateral value declines, the Portfolio might
incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the disposition of collateral may be
delayed or limited. Investments in certain repurchase agreements and certain
other investments which may be considered illiquid are limited. See "Illiquid
Investments; Privately Placed and other Unregistered Securities" below.

FUTURES CONTRACTS AND OPTIONS. The Portfolio may purchase put and call options
on securities, indices of securities and futures contracts. The Portfolio may
also purchase and sell futures contracts. Futures contracts on securities and
securities indices will be used primarily to accommodate cash flows or in
anticipation of taking a market position when, in the opinion of the Investment
Managers, available cash balances do not permit economically efficient purchases
of securities. Moreover, the Portfolio may sell futures and options to "close
out" futures and options it may have purchased or to protect against a decrease
in the price of securities it owns but intends to sell. The Portfolio will not
invest in futures or options as part of a defensive strategy to protect against
potential market declines. See "Futures Contracts and Options on Futures
Contracts" in the Statement of Additional Information.

securities. In addition, the Portfolio may sell (write) exchange-traded and OTC
put and call options on securities and indices of securities and on futures
contracts on securities and indices of securities. The staff of the SEC has
taken the position that OTC options are illiquid and, therefore, together with
other illiquid securities held by the Portfolio, cannot exceed 15% of the
Portfolio's net assets. The Portfolio intends to comply with this limitation.

ILLIQUID INVESTMENTS; PRIVATELY PLACED AND OTHER UNREGISTERED SECURITIES. The
Portfolio may acquire investments that are illiquid or have limited liquidity,
such as private placements or investments that are not registered under the
Securities Act of 1933 (the "1933 Act") and cannot be offered for public sale in
the United States without first being registered under the 1933 Act. An illiquid
investment is any investment that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which it is valued by
the Portfolio. The price the Portfolio pays for illiquid securities or receives
upon resale may be lower than the price paid or received for similar securities
with a more liquid market. Accordingly the valuation of these securities will
reflect any limitations on their liquidity.

These securities may be determined to be liquid in accordance with guidelines
established by the Investment Managers and approved by the Trustees of Federated
Portfolios. The Trustees of Federated Portfolios will monitor the implementation
of these guidelines on a periodic basis. Because Rule 144A is relatively new, it
is not possible to predict how markets in Rule 144A securities will develop. If
trading in Rule 144A securities were to decline, these securities could become
illiquid after being purchased, increasing the level of illiquidity of the
Portfolio. As a result, the Portfolio might not be able to sell these securities
when the Investment Managers wish to do so, or might have to sell them at less
than fair value.

The Portfolio may invest in U.S. dollar-denominated certificates of deposit,
time deposits, bankers' acceptances and other short-term obligations issued by
domestic banks and domestic or foreign branches or subsidiaries of foreign
banks. Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time. Such
instruments include Yankee Certificates of Deposit ("Yankee CDs"), which are
certificates of deposit denominated in U.S. dollars and issued in the United
States by the domestic branch of a foreign bank. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by the
Portfolio are not insured by the Federal Deposit Insurance Corporation or any
other agency of the U.S. Government. The Portfolio will not invest more than 15%
of the value of its net assets in time deposits maturing in longer than seven
days and other instruments which are deemed illiquid or not readily marketable.
Bankers' acceptances are credit instruments evidencing the obligation of a

bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations in which the
Portfolio may invest include uninsured, direct obligations which have either
fixed, floating or variable interest rates.

SHORT SALES "AGAINST THE BOX." In a short sale, the Portfolio sells a borrowed
security and has a corresponding obligation to the lender to return the
identical security. The Portfolio may engage in short sales only if at the time
of the short sale it owns or has the right to obtain, at no additional cost, an
equal amount of the security being sold short. This investment technique is
known as a short sale "against the box." The Portfolio may make a short sale as
a hedge, when it believes that the value of a security owned by it (or a
security convertible or exchangeable for such security) may decline, or when the
Portfolio wants to sell the security at an attractive current price but wishes
to defer recognition of gain or loss for tax purposes. Not more than 40% of the
Portfolio's total assets would be involved in short sales "against the box."

Portfolio may invest in obligations other than those listed previously, provided
such investments are consistent with the Portfolio's and Fund's investment
objective, policies and restrictions.

INVESTMENT LIMITATIONS

As a diversified investment company, 75% of the assets of the Portfolio are
represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following fundamental
limitations: (a) the Portfolio may not invest more than 5% of its total assets
in the securities of any one issuer, and (b) the Portfolio may not own more than
10% of the outstanding voting securities of any one issuer. In addition, the
Portfolio may not invest 25% or more of its assets in the securities of issuers
in any one industry, unless the securities in a single industry were to comprise
25% or more of the Aggregate Bond Index in which case the Portfolio will invest
25% or more of its assets in that industry. These are fundamental investment
policies which may not be changed without investor approval.
The Statement of Additional Information includes a further discussion of
investment strategies and techniques, and a listing of other fundamental
investment restrictions and non-fundamental investment policies which govern the
investment policies of the Fund and the Portfolio. Fundamental investment
restrictions may not be changed, in the case of the Fund, without the approval
of the shareholders of the Fund or, in the case of the Portfolio, without the
approval of the investors (including the Fund) in the Portfolio. If a percentage
restriction (other than a restriction as to borrowing) or a rating restriction
on investment or utilization of assets is adhered to at the time an investment
is made or assets are so utilized, a later change in percentage resulting from
changes in the value of the securities held by the Portfolio or a later change
in the rating of a security held by the Portfolio is not considered a violation
of the policy.

SPECIAL INFORMATION CONCERNING HUB AND SPOKE

Unlike other mutual funds that directly acquire and manage their own portfolios
of securities, the Fund seeks to achieve its investment objective by investing
all of its Assets in the Portfolio. The
Fund invests in the Portfolio through Signature Financial Group, Inc.'s two-tier
structure master/ feeder fund known as the Hub and Spoke financial services
method. Hub and Spokeis a registered service mark of Signature Financial Group,
Inc. and is licensed to Federated Services Company. The Fund has the same
investment objective and policies as the Portfolio. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to issue their shares at the same public offering
price as the Fund due to variations in sales commissions and other operating
expenses. Investors in the Fund should be aware that these differences may
result in differences in returns experienced by investors in the different funds
that invest in the Portfolio. Such differences in returns are also present in
other mutual fund structures. Information concerning other holders of interests
(e.g., other spokeSM or feeder funds) in the Portfolio is available from
Federated Services Company at
1-800-245-4270.

Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns. Additionally, the Portfolio
may become less diverse, resulting in increased portfolio risk. Also, funds with
a greater pro rata ownership in the Portfolio could have effective voting
control over the operations of the Portfolio. (However, these situations also
exist for traditionally structured funds which have large or institutional
investors). Whenever the Fund is requested to vote on a matter pertaining to the
Portfolio, the Fund will vote its shares without a meeting of Fund shareholders
if the proposal is one, if which made with respect to the Fund, would not
require the vote of Fund shareholders, as long as such action is permissible
under applicable statutory and regulatory requirements. Conversely, except as
permitted by the SEC, whenever the Fund is requested to vote as an investor in
the Portfolio on matters pertaining to the Portfolio because the 1940 Act
requires approval of the matter by an investment company's shareholders (other
than a vote by the Fund to continue the operation of the Portfolio such as when
there is the withdrawal of another investor in the Portfolio), the Fund will
hold a meeting of its shareholders and will cast all of its votes as an

investor in the Portfolio in the same proportion as directed by the votes of the
Fund's shareholders. Fund shareholders who do not vote will not affect the votes
cast by the Fund at the meeting of the Portfolio investors. The percentage of
votes representing the Fund's shareholders will be voted by the Fund in the same
proportion as the Fund's shareholders who do, in fact, vote. Certain changes in
the Portfolio's investment objective, policies or limitations may require the
Fund to withdraw its investment in the Portfolio. Any such withdrawal could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, the Fund could
incur brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting shareholder redemption requests, such
as borrowing.

MANAGEMENT OF THE TRUST AND FEDERATED PORTFOLIOS

A majority of the disinterested Trustees have adopted written procedures
reasonably appropriate to deal with potential conflicts of interest arising from
the fact that the same individuals are Trustees of the Trust and of the
Federated Portfolios, up to and including creating a separate board of trustees.
See "Management of the Trust and of Federated Portfolios" in the Statement of
Additional Information for more information about the Trustees and officers of
the Trust and of Federated Portfolios.

INVESTMENT ADVISER. The Fund seeks to achieve its investment objective by
investing all of its Assets in the Portfolio, which has the same investment
objective, policies, and limitations as the Fund. Federated Research Corp. (the
"Adviser") is responsible for the management of the assets of
the Portfolio, pursuant to an investment advisory agreement (the "Advisory
Agreement") with Federated Portfolios on behalf of the Portfolio. As of
September 30, 1996, Federated Management was replaced as adviser to the
Portfolio by Federated Research Corp. In all other respects, the advisory
arrangements are identical. Both advisers are subsidiaries of Federated
Investors, are registered investment advisers and have common
directors/trustees, officers and employees. Federated Research Corp. has
delegated the daily management of the security holdings of the Portfolio to U.S.
Trust Company, acting as sub-adviser.

ADVISER'S BACKGROUND. Federated Research Corp., a Maryland corporation
organized on
May 23, 1958, is a registered investment adviser under the Investment Advisers
Act of 1940. It is a subsidiary of Federated Investors. All of the Class A
(voting) shares of Federated Investors are owned by a trust, the trustees of
which are John F. Donahue, Chairman and Trustee of Federated Investors, Mr.
Donahue's wife, and Mr. Donahue's son, J. Christopher Donahue, who is President
and Trustee of Federated Investors.
Federated Research Corp. and other subsidiaries of Federated Investors serve as
investment advisers to a number of investment companies and private accounts.
Certain other subsidiaries also provide administrative services to a number of
investment companies. With over $80 billion invested across more than 250 funds
under management and/or administration by its subsidiaries, as of December 31,
1995, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 1,800 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,000 financial institutions nationwide. More
than 100,000 investment professionals have selected Federated funds for their
clients.

Susan M. Nason has been the Portfolio's portfolio manager since its inception.
Ms. Nason joined Federated Investors in 1987 and has been a Vice President of
the Adviser since 1993. Ms. Nason served as an Assistant Vice President of the
Adviser from 1990 until 1992. Ms. Nason is a Chartered Financial Analyst and
received her M.B.A. in Finance from Carnegie Mellon University.

Mr. Theccanat has been managing structured investment portfolios at U.S. Trust
Company since January, 1990. Mr. Tavel designs, develops and implements analytic
procedures and services utilizing quantitative and financial information. He has
over 18 years of experience in the execution
of decision support systems at U.S. Trust Company and previously at Lehman Asset
Management, where he was Director of Institutional Computer Services.

DISTRIBUTION OF INSTITUTIONAL SERVICE SHARES

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan adopted
in accordance with Investment Company Act Rule 12b-1 (the "Distribution Plan"),
the distributor may be paid a fee by the Fund in an amount, computed at an
annual rate of 0.25% of the average daily net asset value of Shares. The
distributor may select financial institutions such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers to provide
sales services or distribution-related support services as agents for their
clients or customers.

The Distribution Plan is a compensation-type plan. As such, the Fund makes no
payments to the distributor except as described above. Therefore, the Fund does
not pay for unreimbursed expenses of the distributor, including amounts expended
by the distributor in excess of amounts received by

it from the Fund, interest, carrying, or other financing charges in connection
with excess amounts expended, or the distributor's overhead expenses. However,
the distributor may be able to recover such amounts or may earn a profit from
future payments made by the Fund under the Distribution Plan.

In addition, the Fund has entered into a Shareholder Services Agreement with
Federated Shareholder Services, a subsidiary of Federated Investors, under which
the Fund may make payments up to 0.25% of the average daily net asset value of
its Shares to obtain certain personal services for shareholders and maintain
shareholder accounts.

Under the Shareholder Services Agreement, Federated Shareholder Services will
either perform shareholder services directly or will select financial
institutions to perform shareholder services. Financial institutions will
receive fees based upon Shares owned by their clients or customers. The
schedules of such fees and the basis upon which fees will be paid will be
determined from time to time by the Fund and Federated Shareholder Services.

SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. In addition to payments made
pursuant to the Distribution Plan and Shareholder Services Agreement, Federated
Securities Corp. and Federated Shareholder Services, from their own assets, may
pay financial institutions supplemental fees for the performance of substantial
sales services, distribution-related support services, or shareholder services.
The support may include sponsoring sales, educational and training seminars for
their employees, providing sales literature, and engineering computer software
programs that emphasize the attributes of the Fund. Such assistance will be
predicated upon the amount of Shares the financial institution sells or may sell
and/or upon the type and nature of sales or marketing support furnished by the
financial institution. Any payments made by the distributor may be reimbursed by
the Adviser or its affiliates.
The Glass-Steagall Act prohibits a depository institution (such as a commercial
bank or savings association) from being an underwriter or distributor of most
securities. In the event the Glass-Steagall Act is deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Trustees will
consider appropriate changes in the services.

The distributor may, from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the plans.

ADMINISTRATION OF THE TRUST

ADMINISTRATIVE SERVICES. Federated Services Company provides administrative
personnel and services (including certain legal and financial reporting
services) necessary to operate the Fund. Federated Services Company, a
Pennsylvania corporation, is a subsidiary of Federated Investors and is located
in Pittsburgh, Pennsylvania. Federated Services Company provides these services
at an annual rate, accrued daily and paid monthly, which relates to the average
aggregate daily net assets of the Fund as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE
ADMINISTRATIVE FEE DAILY NET ASSETS OF THE FUND
<S> <C>
0.1000% on the first $250 million
0.0875% on the next $250 million
0.0750% on the next $250 million
0.0700% on assets in excess of $750 million
</TABLE>

SERVICE PROVIDERS OF THE PORTFOLIO

Federated Securities Corp. is the placement agent for investments in the
Portfolio but receives no fee for such services.

NET ASSET VALUE
- --------------------------------------------------------------------------------

INVESTING IN INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------

SHARE PURCHASES

Shares are sold on days on which the New York Stock Exchange is open for
business. Shares may be purchased either by wire or mail.

BY WIRE. To purchase Shares by Federal Reserve wire, call the Fund before 4:00
p.m. (Eastern time) to place an order. The order is considered received
immediately. Payment by federal wire funds must be received before 3:00 p.m.
(Eastern time) on the next business day following the order. Federal funds
should be wired as follows: Federated Shareholder Services Company, c/o State
Street Bank and Trust Company, Boston, Massachusetts; Attention: EDGEWIRE; For
Credit to: Federated Bond Index Fund--Institutional Service Shares; Fund Number
(this number can be found on the account statement or by contacting the Fund);
Group Number or Wire Order Number; Nominee or Institution Name; and ABA Number
011000028. Shares cannot be purchased by wire on holidays when wire transfers
are restricted. Questions on wire purchases should be directed to your
shareholder services representative at the telephone number listed on your
account statement.

BY MAIL. To purchase Shares by mail, send a check made payable to Federated
Bond Index Fund --Institutional Service Shares to Federated Shareholder Services
Company, P.O. Box 8600, Boston, Massachusetts 02266-8600. Orders by mail are
considered received after payment by check is converted by the transfer agent's
bank, State Street Bank, into federal funds. This is generally the next business
day after State Street Bank receives the check.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in Shares is $5,000. Subsequent investments must
be in amounts of at least $100. The minimum initial and subsequent investment
amounts in Shares is $50 if the investment is in a retirement program. An
institutional investor's minimum investment will be calculated by combining all
accounts it maintains with the Trust. Accounts established through a
non-affiliated bank or broker may be subject to a smaller minimum investment.

WHAT SHARES COST

Day, Thanksgiving Day and Christmas Day. Any day on which the Fund may determine
its net asset value, as described above, may be referred to herein as a
"Business Day."
Assets in the Portfolio which are traded on a recognized domestic exchange or
are quoted on a national securities market are valued at the last sale price on
the securities exchange on which such securities are primarily traded or at the
last sale price on such national securities market. Securities traded only on
over-the-counter markets are valued on the basis of closing over-the-counter bid
prices. Restricted securities, securities for which market quotations are not
readily available, and other assets are valued at fair value, pursuant to
guidelines adopted by the Trustees of Federated Portfolios. Absent unusual
circumstances, debt securities maturing in 60 days or less are valued at
amortized cost. Some of the securities acquired by the Portfolio may be traded
on over-the-counter markets on days which are not Business Days. In such cases,
the net asset value per share of Fund Shares may be significantly affected on
days when shareholders neither purchase nor redeem their shares of beneficial
interest in the Fund. The Portfolio may use one or more independent pricing
services in connection with the pricing of its portfolio securities.

CERTIFICATES AND CONFIRMATIONS

Detailed confirmations of each purchase or redemption are sent to each
shareholder. Monthly confirmations are sent to report dividends paid during the
month.

DIVIDENDS

CAPITAL GAINS

gains). Net short-term capital gains realized during the Fund's fiscal year will
also be distributed during such year.

RETIREMENT PLANS

Shares of the Fund can be purchased as an investment for retirement plans or for
IRA accounts. For further details, contact Federated Securities Corp. and
consult a tax adviser.

REDEEMING INSTITUTIONAL SERVICE SHARES
- --------------------------------------------------------------------------------

TELEPHONE REDEMPTION

An authorization form permitting the Fund to accept telephone requests must
first be completed. Authorization forms and information on this service are
available from Federated Securities Corp.

WRITTEN REQUESTS

Shares may also be redeemed in any amount by mailing a written request to:
Federated Shareholder Services Company, P.O. Box 8600, Boston, Massachusetts
02266-8600. If Share certificates have been issued, they should be sent
unendorsed with the written request by registered or certified mail to the
address noted above.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Fund may
redeem Shares in any account and pay the proceeds to the shareholder if the
account balance falls below a required minimum value of $5,000. This requirement
does not apply, however, if the balance falls below $5,000 because of changes in
the Fund's net asset value.

Before Shares are redeemed to close an account, the shareholder is notified in
writing and allowed 30 days to purchase additional Shares to meet the minimum
requirement.

SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------

VOTING RIGHTS

The Fund invests in the Portfolio, a series of Federated Portfolios, which is a
business trust organized under the laws of the Commonwealth of Massachusetts.
The interests in Federated Portfolios are divided into separate series or
portfolios. Investors in each series of Federated

Portfolios will vote separately or together in the same manner as shareholders
of the Trust's series.
Federated Portfolios' Declaration of Trust provides that the Fund and other
entities investing in the Portfolio and the other series of Federated Portfolios
(e.g., other investment companies, insurance company separate accounts and
common and commingled trust funds) will each be liable for all obligations of
the series in which they invest (and of no other series) and of the overall
obligations of Federated Portfolios. However, the Trustees of the Trust believe
that the risk of the Fund incurring financial loss on account of such liability
is limited to circumstances in which neither the Portfolio nor Federated
Portfolios are able to meet their obligations, and that neither the Fund nor its
shareholders will be exposed to a material risk of liability by reason of the
Fund's investment in the Portfolio.

For more information regarding the Trustees of the Trust and of Federated
Portfolios, see "Management of Trust and Federated Portfolios" in the Statement
of Additional Information.

EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------

The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956,
such as U.S. Trust Company, or any affiliate thereof, from sponsoring,
organizing or controlling a registered, open-end investment company continuously
engaged in the issuance of its shares, and from issuing, underwriting, selling
or distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customers. Based on
advice of its counsel, it is the position of U.S. Trust Company that it may
perform the investment sub-advisory services it performs under the Sub-Advisory
Agreement with the Adviser without violating the Glass-Steagall Act or other
banking laws or regulations. Changes in either federal or state statutes and
regulations relating to the permissible activities of banks and their
subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of present or future statutes and regulations,
could prevent a bank from continuing to perform all or part of the above
services. If this happens, changes in the operation of the Portfolio (or the
Fund) may occur and the Trustees would consider alternative sub-advisers and
other means of continuing available investment services. It is not expected that
shareholders would suffer any adverse financial consequences as a result of any
of these occurrences.

TAX INFORMATION
- --------------------------------------------------------------------------------

Each year the Trust intents to qualify the Fund and elect that the Fund be
treated as a separate "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Provided the Fund meets all income,
distribution and diversification requirements of the Code, and distributes
substantially all of its net investment income and realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, no
federal income or excise taxes will be required to be paid from the Fund. If the
Fund fails to qualify as a "regulated investment company" in any year, the Fund
would incur a regular corporate federal income tax upon its taxable income.
Whether or not the Fund qualifies as a RIC, the Fund's distributions would
generally be taxable as ordinary dividend income to shareholders. The Portfolio
in which the Fund invests is also not expected to be required to pay any federal
income or excise taxes.

withholding is not an additional tax. Any amounts withheld may be credited
against the Fund shareholder's federal income tax liability.

PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------

From time to time, the Fund advertises its total return and yield for Shares.

The Fund is sold without any sales charge or other similar non-recurring
charges.

Total return and yield will be calculated separately for Institutional Shares
and Institutional Service Shares.

From time to time, advertisements for the Fund may refer to ratings, rankings,
and other information in certain financial publications and/or compare the
Fund's performance to certain indices.

OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------

The Fund also offers another class of shares called Institutional Shares.
Institutional Shares are sold at net asset value primarily to accounts for which
financial institutions act in a fiduciary or agency capacity, or other accounts
where the financial institution maintains master accounts with an aggregate
investment of at least $400 million in certain funds which are advised or
distributed by affiliates of Federated Investors. Institutional Shares are also
made available to financial intermediaries, as well as private and public
organizations and are subject to a minimum initial investment of $25,000.

Institutional Shares and Institutional Service Shares are subject to certain of
the same expenses; however, Institutional Service Shares are distributed under a
12b-1 Plan adopted by the Fund. This,

plus other expense differences between Institutional Shares and Institutional
Service Shares, may affect the performance of each class.

To obtain more information and a prospectus for Institutional Shares, investors
may call
1-800-245-4270.

MISCELLANEOUS
- --------------------------------------------------------------------------------

The Fund's Statement of Additional Information bears the same date as this
prospectus and contains more detailed information about the Fund and the
Portfolio, including information related to (i) investment policies and
restrictions of the Fund and the Portfolio, (ii) Trustees and officers of the
Trust and of Federated Portfolios, (iii) portfolio transactions and any
brokerage commissions, (iv) rights and liabilities of shareholders of the Trust
and investors in Federated Portfolios, (v) additional performance information,
including a description of the Fund's calculation of yield and total return,
(vi) determination of the net asset value of Shares of the Fund, and (vii)
financial statements for the Fund and the Portfolio.

ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Federated Bond Index Fund
Institutional Service Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Distributor for Federated Bond Index Fund
and Placement Agent for Bond Index Portfolio
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

Investment Adviser for Bond Index Portfolio
Federated Research Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

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

Administrator
Federated Administrative Services, Inc. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- -----------------------------------------------------------------------------------------------------------------------

FEDERATED BOND
INDEX FUND
INSTITUTIONAL SERVICE SHARES

PROSPECTUS
An Open-End, Diversified Management
Investment Company

Prospectus dated September 30, 1996

[LOGO] FEDERATED INVESTORS

Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Securities Corp. is the distributor of the fund
and is a subsidiary of Federated Investors

G01556-01-SS (9/96)
Cusip 313909202

FEDERATED BOND INDEX FUND
(A PORTFOLIO OF FEDERATED INVESTMENT TRUST)
INSTITUTIONAL SHARES
INSTITUTIONAL SERVICE SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information relates to the Institutional
Shares and Institutional Service Shares (individually and collectively
referred to as ``Shares,''as the context may require). The Shares
represent interests in a diversified portfolio of securities of Federated
Bond Index Fund (the "Fund"), a portfolio of Federated Investment Trust
(the ``Trust'). This Statement of Additional Information should be read
with the respective prospectuses for Institutional Shares and Institutional
Service Shares dated September 30, 1996. This Statement is not a prospectus
itself. You may request a copy of either prospectus or a paper copy of this
Statement of Additional Information, if you have received it
electronically, free of charge by calling 1-800-245-4270. Terms used but
not defined herein, which are defined in the prospectus, are used herein as
defined in the prospectus.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated September 30, 1996
Federated Securities Corp. is the distributor of the Fund
and is a subsidiary of Federated Investors.
Cusip 313909202
Cusip 313909103
G01556-03 (9/96)

INVESTMENT OBJECTIVE AND POLICIES3 Trustee Liability 45
Trustees' Compensation 46
Asset-Backed Securities 3
INVESTMENT ADVISORY AND SUB-ADVISORY
Bank Obligations 5
SERVICES 48
Commercial Paper 6
Lending of Portfolio Securities 7 Adviser and Sub-Adviser to the
Variable Rate and Floating Portfolio 48
Securities 8 State Expense Limitations 50
Participation Interests 9 BROKERAGE TRANSACTIONS 51
Illiquid Securities 10
OTHER SERVICES 54
Unsecured Promissory Notes 12
Repurchase Agreements and Reverse Trust Administration 54
Repurchase Agreements 12 Custodian and Portfolio Recordkeeper
Guaranteed Investment Contracts13 54
When-Issued Securities 14 Transfer Agent And Dividend
Zero Coupon Obligations 15 Disbursing Agent 54
Futures Contracts and Options on Independent Auditors 54
Futures Contracts 15
Options on Securities 21
Options on Securities Indices 25
Short Sales "Against the Box" 26
Certain Other Obligations 27
Rating Services 27
Portfolio Turnover 28
Investment Limitations 29
MANAGEMENT OF THE TRUST AND FEDERATED
PORTFOLIOS 35

Fund Ownership 45

PURCHASING SHARES 55 Institutional Clients 73
Trust Organizations 73
Distribution Plan (Institutional
Broker/Dealers and Bank
Service Shares only) and
Broker/Dealer Subsidiaries 73
Shareholder Services Agreement55
FINANCIAL STATEMENTS 74
Conversion To Federal Funds 56
DETERMINING NET ASSET VALUE 56 APPENDIX 75

Determining Market Value Of
Securities 56
REDEEMING SHARES 58

Redemption In Kind 59
MASSACHUSETTS PARTNERSHIP LAW 59

TAX STATUS 60

The Fund's Tax Status 60
TOTAL RETURN 64

YIELD 64

PERFORMANCE COMPARISONS 65

Economic and Market Information67
DESCRIPTION OF FEDERATED PORTFOLIOS
67

Beneficial Interests 67
Service Providers 70
ABOUT FEDERATED INVESTORS 71

Mutual Fund Market 73

INVESTMENT OBJECTIVE AND POLICIES

The investment objective of the Fund and Portfolio is described in the
prospectus. There can, of course, be no assurance that the Fund or the
Portfolio will achieve its investment objective.
The Fund seeks to achieve its investment objective by investing all of its
assets in the Portfolio. The Fund may withdrawal its investment from the
Portfolio at any time if the Board of Trustees of the Trust (`Trustees'')
determines that it is in the best interests of the Fund to do so.
Since the investment characteristics of the Fund correspond directly to those of
the Portfolio, the following supplements the discussions of the various
investments of and techniques employed by the Portfolio set forth in the
prospectus of the Fund.
Unless indicated otherwise, the investment objectives and policies of the Fund
may be changed by the Boards of Trustees of the Trust and of Federated
Portfolios without the approval of the Fund's shareholders. Likewise, the
investment objective and policies of the Portfolio may be changed by the Board
of Trustees of Federated Portfolios without the approval of the Portfolio's
investors, such as the Fund. Fund shareholders will be notified before any
material change becomes effective.
ASSET-BACKED SECURITIES
Asset-backed securities have structural characteristics similar to mortgage-
backed securities but have underlying assets that generally are not mortgage
loans or interests in mortgage loans.
The Portfolio may invest in asset-backed securities including, but not limited
to, interests in pools of receivables, such as motor vehicle installment
purchase obligations and credit card receivables, equipment leases, manufactured
housing (mobile home) leases, or home equity loans. These securities may be in

the form of pass-through instruments or asset-backed bonds. The securities are
issued by non-governmental entities and carry no direct or indirect government
guarantee.
The credit characteristics of asset-backed securities differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of asset-backed
securities backed by motor vehicle installment purchase obligations permit the
servicer of such receivable to retain possession of the underlying obligations.
If the servicer sells these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related asset-backed securities. Further, if a vehicle is registered in one
state and is then re-registered because the owner and obligor moves to another
state, such re-registration could defeat the original security interest in the
vehicle in certain cases. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws, the
trustee for the holders of asset-backed securities backed by automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.

BANK OBLIGATIONS
Domestic commercial banks organized under federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System. Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. In addition, state banks are
subject to federal examination and to a substantial body of federal law and
regulation. As a result of federal or state laws and regulations, domestic
banks, among other things, generally are required to maintain specified levels
of reserves, are limited in the amounts which they can loan to a single
borrower, and are subject to other regulations designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches and subsidiaries of domestic banks and domestic
and foreign branches of foreign banks, such as certificates of deposit (`CDs'')
and time deposits (`TDs''), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
Foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.

Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, branches licensed by the Comptroller of the Currency and branches
licensed by certain states may be required to: (1) pledge to the regulator, by
depositing assets with a designated bank within the state, a certain percentage
of their assets as fixed from time to time by the appropriate regulatory
authority; and (2) maintain assets within the state in an amount equal to a
specified percentage of the aggregate amount of liabilities of the foreign bank
payable at or through all of its agencies or branches within the state.
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 an agreement between a commercial paper
issuer and an institutional lender pursuant to which the lender may determine to
invest varying amounts.
The Portfolio may purchase three types of commercial paper, as classified by
exemption from registration under the 1933 Act. The three types include open
market, privately placed, and letter of credit commercial paper. Trading of such
commercial paper is conducted primarily by institutional investors through

investment dealers or directly through the issuers. Individual investor
participation in the commercial paper market is very limited.
OPEN MARKET. "Open market" commercial paper refers to the commercial paper of
any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current transactions,
limits maturities to 270 days and requires that the paper contain no provisions
for automatic rollovers. PRIVATELY PLACED. "Privately placed" commercial paper
relies on the exemption from registration provided by Section 4(2) of the 1933
Act, which exempts transactions by an issuer not involving any public offering.
The commercial paper may only be offered to a limited number of accredited
investors. "Privately placed" commercial paper has no maturity restriction and
may be considered illiquid. See "Illiquid Securities" below. LETTER OF
CREDIT. "Letter of credit" commercial paper is exempt from registration under
Section 3(a)(2) of the 1933 Act. It is backed by an irrevocable or unconditional
commitment by a bank to provide funds for repayment of the notes. Unlike "open
market" and "privately placed" commercial paper, "letter of credit" paper has no
limitations on purchasers.
LENDING OF PORTFOLIO SECURITIES
The Portfolio has the authority to lend portfolio securities to brokers, dealers
and other financial organizations. By lending its securities, the Portfolio can
increase its income by continuing to receive income on the loaned securities as
well as by either investing the cash collateral in short-term securities subject
to payment of a rebate fee to the borrower or obtaining a fee from the borrower
when U.S. Government obligations are used as collateral. There may be risks of
delay in receiving additional collateral or risks of delay in recovery of the
securities or even loss of rights in the collateral should the borrower of the
securities fail financially. The Portfolio will adhere to the following

conditions whenever its securities are loaned: (i) the Portfolio must receive
at least 100% cash collateral or equivalent securities from the borrower; (ii)
the borrower must increase this collateral whenever the market value of the
loaned securities including accrued interest exceeds the level of the
collateral; (iii) the Portfolio must be able to terminate the loan at any time
subject to prior notice; (iv) the Portfolio must receive a reasonable return on
the loan, as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (v) the Portfolio may pay
only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower. However, if a material
event adversely affecting the loaned securities were to occur, the Portfolio
would terminate the loan and regain the right to vote the securities.
VARIABLE RATE AND FLOATING SECURITIES
The Portfolio may purchase floating and variable rate demand notes and bonds,
which are obligations ordinarily having stated maturities in excess of 397 days,
but which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 397 days, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit the Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is

adjusted automatically at specified intervals. Frequently, such obligations are
collateralized by letters of credit or other credit support arrangements
provided by banks. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Portfolio's right to redeem is dependent on the
ability of the borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies and the Portfolio
may invest in obligations which are not so rated only if its Investment Managers
determine that at the time of investment the obligations are of comparable
quality to the other obligations in which the Portfolio may invest. The
Investment Managers will consider on an ongoing basis the creditworthiness of
the issuers of the floating and variable rate demand obligations held by the
Portfolio. The Portfolio will not invest more than 15% of the value of its net
assets in floating or variable rate demand obligations as to which it cannot
exercise the demand feature on not more than seven days' notice if there is no
secondary market available for these obligations, and in other securities that
are not readily marketable. See "Investment Limitations" below.
PARTICIPATION INTERESTS
The Portfolio may purchase from financial institutions participation interests
in securities in which the Portfolio may invest. A participation interest gives
the Portfolio an undivided interest in the security in the proportion that the
Portfolio's participation interest bears to the total principal amount of the
security. These instruments may have fixed, floating or variable rates of
interest, with remaining maturities of 13 months or less. If the participation
interest is unrated, or has been given a rating below that which is permissible

for purchase by the Portfolio, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. Government securities, or, in the case
of unrated participation interests, the Investment Managers of the Portfolio
must have determined that the instrument is of comparable quality to those
instruments in which the Portfolio may invest. For certain participation
interests, the Portfolio will have the right to demand payment, on not more than
seven days' notice, for all or any part of the Portfolio's participation
interest in the security, plus accrued interest. As to these instruments, the
Portfolio intends to exercise its right to demand payment only upon a default
under the terms of the security, as needed to provide liquidity to meet
redemptions or to maintain or improve the quality of its investment portfolio.
The Portfolio will not invest more than 15% of its net assets in participation
interests that do not have this demand feature, and in other securities that are
not readily marketable. Currently, the Portfolio does not intend to invest more
than 5% of its net assets in participation interests during the current year.
See "Investment Limitations" below.
ILLIQUID SECURITIES
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the 1933 Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities

and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them which,
if possible at all, would result in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act for resales of
certain securities to qualified institutional buyers.
The Investment Managers will monitor the liquidity of Rule 144A securities for
the Portfolio under the supervision of the Trustees of Federated Portfolios. In
reaching liquidity decisions, the Investment Managers will consider, among other
things, the following factors: (1) the frequency of trades and quotes for the
security, (2) the number of dealers and other potential purchasers wishing to
purchase or sell the security, (3) dealer undertakings to make a market in the
security and (4) the nature of the security and of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of the transfer).

UNSECURED PROMISSORY NOTES
The Portfolio also may purchase unsecured promissory notes ("Notes") which are
not readily marketable and have not been registered under the 1933 Act, provided
such investments are consistent with the Portfolio's investment objective and
policies. The Portfolio will invest no more than 15% of its net assets in such
Notes and in other securities that are not readily marketable (which securities
would include floating and variable rate demand obligations as to which the
Portfolio cannot exercise the demand feature described above and as to which
there is no secondary market). Currently, the Portfolio does not intend to
invest any of its assets in unsecured promissory notes during the coming year.
See "Investment Limitations" below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements are agreements by which a person purchases a security and
simultaneously commits to resell that security to the seller (which is usually a
member bank of the Federal Reserve System or a member firm of the New York Stock
Exchange or a subsidiary thereof) at an agreed-upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed-upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or government agency issues. Under the Investment
Company Act of 1940 (the "1940 Act"), repurchase agreements may be considered to
be loans by the buyer. The Portfolio's risk is limited to the ability of the
seller to pay the agreed upon amount on the delivery date. If the seller
defaults, the underlying security constitutes collateral for the seller's
obligation to pay although the Portfolio may incur certain costs in liquidating
this collateral and in certain cases may not be permitted to liquidate this

collateral. All repurchase agreements entered into by the Portfolio are fully
collateralized, with such collateral being marked to market daily.
The Portfolio may borrow funds for temporary or emergency purposes, such as
meeting larger than anticipated redemption requests, and not for leverage. One
means of borrowing is by agreeing to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price (a "reverse repurchase agreement"). At the time
the Portfolio enters into a reverse repurchase agreement it will place in a
segregated custodial account cash, U.S. Government securities or high-grade debt
obligations having a value equal to the repurchase price, including accrued
interest. Reverse repurchase agreements involve the risk that the market value
of the securities sold by the Portfolio may decline below the repurchase price
of those securities.
GUARANTEED INVESTMENT CONTRACTS
The Portfolio may invest in guaranteed investment contracts ("GICs") issued by
insurance companies. Pursuant to such contracts, the Portfolio makes cash
contributions to a deposit fund of the insurance company's general account. The
insurance company then credits guaranteed interest to the Portfolio. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Because the Portfolio may not receive the
principal amount of a GIC from the insurance company on seven days' notice or
less, the GIC is considered an illiquid investment and, together with other
instruments in the Portfolio which are not readily marketable, will not exceed
15% of the Portfolio's net assets. The term of a GIC will be 13 months or less.
In determining average weighted portfolio maturity, a GIC will be deemed to have
a maturity equal to the longer of the period of time remaining until the next

readjustment of the guaranteed interest rate or the period of time remaining
until the principal amount can be recovered from the issuer through demand.
Currently, the Portfolio intends to invest 5% or less of its net assets in GICs
during the current year.
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a "when-issued" or on a "forward
delivery" basis. It is expected that under normal circumstances, the Portfolio
would take delivery of such securities. Prior to committing to the purchase of a
security on a when-issued or on a forward delivery basis, the Portfolio will
establish procedures consistent with the relevant policies of the SEC. Those
policies currently recommend that an amount of the Portfolio's assets equal to
the amount of the purchase commitment be held aside or segregated to be used to
pay for the commitment. Therefore, the Portfolio expects always to have cash,
cash equivalents, or high quality debt securities sufficient to cover any
purchase commitments or to limit any potential risk. Although the Portfolio does
not intend to make such purchases for speculative purposes and intends to adhere
to SEC policies, purchases of securities on a when-issued or forward delivery
basis may involve additional risks than other types of securities purchases. For
example, the Portfolio may have to sell assets which have been set aside in
order to meet redemptions. Also, if the Portfolio determines it is advisable as
a matter of investment strategy to sell the when-issued or forward delivery
securities, the Portfolio would be required to meet its obligations from its
then available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the when-issued or forward delivery
securities themselves (which may have a value greater or less than the
Portfolio's payment obligation).
When the Portfolio engages in when-issued or forward delivery transactions, it
relies on the other party to consummate the trade. Failure of such other party

to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities and any subsequent fluctuations in
their market value are taken into account when determining the market value of
the Portfolio starting on the day the Portfolio agrees to purchase the
securities. The Portfolio does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date.
ZERO COUPON OBLIGATIONS
The Portfolio may acquire zero coupon obligations when consistent with its
investment objectives and policies. Such obligations have greater price
volatility than coupon obligations and will not result in payment of interest
until maturity. Since interest income is accrued throughout the term of the zero
coupon obligation but is not actually received until maturity, the Portfolio,
which is required for tax purposes to distribute to its investors a certain
percentage of its income, may have to sell other securities to distribute the
income prior to maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
GENERAL. The successful use of such instruments by the Portfolio may depend in
part upon the Investment Managers' skill and experience with respect to such
instruments. Should interest rates move in an unexpected manner, the Portfolio
may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize losses and thus will be in a worse position
than if such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and
movements in the price of the securities will not be perfect and could produce
unanticipated losses.

FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase or
sale for future delivery of securities, or contracts based on financial indices.
U.S. futures contracts have been designed by exchanges which have been
designated "contracts markets" by the CFTC, and must be executed through a
futures commission merchant, or brokerage firm, which is a member of the
relevant contract market. Futures contracts trade on a number of exchange
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The Portfolio may enter into futures contracts which are based on debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds, Treasury Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities and three-
month U.S. Treasury Bills. The Portfolio may also enter into futures contracts
which are based on fixed income securities issued by entities other than the
U.S. Government, including corporate debt securities, or contracts based on
financial indices including any index of U.S. Government securities, or
corporate debt securities.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract, adjustments
are made to recognize differences in value arising from the delivery of
securities with a different interest rate from that specified in the contract.

In some (but not many) cases, securities called for by a futures contract may
not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, the Portfolio will incur brokerage fees when
it purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case where
the Portfolio holds or intends to acquire fixed-income securities, is to attempt
to protect the Portfolio from fluctuations in interest rates without actually
buying or selling fixed-income securities. For example, if interest rates were
expected to increase, the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt security in the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures

contracts as an investment technique allows the Portfolio to maintain a
defensive position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, the Portfolio could
take advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent the Portfolio enters into futures contracts
for this purpose, the assets in the segregated asset account maintained to cover
the Portfolio's obligations with respect to such futures contracts will consist
of cash, cash equivalents or high quality liquid debt securities from its
portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial and
variation margin payments made by the Portfolio with respect to such futures
contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures

market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the Investment Managers may
still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Investment Managers
believe that use of such contracts will benefit the Portfolio, if the judgment
of the Investment Managers about the general direction of interest rates is
incorrect, the Portfolio's overall performance would be poorer than if it had
not entered into any such contract. For example, if the Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of debt securities held by it and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities to meet
daily variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.

Options on Futures Contracts. The Portfolio may purchase and write options on
futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership

of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when the Portfolio is not fully invested it may purchase a
call option on a futures contract to hedge against a market advance due to
declining interest rates.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security which is deliverable upon exercise of
the futures contract. If the futures price at expiration of the option is below
the exercise price, the Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Portfolio's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
security which is deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Portfolio will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option the Portfolio has written
is exercised, the Portfolio will incur a loss which will be reduced by the
amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk the Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction

costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
The Trustees of Federated Portfolios have adopted the requirement that futures
contracts and options on futures contracts be used either (i) as a hedge without
regard to any quantitative limitation, or (ii) for other purposes to the extent
that immediately thereafter the aggregate amount of initial margin deposits on
all (non-hedge) futures contracts of the Portfolio and premiums paid on
outstanding (non-hedge) options on futures contracts owned by the Portfolio do
not exceed 5% of the market value of the net assets of the Portfolio. In
addition, the aggregate market value of the outstanding futures contracts
purchased by the Portfolio may not exceed 50% of the market value of the total
assets of the Portfolio. Neither of these restrictions will be changed by the
Trustees without considering the policies and concerns of the various applicable
federal and state regulatory agencies.
OPTIONS ON SECURITIES
The Portfolio may write (sell) covered call and put options to a limited extent
on its portfolio securities ("covered options"). However, the Portfolio may
forgo the benefits of appreciation on securities sold or may pay more than the
market price on securities acquired pursuant to call and put options written by
the Portfolio.
When the Portfolio writes a covered call option, it gives the purchaser of the
option the right to buy the underlying security at the price specified in the
option (the "exercise price") by exercising the option at any time during the
option period. If the option expires unexercised, the Portfolio will realize
income in an amount equal to the premium received for writing the option. If the
option is exercised, a decision over which the Portfolio has no control, the
Portfolio must sell the underlying security to the option holder at the exercise

price. By writing a covered call option, the Portfolio forgoes, in exchange for
the premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the market value of the underlying
security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in the amount of the
premium received for writing the option. If the put option is exercised, a
decision over which the Portfolio has no control, the Portfolio must purchase
the underlying security from the option holder at the exercise price. By writing
a covered put option, the Portfolio, in exchange for the net premium received,
accepts the risk of a decline in the market value of the underlying security
below the exercise price. The Portfolio will only write put options involving
securities for which a determination is made at the time the option is written
that the Portfolio wishes to acquire the securities at the exercise price.

The Portfolio may terminate its obligation as the writer of a call or put option
by purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." Where the Portfolio cannot effect a closing purchase transaction,
it may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium received
by the Portfolio is included in the liability section of the Portfolio's
Statement of Assets and Liabilities as a deferred credit. The amount of the

deferred credit will be subsequently marked to market to reflect the current
market value of the option written. The current market value of a traded option
is the last sale price or, in the absence of a sale, the closing bid price. If
an option expires on its stipulated expiration date or if the Portfolio enters
into a closing purchase transaction, the Portfolio will realize a gain (or loss
if the cost of a closing purchase transaction exceeds the premium received when
the option was sold), and the deferred credit related to such option will be
eliminated. If a call option is exercised, the Portfolio will realize a gain or
loss from the sale of the underlying security and the proceeds of the sale will
be increased by the premium originally received. The writing of covered call
options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options are written will
be segregated on the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which it
may invest. The Portfolio would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a decline
in the market value of securities in its portfolio ("protective puts") or
securities of the type in which it is permitted to invest. The purchase of a put
option would entitle the Portfolio, in exchange for the premium paid, to sell a
security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is

designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by the
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. The Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Portfolio has adopted certain other non-fundamental policies concerning
option transactions which are discussed below. The Portfolio's activities in
options may also be restricted by the requirements of the Internal Revenue Code
of 1986 (the "Code") for the Fund's qualification as a regulated investment
company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with broker-
dealers who make markets in these options. The ability to terminate over-the-
counter option positions is more limited than with exchange-traded option
positions because the predominant market is the issuing broker rather than an
exchange, and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary

government securities dealers recognized by the Federal Reserve Bank of New York
and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. The Investment Managers
will monitor the creditworthiness of dealers with whom the Portfolio enters into
such option transactions, under the general supervision of the Trustees of
Federated Portfolios.
OPTIONS ON SECURITIES INDICES
In addition to options on securities, the Portfolio may also purchase and write
(sell) call and put options on securities indices. Such options give the holder
the right to receive a cash settlement during the term of the option based upon
the difference between the exercise price and the value of the index. Such
options will be used for the purposes described under "Options on Securities."
Options on securities indices entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indices is more likely to occur, although the Portfolio
generally will only purchase or write such an option if its Investment Managers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolio will not purchase such options unless its
Investment Managers believe the market is sufficiently developed such that the
risk of trading in such options is no greater than the risk of trading in
options on securities.
Price movements in the Portfolio's securities may not correlate precisely with
movements in the level of an index and, therefore, the use of options on indices
cannot serve as a complete hedge. Because options on securities indices require

settlement in cash, the Investment Managers may be forced to liquidate portfolio
securities to meet the Portfolio's settlement obligations.
SHORT SALES "AGAINST THE BOX"
In a short sale, the Portfolio sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The Portfolio may
engage in short sales only if at the time of the short sale it owns or has the
right to obtain, at no additional cost, an equal amount of the security being
sold short. This investment technique is known as a short sale "against the
box."
In a short sale, the seller does not immediately deliver the securities sold and
is said to have a short position in those securities until delivery occurs. If
the Portfolio engages in a short sale, the collateral for the short position
will be maintained by its custodian or qualified sub-custodian. While the short
sale is open, the Portfolio maintains in a segregated account an amount of
securities equal in kind and amount to the securities sold short or securities
convertible into or exchangeable for such equivalent securities. These
securities constitute the Portfolio's long position.
The Portfolio will not engage in short sales against the box for investment
purposes. The Portfolio may, however, make a short sale as a hedge, when it
believes that the price of a security may decline, causing a decline in the
value of a security (or a security convertible or exchangeable for such
security), or when the Portfolio wants to sell the security at an attractive
current price, but also wishes to defer recognition of gain or loss for federal
income tax purposes or for purposes of satisfying certain tests applicable to
regulated investment companies under the Code. In such case, any future losses
in the Portfolio's long position should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a loss
in the short position. The extent to which such gains or losses are reduced

depends upon the amount of the security sold short relative to the amount the
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolio will endeavor to offset these
costs with the income from the investment of the cash proceeds of short sales.
As a non-fundamental operating policy, not more than 40% of the Portfolio's
total assets would be involved in short sales against the box.
CERTAIN OTHER OBLIGATIONS
In order to allow for the investments in new instruments that may be created in
the future, upon supplementing this registration statement, the Portfolio may
invest in obligations other than those listed previously, provided such
investments are consistent with the investment objectives, policies and
limitations of the Portfolio and the Fund.
RATING SERVICES
Ratings represent the opinions of rating services as to the quality of the
securities that they undertake to rate. It should be emphasized, however, that
the ratings are relative and subjective and are not absolute standards of
quality. Although these ratings are an initial criterion for selection of
portfolio investments, the Investment Managers also make their own evaluations
of these securities, subject to review by the Trustees of Federated Portfolios.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event would require the Portfolio to dispose of the obligation, but its
Investment Managers will consider such an event in their determination of
whether the Portfolio should continue to hold the obligation. A description of
the ratings used herein and in the prospectus is set forth in the Appendix to
this Statement of Additional Information.

PORTFOLIO TURNOVER
Although the Portfolio is managed to reflect the composition of the Aggregate
Bond Index, the Portfolio may sell securities irrespective of how long such
securities have been held. Ordinarily, securities will be sold from the
Portfolio only to reflect certain administrative changes in the Lehman Brothers
Aggregate Bond Index (including mergers or changes in its composition) or to
accommodate cash flows into and out of the Portfolio while maintaining the
similarity of its portfolio to its benchmark index. The Portfolio may sell a
portfolio investment immediately after its acquisition if the Investment
Managers believe that such a disposition is consistent with the investment
objective of the Portfolio. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold such investments.
Except as may be required to ensure satisfaction of certain tests applicable to
regulated investment companies under the Code, portfolio changes are made
without regard to the length of time a security has been held, or whether a sale
would result in the recognition of a profit or loss. The Portfolio may engage in
short-term trading to achieve its investment objective. Portfolio turnover may
vary greatly from year to year as well as within a particular year. The
Portfolio's portfolio turnover rate may also be affected by cash requirements
for redemptions of shares and by regulatory provisions which enable the
Portfolio to receive certain favorable tax treatment. Portfolio turnover will
not be a limiting factor in making portfolio decisions. Portfolio trading is
engaged in for the Portfolio if its Investment Managers believe that a
transaction net of costs (including custodian charges) will help achieve the
Portfolio's investment objective.

For the fiscal year ended May 31, 1996 and for the period from July 11, 1994
(date of initial public investment) to May 31, 1995, the Portfolio's turnover
rate was 43% and 67%, respectively. The portfolio turnover rates presented
herein include the operations of the Bond Market Portfolio (the `Predecessor
Portfolio'), a portfolio of the St. James Portfolios, for periods prior to
January 2, 1996. (See `Financial Statements'' for additional information about
the Predecessor Portfolio.) A high rate of portfolio turnover may involve
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by the Portfolio and ultimately by the
investors in the Portfolio. High portfolio turnover may result in the
realization of substantial net capital gains. To the extent net short-term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for Federal income tax purposes.
Except as stated otherwise, all investment policies and limitations described
herein are non-fundamental, and may be changed without prior shareholder
approval.

INVESTMENT LIMITATIONS
The following investment limitations are "fundamental policies" of the Fund and
the Portfolio and may not be changed with respect to the Fund or the Portfolio
without the approval of a "majority of the outstanding voting securities" of the
Fund or the Portfolio, as the case may be. "Majority of the outstanding voting
securities" under the 1940 Act and as used in this Statement of Additional
Information and in the prospectus means, with respect to the Fund (or the
Portfolio), the lesser of (i) 67% or more of the outstanding voting securities
of the Fund (or of the total beneficial interests of the Portfolio) present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
the Fund (or of the total beneficial interests of the Portfolio) are present or

represented by proxy, or
(ii) more than 50% of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio).
Because the Fund invests through the Portfolio, shareholders should be aware
that fundamental policies of the Portfolio may not be changed without the
approval of a `majority of the outstanding voting securities'' of the
Portfolio, i.e., the holders of the beneficial interests of the Portfolio.
Whenever the Fund is requested to vote on a fundamental policy of the Portfolio,
the Trust will hold a meeting of the Fund's shareholders and will cast its vote
as instructed by the Fund's shareholders.
With respect to each fundamental investment restriction and each non-fundamental
investment policy listed below, if a percentage restriction (other than a
restriction as to borrowing) or a rating restriction on investment or
utilization of assets is adhered to at the time an investment is made or assets
are so utilized, a later change in such percentage resulting from changes in the
Portfolio's total assets or the value of the Portfolio's securities, or a later
change in the rating of a portfolio security, will not be considered a violation
of the relevant restriction or policy.

As a diversified investment company, 75% of the assets of the Portfolio (or the
Fund) are represented by cash and cash items (including receivables), government
securities, securities of other investment companies, and other securities which
for purposes of this calculation are subject to the following limitations: (a)
the Portfolio (or the Fund) may not invest more than 5% of its total assets in
the securities of any one issuer; and (b) the Portfolio (or the Fund) may not
own more than 10% of the outstanding voting securities of any one issuer. This

is a fundamental investment policy which may not be changed without investor
approval.
As a matter of fundamental policy , the Portfolio (or the Fund) may not (except
that no investment restriction of the Fund shall prevent the Fund from investing
all of its investable assets in an open-end management investment company with
substantially the same investment objective and policies as the Fund):
(1) borrow money or mortgage or hypothecate assets of the Portfolio (or the
Fund), except that in an amount not to exceed 1/3 of the current value of the
Portfolio's (or Fund's) assets (including such borrowing) less liabilities (not
including such borrowing), it may borrow money, enter into reverse repurchase
agreements, and purchase when-issued securities, and except that it may pledge,
mortgage or hypothecate its assets to secure such borrowings, reverse repurchase
agreements, or when-issued securities, provided that collateral arrangements
with respect to options and futures, including deposits of initial deposit and
variation margin, are not considered a pledge of assets for purposes of this
restriction, and except that assets may be pledged to secure letters of credit
solely for the purpose of participating in a captive insurance company sponsored
by the Investment Company Institute.
The Fund will not purchase securities while borrowings exceed 5% of the
Portfolio's (or Fund's) total assets;
(2) underwrite securities issued by other persons except insofar as Federated
Portfolios or the Portfolio (or the Trust or the Fund) may technically be deemed
an underwriter under the 1933 Act in selling a portfolio security;
(3) make loans to other persons except (a) through the lending of the
Portfolio's (or Fund's) portfolio securities and provided that any such loans
not exceed 30% of the Portfolio's (or Fund's) total assets (taken at market
value), (b) through the use of repurchase agreements or the purchase

of short-term obligations, or (c) by purchasing debt securities of types
distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests in
partnerships substantially all of whose assets consist of real estate but
excluding securities secured by real estate or interests therein), interests in
oil, gas or mineral leases, commodities or commodity contracts (except futures
and option contracts) in the ordinary course of business (Federated Portfolios
(or the Trust) may hold and sell, for the Portfolio's (or Fund's) portfolio,
real estate acquired as a result of the Portfolio's (or Fund's) ownership of
securities);
(5) invest 25% or more of its assets in any one industry (excluding U.S.
Government securities), unless the debt securities issued by companies in a
single industry were to comprise 25% or more of Lehman Brothers Aggregate Bond
Index, in which case the Portfolio (or Fund) will invest 25% or more of its
assets in that industry; or
(6) issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and regulations
promulgated thereunder, provided that collateral arrangements with respect to
options and futures, including deposits of initial deposit and variation margin,
are not considered to be the issuance of a senior security for purposes of this
restriction.
State and Federal Restrictions. In order to comply with certain state and
federal statutes and policies, the Portfolio (or Fund) will not as a matter of
operating policy (except that no operating policy shall prevent the Fund from
investing all of its investable assets in an open-end management investment
company with substantially the same investment objective and policies as the
Fund): (i) purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the clearance of

purchases and sales of securities may be obtained and except that deposits of
initial deposit and variation margin may be made in connection with the
purchase, ownership, holding or sale of futures;
(ii) invest for the purpose of exercising control or management;
(iii) purchase securities issued by any other investment company except by
purchase in the open market where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission, or
except when such purchase, though not made in the open market, is part of a plan
of merger or consolidation; provided, however, that securities of any investment
company will not be purchased for the Portfolio (or Fund) if such purchase at
the time thereof would cause (a) more than 10% of the Portfolio's (or Fund's)
total assets (taken at the greater of cost or market value) to be invested in
the securities of such issuers; (b) more than 5% of the Portfolio's (or Fund's)
total assets (taken at the greater of cost or market value) to be invested in
any one investment company; or (c) more than 3% of the outstanding voting
securities of any such issuer to be held for the Portfolio (or Fund);
(iv) purchase securities of any issuer if such purchase at the time thereof
would cause the Portfolio (or Fund) to hold more than 10% of any class of
securities of such issuer, for which purposes all indebtedness of an issuer
shall be deemed a single class and all preferred stock of an issuer shall be
deemed a single class, except that futures or option contracts shall not be
subject to this restriction; (v) purchase or retain in the Portfolio's (or
Fund's) portfolio any securities issued by an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of Federated
Portfolios (or the Trust), or is an officer or partner of the Adviser or U.S.
Trust Company, if after the purchase of the securities of such issuer for the
Portfolio (or Fund) 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; (vi) invest more than 5% of the Portfolio's (or
Fund's) net assets in warrants. No more than 2% of the Portfolio's (or Fund's)
net assets, to be included within the overall 5% limit on investments in
warrants, may be warrants which are not listed on the New York Stock Exchange or
the American Stock Exchange; (vii) make short sales of securities or maintain
a short position (excluding short sales if the Portfolio (or Fund) owns an equal
amount of such securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of equivalent kind and
amount) if such short sales represent more than 25% of the Portfolio's (or
Fund's) net assets (taken at market value); provided, however, that the value of
the Portfolio's (or Fund's) short sales of securities (excluding U.S. Government
securities) of any one issuer may not be greater than 2% of the value (taken at
market value) of the Portfolio's (or Fund's) net assets or more than 2% of the
securities of any class of any issuer; (viii) enter into repurchase agreements
providing for settlement in more than seven days after notice, or purchase
securities which are not readily marketable, if, in the aggregate, more than 15%
of its net assets would be so invested;
(ix) purchase puts, calls, straddles, spreads or any combination thereof, if by
reason of such purchase the value of its aggregate investment in such securities
would exceed 5% of the Portfolio's (or Fund's) total assets;
(x) invest more than 10% of Portfolio's (or Fund's) total assets in securities
subject to restrictions on resale under the Securities Act of 1933, except for
commercial paper issued under Section 4(2) of the Securities Act of 1933 and
certain other restricted securities which meet the criteria for liquidity as
established by the Trustees of Federated Portfolios or the Trust; or

(xi) invest more than 5% of the value of Portfolio's (or Fund's) total assets
in securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.
Policies (i) through (xi) above may be changed by the Board of Trustees of
Federated Portfolios or the Trust without investor or shareholder approval.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings association having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be `cash items.''

MANAGEMENT OF THE TRUST AND FEDERATED PORTFOLIOS

Officers and Trustees of the Trust are listed with their addresses, birthdates,
principal occupations during the past five years, and present positions,
including any affiliation with Federated Research Corp., Federated Investors,
Federated Securities Corp., Federated Administrative Services, Federated
Administrative Services, Inc., Federated Shareholder Services, Federated
Shareholder Services Company, Federated Services Company, and the Funds, as
defined below. The officers and Trustees of the Trust also serve in the same
capacities as officers and Trustees of Federated Portfolios.

John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
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 or Trustee of the Funds. Mr. Donahue is the
father of J. Christopher Donahue, President and Trustee of the Trust.

Thomas G. Bigley
28th Floor, One Oxford Centre
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; MED 3000 Group, Inc.; Trustee, University of
Pittsburgh; Director, or Trustee of the Funds.

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly President, Northgate Village Development
Corporation and Naples Property Management, Inc.; Director or Trustee of the
Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp. and Director,
Ryan Homes, Inc.; Director or Trustee of the Funds;.

J. Christopher Donahue *
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
President and Trustee
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 Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company and Federated Administrative
Services, Inc.; President or Executive Vice President of the Funds; Director or
Trustee of some of the Funds. Mr. Donahue is the son of John F. Donahue,
Chairman and Trustee of the Trust.

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

Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University
of Pittsburgh Medical Center - Downtown; Member, Board of Directors, University
of Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and
Internist, Presbyterian and Montefiore Hospitals; Director or Trustee of the
Funds.

Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.

Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.

Gregor F. Meyer
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: October 6, 1926
Trustee
Attorney, Member of Miller, Ament, Henny & Kochuba; Chairman, Meritcare, Inc.;
Director, Eat'N Park Restaurants, Inc.; Director or Trustee of the Funds.

John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica,
Murray and Hogue; Director or Trustee of the Funds.

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

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning, Manchester Craftmen's Guild;
Restaurant Consultant, Frick Art & History Center; Conference Coordinator,
University of Pittsburgh Art History Department; Director or Trustee of the
Funds.

Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
Executive Vice President
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; Executive
Vice President and/or Treasurer of some of the Funds.

Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
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.

John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President, Secretary and Treasurer
Executive Vice President, Secretary, General Counsel, 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 and Federated Administrative Services, Inc.; President and
Trustee, Federated Shareholder Services; Director, Federated Securities Corp.;
Executive Vice President and Secretary of the Funds; Treasurer of some of the
Funds.

* This Trustee is deemed to be an "interested person" as defined in the 1940
Act.
@ Member of both the Trust's and Federated Portfolio's Executive Committee.
The Executive Committee of a Board of Trustees handles the responsibilities of
the Trustees between meetings of the Board.
As used in the table above, `The Funds'' and ``Funds'' mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;
Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Investment Portfolios; Federated
Investment Trust; Federated Master Trust; Federated Municipal Opportunities
Fund, Inc.; Federated Municipal Securities Fund, Inc.; Federated Municipal
Trust; Federated Short-Term Municipal Trust; Federated Short-Term U.S.
Government Trust; Federated Stock and Bond Fund, Inc.; Federated Stock
Trust; Federated Tax-Free Trust; Federated Total Return Series, Inc.;
Federated U.S. Government Bond Fund; Federated U.S. Government Securities
Fund: 1-3 Years; Federated U.S. Government Securities Fund: 2-5 Years;
Federated U.S. Government Securities Fund: 5-10 Years; Federated Utility

Fund, Inc.; First Priority Funds; Fixed Income Securities, Inc.; Fortress
Utility Fund, Inc.; High Yield Cash Trust; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds, Inc.; Investment
Series Trust; Liberty Term Trust, Inc. - 1999; Liberty U.S. Government
Money Market Trust; Liquid Cash Trust; Managed Series Trust; Money Market
Management, Inc.; Money Market Obligations Trust; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; Peachtree Funds; RIMCO
Monument Funds; Targeted Duration Trust; Tax-Free Instruments Trust; The
Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding shares. As of
September 3, 1996 the following shareholders of record owned 5% or more of the
outstanding shares of the Fund: Temple First Stock Co. owned approximately
113,496 (7.70%) and Frojack Co. owned approximately 728,686 (49.44%) of the
Institutional Shares of the Fund; and Menomin Co. owned approximately 698
(96.08%) of the Institutional Service Shares of the Fund.

TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office. See

`Description of Federated Portfolios'' below for a description of Trustee
liability.
TRUSTEES' COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
TRUST/FEDERATED TRUST/ FROM FUND COMPLEX +
PORTFOLIOS FEDERATED PORTFOLIOS*

John F. Donahue, $ 0 $0 for the Trust, Federated Portfolios, and
Chairman and Trustee 54 other investment companies in the Fund Complex

J. Christopher Donahue, $ 0 $0 for the Trust, Federated Portfolios, and
President and Trustee 16 other investment companies in the Fund Complex

Thomas G. Bigley,++ $ 0 $86,331 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

John T. Conroy, Jr., $ 0 $115,760 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

William J. Copeland, $ 0 $115,760 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

James E. Dowd, $ 0 $115,760 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Lawrence D. Ellis, M.D., $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Edward L. Flaherty, Jr., $ 0 $115,760 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Peter E. Madden, $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Gregor F. Meyer, $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

John E. Murray, Jr., $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Wesley W. Posvar, $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

Marjorie P. Smuts, $ 0 $104,898 for the Trust, Federated Portfolios, and
Trustee 54 other investment companies in the Fund Complex

*As of the date of this Statement of Additional Information, neither the Trust
nor Federated Portfolios (each of which consists of one portfolio) has paid any
fees to the Trustees.
+The information is provided for the last calendar year.
++Mr. Bigley served on 39 investment companies in the Federated Funds complex
from January 1 through
September 30, 1995. On October 1, 1995, he was appointed a Trustee on 15
additional funds advised or administered by Federated Investors, its
subsidiaries or affiliates.

INVESTMENT ADVISORY AND SUB-ADVISORY SERVICES

ADVISER AND SUB-ADVISER TO THE PORTFOLIO
The Portfolio's investment adviser is Federated Research Corp. (the
`Adviser''), a subsidiary of Federated Investors. All of the voting securities
of Federated Investors are owned by a trust, the trustees of which are John F.
Donahue, his wife, and his son, J. Christopher Donahue. For its advisory
services, the Adviser receives an annual investment advisory fee as described in
the prospectus.

The Adviser has contracted to U.S. Trust Company the responsibility to make the
day-to-day investment decisions for the Portfolio and to place the purchase and
sales orders for securities transactions of the Portfolio, subject in all cases
to the general supervision of the Adviser. U.S. Trust Company furnishes at its
own expense all services, facilities and personnel necessary in connection with
managing the Portfolio's investments and effecting securities transactions for
the Portfolio.
The Advisory Agreement and the Sub-Advisory Agreement will continue in effect
with respect to the Portfolio as long as such continuance is specifically
approved at least annually by the Trustees of Federated Portfolios or by a
majority vote of the investors in the Portfolio (with the vote of each being in
proportion to the respective values of their investments) and, in either case,
by a majority of the Trustees of Federated Portfolios who are not parties to the
Advisory Agreement, the Sub-Advisory Agreement, as the case may be, or
interested persons of any such party, at a meeting called for the purpose of
voting on the Advisory Agreement or Sub-Advisory Agreement. The Advisory
Agreement and the Sub-Advisory Agreement were both approved by the Trustees of
Federated Portfolios and are effective on September 30, 1996. The terms of the
contract under which Federated Research Corp., as the current Adviser, and the
Sub-Adviser presently perform these services are identical to those previously
performed by Federated Management, as the former Adviser, and the Sub-Adviser.
The Adviser, U.S. Trust Company, and administrator have agreed to waive certain
fees.
The Advisory Agreement and Sub-Advisory Agreement provide that the Adviser and
U.S. Trust Company may render services to others, and each agreement is
terminable by the Portfolio without penalty on not more than 60 days' nor less
than 30 days' written notice when authorized either by majority vote of the Fund
and the other investors in the Portfolio (with the vote of each being in

proportion to the amount of its investment), or by a vote of a majority of the
Trustees of Federated Portfolios, or by the Adviser or U.S. Trust Company on not
more than 60 days' nor less than 30 days' written notice. The Advisory Agreement
and Sub-Advisory Agreement each will automatically terminate in the event of
its assignment. The Advisory Agreement and the Sub-Advisory Agreement provide
that neither the Adviser, U.S. Trust Company, nor its personnel shall be liable
for any error of judgment or mistake of law or for any loss arising out of any
investment, or for any act or omission in the execution of security transactions
for the Portfolio, except for willful misfeasance, bad faith, gross negligence
or reckless disregard of its or their obligations and duties under the Advisory
and Sub-Advisory Agreements.
For the period from January 2, 1996 to May 31, 1996, Federated Management and
the Sub-Adviser voluntarily waived all of their fees which amounted to $17,632.
United States Trust Company of the Pacific Northwest (`U.S. Trust Pacific'')
was the investment adviser and U.S. Trust Company of New York (`Sub-Adviser'')
was the sub-adviser of the Predecessor Portfolio. U.S. Trust Pacific and the
Sub-Adviser voluntarily agreed to waive all of their investment advisory fees
and reimburse certain operational expenses of the Predecessor Portfolio. The
investment advisory fee waivers and expense reimbursements totaled $23,111 and
$55,998, respectively, for the period from June 1, 1995 to January 2, 1996, and
$47,955 and $83,454, respectively, for the period from July 11, 1994 (date of
initial public investment) to May 31, 1995.
STATE EXPENSE LIMITATIONS
The Adviser and the Sub-Adviser, if required by applicable state law, shall
reimburse the Fund or waive all or part of its fees up to, but not exceeding,
its investment advisory fees from the Portfolio. Such reimbursement, if
required, will be equal to the combined aggregate annual expenses of the Fund
and the Portfolio which exceed that expense limitation with the lowest threshold

prescribed by any state in which the Fund is qualified for offer or sale.
Management of each of the Trust and Federated Portfolios has been advised that
the lowest such threshold currently in effect is 2 1/2% of net assets up to
$30,000,000, 2% of the next $70,000,000 of net assets and 1 1/2% of net assets
in excess of that amount.
This arrangement is not part of the Advisory Agreement or Sub-Advisory Agreement
and may be amended or rescinded in the future.

BROKERAGE TRANSACTIONS

The Portfolio's purchase and sales of securities may be principal transactions,
that is, securities may be purchased directly from the issuer or from an
underwriter or market maker for the securities. There usually are no brokerage
commissions paid for such purchases and, therefore, the Portfolio does not
anticipate paying brokerage commissions in such transactions. Purchases and
sales of the Portfolio's portfolio securities will usually be principal
transactions without brokerage commissions. Any transactions for which the
Portfolio pays a brokerage commission will be effected at the best price and
execution available. Purchases from underwriters of securities include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and the
asked price. For the fiscal year ended May 31, 1996 and for the period from July
11, 1994 (date of initial public investment) to May 31, 1995, the Portfolio paid
no brokerage commissions. The brokerage commissions presented above include the
operations of the Predecessor Portfolio for periods prior to January 2, 1996.
Allocations of transactions, including their frequency, to various dealers
is determined by the Investment Managers in their best judgment and in a manner

deemed to be in the best interest of the investors in the Portfolio rather than
by any formula. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price.
The Advisory and Sub-Advisory Agreements provide that, in executing portfolio
transactions and selecting brokers or dealers, the Investment Managers will seek
to obtain the best net price and the most favorable execution. The Investment
Managers shall consider factors they deem relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, the Advisory and Sub-Advisory Agreements authorize the Investment
Managers, to the extent permitted by law and subject to the review of Federated
Portfolio's Trustees, to cause the Portfolio to pay a broker which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker for effecting the same transaction, provided that the
Investment Managers determine in good faith that such commission is reasonable
in relation to the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or the overall
responsibilities of the Investment Managers to the accounts as to which they
exercise investment discretion. Such brokerage and research services might
consist of reports and statistics on specific companies or industries, general
summaries of groups of stocks and their comparative earnings, or broad overviews
of the stock market and the economy. Such services might also include reports
on global, regional, and country by-country prospects for economic growth,
anticipated levels of inflation, prevailing and expected interest rates, and the
outlook for currency relationships.
Supplementary research information so received is in addition to and not in lieu
of services required to be performed by the Investment Managers and does not

reduce the investment advisory fees (if any) payable by the Portfolio. Such
information may be useful to the Investment Managers in serving the Portfolio
and other clients and, conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Investment Managers
in carrying out their obligations to the Portfolio. Investment decisions for
the Portfolio will be made independently from those for any other account or
investment company that is or may in the future become managed by its Investment
Managers or any of their affiliates. If, however, the Portfolio and other
investment companies or accounts managed by the same investment manager are
contemporaneously engaged in the purchase or sales of the same security, the
transactions may be averaged as to price and allocated equitably to each
account. In some cases, this policy might adversely affect the price paid or
received by the Portfolio or the size of the position obtainable for the
Portfolio. In addition, when purchases or sales of the same security for the
Portfolio and for other investment companies managed by the same Investment
Managers occur contemporaneously, the purchase or sale orders may be aggregated
in order to obtain any price advantages available to large denomination
purchases or sales. Furthermore, in certain circumstances affiliates of the
Investment Managers whose investment portfolios are managed internally, rather
than by the Investment Managers, might seek to purchase or sell the same type of
investments at the same time as the Portfolio. Such an event might also
adversely affect the Portfolio.
As of May 31, 1996, the Portfolio owned approximately $514,000 of debt
securities of Lehman Brothers, Inc., one of its regular brokers that derives
more than 15% of gross revenues from securities-related activities.

OTHER SERVICES

For information regarding the service providers of Federated Portfolios, see
`Description of Federated Portfolios-Service Providers'' in this Statement of
Additional Information.
TRUST ADMINISTRATION
Federated Services Company, a subsidiary Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
prospectus. For the period from February 22, 1996 (date of initial public
investment) to May 31, 1996, Federated Services Company earned $24,098, all of
which was voluntarily waived.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
State Street Bank and Trust Company, Boston, Massachusetts, is custodian for the
cash and securities of the Fund.
Federated Services Company has contracted on behalf of its subsidiaries
(including Federated Administrative Services) to maintain the Fund's 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.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder Services Company, a subsidiary of Federated Services
Company, serves as transfer agent and dividend disbursing agent for the Fund.
For its services, the transfer agent receives a fee based upon the size, type
and number of accounts and transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young LLP, Pittsburgh,
Pennsylvania.

PURCHASING SHARES

Shares are sold at their net asset value without a sales charge on days the New
York Stock Exchange is open for business. The procedure for purchasing Shares is
explained in the respective prospectus under "Investing in Institutional Shares"
or "Investing in Institutional Service Shares."
DISTRIBUTION PLAN (INSTITUTIONAL SERVICE SHARES ONLY) AND SHAREHOLDER SERVICES
AGREEMENT
These arrangements permit the payment of fees to financial institutions, the
distributor, and Federated Shareholder Services to stimulate distribution
activities and to cause services to be provided to shareholders by a
representative who has knowledge of the shareholder's particular circumstances
and goals. These activities and services may include, but are not limited to,
marketing efforts; providing office space, equipment, telephone facilities, and
various clerical, supervisory, computer, and other personnel as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries; and assisting
clients in changing dividend options, account designations, and addresses.
With respect to the Institutional Service Shares class of the Fund, by adopting
the Distribution Plan, the Trustees of the Trust expect that the Fund will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Fund in seeking to achieve its investment objectives. By identifying
potential investors whose needs are served by the Fund's objectives, and
properly servicing these accounts, it may be possible to curb sharp fluctuations
in rates of redemptions and sales.

Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative detail; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.
For the period from February 22, 1996 (date of initial public investment) to May
31, 1996, no payments were made pursuant to the distribution plan or shareholder
services plan.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. Federated Services Company
acts as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset value is
calculated by the Fund are described in the respective prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Portfolio securities are valued on the basis of market quotations when they are
readily available. The Portfolio values mortgage-backed and other debt
securities for which market quotations are not readily available at their fair
value as determined in good faith, utilizing procedures approved by the Board of
Trustees of Federated Portfolios, on the basis of valuations provided either by
dealers or a pricing service. Absent unusual circumstances, debt securities
having a remaining maturity of sixty days or less when purchased, and debt
securities originally purchased with maturities in excess of sixty days but

which currently have maturities of sixty days or less, are valued at cost
adjusted for amortization of premium and accretion of discounts.
Interest rate futures contracts held by the Portfolio are valued on the basis of
closing market quotations, which are normally available daily. When market
quotations are not readily available, the fair value of these contracts will be
determined in good faith utilizing procedures approved by the Trustees of
Federated Portfolios.
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by the
Board of Trustees of Federated Portfolios. While no single standard for
determining fair value exists, as a general rule, the current fair value of a
security would appear to be the amount which the Portfolio could expect to
receive upon its current sale. Some, but not necessarily all, of the general
factors which may be considered in determining fair value include: (i) the
fundamental analytical data relating to the investment; (ii) the nature and
duration of restrictions on disposition of the securities; and (iii) an
evaluation of the forces which influence the market in which these securities
are purchased and sold. Without limiting or including all of the specific
factors which may be considered in determining fair value, some of the specific
factors include: type of security, financial statements of the issuer, cost at
date of purchase, size of holding, discount from market value, value of
unrestricted securities of the same class at the time of purchase, special
reports prepared by analysts, information as to any transactions or offers with
respect to the security, existence of merger proposals or tender offers
affecting the securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each Business Day. As of the Valuation Time on

each such day, the value of each investor's beneficial interest in the Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or reductions which are to be effected
on that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of the Valuation Time on such day plus or minus,
as the case may be, the amount of net additions to or reductions in the
investor's investment in the Portfolio effected on such day, and
(ii) the denominator of which is the aggregate net asset value of the Portfolio
as of the Valuation Time on such day plus or minus, as the case may be, the
amount of the net additions to or reductions in the aggregate investments in the
Portfolio by all investors in the Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as of the Valuation Time on the following Business Day adjusted for
any additions or reductions which are to be effected on that following day.
REDEEMING SHARES

The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request. Redemption procedures are explained in the
respective prospectuses under "Redeeming Institutional Shares" and "Redeeming
Institutional Service Shares." Although State Street Bank does not charge for
telephone redemptions, it reserves the right to charge a fee for the cost of
wire-transferred redemptions of less than $5,000.

REDEMPTION IN KIND
The Fund is obligated to redeem Shares solely in cash up to $250,000 or 1% of
the respective class net asset value, whichever is less, for any one shareholder
within a 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees of
the Trust and of Federated Portfolios determine that further cash payments will
have a material adverse effect on the remaining Fund shareholders and Portfolio
investors. In such a case, the Fund will pay all or a portion of the remainder
of the redemption in portfolio instruments, valued in the same way as the Fund
determines net asset value. The portfolio instruments will be selected in a
manner that the Trustees of the Trust and of Federated Portfolios deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
Although the Fund intends to redeem shares in cash, the Fund and the Portfolio
reserve the right under certain circumstances to pay the redemption price in
whole or in part by a distribution of securities. To the extent available, such
securities will be readily marketable.
MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Trust. To protect its
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of its shareholders for acts or obligations of

the Trust. These documents require notice of this disclaimer to be given in each
agreement, obligation, or instrument the Trust or its Trustees enter into or
sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required by the Declaration of Trust to use its
property to protect or compensate the shareholder. On request, the Trust will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Trust. Therefore, financial loss resulting from liability as a
shareholder will occur only if the Trust itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
See `Description of Federated Portfolios'' below for a description of
Massachusetts partnership law and investor liability with respect to an
investment in Federated Portfolios.
TAX STATUS

THE FUND'S TAX STATUS
Each series of the Trust is treated as a separate entity for federal income tax
purposes under the Code. The Fund has elected to be treated and intends to
qualify each year as a `regulated investment company'' under Subchapter M of
the Code (a `RIC'') by meeting all applicable requirement of Subchapter M,
including requirements as to the nature of the Fund's gross income, the amount
of the Fund's distributions, and the composition and holding period of the
Fund's portfolio assets. Because the Fund intends to distribute substantially
all of its net investment income and net realized capital gains to its
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Fund will be required to pay any federal income or
excise taxes. If the Fund fails to qualify as a RIC in any year, the Fund would
incur a regular corporate federal income tax upon its taxable income. Whether or

not the Fund qualifies as a RIC, the Fund's distributions would generally be
taxable as ordinary dividend income to shareholders.
The Trust anticipates that under interpretations of the Internal Revenue
Service, (1) the Portfolio will be treated for federal income tax purposes as a
partnership and (2) for purposes of determining whether the Fund satisfies the
income and diversification requirements to maintain its status as a RIC, the
Fund, as an investor in the Portfolio, will be deemed to own a proportionate
share of the Portfolio's assets and will be deemed to be entitled to the
Portfolio's income or loss attributable to that share. The Portfolio has advised
the Fund that it intends to conduct its operations so as to enable its
investors, including the Fund, to satisfy those requirements.
Any Fund distribution or any distribution of net capital gains or net short-term
capital gains will have the effect of reducing the per share net asset value of
Shares in the Fund by the amount of the distribution. Shareholders purchasing
shares shortly before the record date of any distribution may thus pay the full
price for the Shares and then effectively receive a portion of the purchase
price back as a taxable distribution.

Any investment by the Portfolio in zero coupon bonds, certain securities
purchased at a market discount, and similar instruments will cause the Portfolio
to recognize income prior to the receipt of cash payments with respect to those
securities. In order to distribute this income and avoid a tax on the Fund, the
Portfolio may be required to liquidate portfolio securities that it might
otherwise have continued to hold, potentially resulting in additional taxable
gain or loss to the Fund.

The Portfolio's transactions in options and futures contracts will be subject to
special tax rules that may affect the amount, timing, and character of Fund
income and distributions to investors.
TAXATION OF THE PORTFOLIO
The Trust anticipates that the Portfolio will be treated as a partnership for
federal income tax purposes. As such, the Portfolio is not subject to federal
income taxation. Instead, the Fund must take into account, in computing its
federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio.
TAXATION OF FUND DISTRIBUTIONS
Dividends from ordinary income and any distributions from net short-term capital
gains are taxable to Fund shareholders as ordinary income for federal income tax
purposes and will not be eligible for the dividends received deduction available
to corporations. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, are taxable to Fund
shareholders as long-term capital gains without regard to the length of time the
shareholders have held their Shares. Distributions are taxable as described
above whether paid in cash or reinvested in additional Shares. Fund shareholders
will be notified annually as to the federal tax status of distributions.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must, and intends to, distribute
during each calendar year substantially all of its ordinary income for that year
and substantially all of its capital gain in excess of its capital losses for
that year, plus any undistributed ordinary income and capital gains from
previous years. For this and other purposes, the Fund dividend will be treated
as paid on December 31 if it is declared by the Fund in October, November or

December with a record date in such a month and paid by the Fund during January
of the following calendar year. Accordingly, those distributions will be taxable
to shareholders for the taxable year in which that December 31 falls.
Withdrawals by the Fund from the Portfolio generally will not result in the Fund
recognizing any gain or loss for federal income tax purposes, except that (1)
gain will be recognized to the extent that any cash distributed exceeds the
basis of the Fund's interest in the Portfolio prior to the distribution, (2)
income or loss will be realized if the withdrawal is in liquidation of all or a
part of the Portfolio's interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio, and
(3) loss will be recognized if the distribution is in liquidation of that entire
interest in the Portfolio and consists solely of cash and/or unrealized
receivables. The basis of the Fund's interest in the Portfolio generally equals
the amount of cash and the basis of any property that the Fund invests in the
Portfolio, increased by the Fund's share of income from the Portfolio and the
amount of any cash distributions and the basis of any property distributed from
the Portfolio.
OTHER TAXATION
The Trust is organized as a Massachusetts business trust and, under current law,
neither the Trust nor the Fund is liable for any income or franchise tax in the
Commonwealth of Massachusetts, provided that the Fund continues to qualify as a
RIC for federal income tax purposes.
The Portfolio is organized as a series of Federated Portfolios, a business trust
organized under the laws of the Commonwealth of Massachusetts. The Portfolio is
not subject to any income or franchise tax in the Commonwealth of Massachusetts.
The investment by the Fund in the Portfolio does not cause the Fund to be liable
for any income or franchise tax in the Commonwealth of Massachusetts.

Fund shareholders may be subject to state and local taxes on Fund distributions
to them by the Fund. Shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in the
Fund.

TOTAL RETURN

The Fund's cumulative total return for the period from February 22, 1996 (start
of performance) to May 31, 1996 for Institutional Shares and Institutional
Services Shares were (2.32%) and (2.32%), respectively. Cumulative total return
reflects the Fund's total performance over a specific period of time. The total
returns are representative of less than four months of Fund activity since the
Fund's start of performance.
The average annual total return all classes of Shares of the Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the maximum offering price per share at the end of the
period. The number of Shares owned at the end of the period is based on the
number of Shares purchased at the beginning of the period with $1,000, less any
applicable sales charge, adjusted over the period by any additional Shares,
assuming the reinvestment of all dividends and distributions.
YIELD

The thirty-day yield for the period ended May 31, 1996 for Institutional Shares
and Institutional Services Shares, were 6.44% and 6.70%, respectively.
The yield for all classes of shares of the Fund is determined by dividing the
net investment income per Share (as defined by the Securities and Exchange

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

The performance of each class of Shares depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the Portfolio is invested;
o changes in interest rates and market value of portfolio securities;
o changes in the expenses of the Portfolio, the Fund, or either class of
Shares; and
o various other factors.
A class of Shares' performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings and net
asset value per Share are factors in the computation of yield and total return.

Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various categories by
making competitive calculations using total return. Total return assumes
the reinvestment of all capital gains distributions and income dividends
and takes into account any change in net asset value over a specific period
of time. From time to time, the Fund will quote its Lipper ranking in the
`general bond funds'' category in advertising and sales literature.
o LEHMAN BROTHERS AGGREGATE BOND INDEX which is composed of securities from
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and the Asset-Backed Securities Index. Total return comprises price
appreciation/depreciation and income as a percentage of the original
investment. Indices are rebalanced monthly by market capitalization.
Advertisements and other sales literature for any class of Shares may quote
total returns which are calculated on nonstandardized base periods. These total
returns also represent the historic change in the value of an investment in any
class of Shares based on monthly reinvestment of dividends over a specified
period of time.
Advertising and other promotional literature may include charts, graphs and
other illustrations using the Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding, dollar-
cost averaging and systematic investment. In addition, the Fund can compare its
performance, or performance for the types of securities in which it invests, to

a variety of other investments, such as bank savings accounts, certificates of
deposit and Treasury bills.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Fund may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by portfolio managers and their views and analysis on how such
developments could affect the Fund. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
funds industry, including the growth of the industry, from sources such as the
Investment Company Institute.
DESCRIPTION OF FEDERATED PORTFOLIOS

BENEFICIAL INTERESTS
The Bond Index Portfolio is a series of Federated Portfolios, which is organized
as a trust having separate series under the laws of the Commonwealth of
Massachusetts. Under the Declaration of Trust, the Trustees are authorized to
issue beneficial interests in one or more series. Currently, there is one
portfolio of Federated Portfolios, the Bond Index Portfolio. The Trustees have
established five other series, none of which are being offered presently: Bond
Portfolio, Connecticut Municipal Money Market Portfolio, Florida Municipal Money
Market Portfolio, Max-Cap Portfolio and New Jersey Municipal Money Market
Portfolio. Investors in a portfolio will be held personally liable for the
obligations and liabilities of that portfolio (and of no other portfolio) and
Federated Portfolios, subject, however, to indemnification by Federated
Portfolios in the event that there is imposed upon an investor any liability or
obligation of the Portfolio or Federated Portfolios. The Declaration of Trust
also provides that Federated Portfolios may maintain appropriate insurance for

the protection of Federated Portfolios, its Trustees, officers, employees and
agents, and covering possible tort and other liabilities. The risk of an
investor incurring financial loss on account of investor liability is limited to
circumstances in which the Portfolio or Federated Portfolios are unable to meet
their obligations.
Investors in a portfolio are entitled to participate pro rata in distributions
of taxable income, loss, gain and credit of their respective portfolio only.
Upon liquidation or dissolution of a portfolio, investors are entitled to share
pro rata in the portfolio's (and no other portfolio's) net assets available for
distribution to its investors. Federated Portfolios reserves the right to create
and issue additional portfolios of beneficial interests, in which case the
beneficial interests in each new portfolio would participate equally in the
earnings, dividends and assets of that portfolio (and of no other portfolio).
Investments in a portfolio have no preference, preemptive, conversion or similar
rights and are fully paid and nonassesable, except as set forth below.
Investments in a portfolio may not be transferred.
Each investor of Federated Portfolios is entitled to a vote in proportion to the
amount of its investment in each portfolio. Investors in a portfolio do not have
cumulative voting rights, and a plurality of the aggregate beneficial interests
in all outstanding series of Federated Portfolios may elect all of the Trustees
if they choose to do so and in such event other investors would not be able to
elect any Trustees. Investors in each portfolio will vote as a separate class
except as to voting for the election or removal of Trustees, the termination of
Federated Portfolios, as otherwise required by the 1940 Act, or if the matter is
determined by the Trustees to be a matter which affects all portfolios.
Federated Portfolio's Declaration of Trust may be amended without the vote of
investors, except that investors have the right to approve by affirmative
majority vote any amendment which would adversely affect their voting rights,

alter the procedures to amend the Declaration of Trust of Federated Portfolios,
as required by Federated Portfolio's registration statement, or as submitted to
them by the Trustees.
Federated Portfolios or any portfolio may enter into a merger or consolidation,
or sell all or substantially all of its assets, if approved (a) at a meeting of
investors by investors representing the lesser or (i) 67% or more of the
beneficial interests in the affected portfolio present or represented at such
meeting, if investors in more than 50% of all such beneficial interests are
present or represented by proxy, or (ii) more than 50% of all such beneficial
interests (hereinafter referred to as a `Majority Shareholder Vote'') are
present or represented by proxy, or (b) by an instrument in writing without a
meeting, consented to by a Majority Shareholder Vote of the investors holding a
majority of the beneficial interests in the affected portfolio.
Federated Portfolios' Declaration of Trust provides that obligations of
Federated Portfolios are not binding upon the Trustees individually but only
upon the property of Federated Portfolios and that the Trustees will not be
liable for any action or failure to act, 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.
Federated Portfolio's Declaration of Trust further provides that it will
indemnify its Trustees, officers, employees and agents against liabilities and
expenses incurred in connection with litigation in which they may be involved
because of their offices with Federated Portfolios, unless, as to liability to
the Federated Portfolios or its investors, it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices. In the case of settlement,
the By-Laws of Federated Portfolios provide that such indemnification will not

be provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by a vote of a majority of disinterested
Trustees or by a written opinion of independent counsel, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
SERVICE PROVIDERS
ADMINISTRATION
Federated Services Company, through its subsidiary Federated Administrative
Services, Inc., provides administrative personnel and services to Federated
Portfolios at an annual rate which relates to the average aggregate daily net
assets of each series as specified below:
Average Aggregate Daily
Maximum Administrative Fee Net Assets of the Portfolio
.050% on the first $1 billion
.045% on the next $1 billion
.040% on the next $1 billion
.025% on the next $1 billion
.010% on the next $1 billion
.005% on assets in excess of $5 billion
The minimum administrative fee shall be $60,000 annually for each series (unless
waived).
Prior to March 1, 1996, Federated Administrative Services was designated as the
subsidiary through which Federated Services Company provided administrative
services and also maintained the Portfolio's portfolio accounting records.
Subsequently, Federated Administrative Services, Inc. has been designated as the
subsidiary to provide such services. For the period from January 2, 1996 to May
31, 1996, the administrators earned and voluntarily agreed to waive their entire

fee of $24,754. Administrative and portfolio accounting services were provided
to the Predecessor Portfolio by Signature Financial Services, Inc.
(`Signature''). For the period from June 1, 1995 to January 2, 1996, and the
period from July 11, 1994 (date of initial public investment) to May 31, 1995,
Signature earned administrative fees of $33,589 and $54,279, respectively.
CUSTODIAN AND PORTFOLIO RECORDKEEPER
As of June 5, 1996, State Street Bank and Trust Company, P.O. Box 8600 , Boston,
Massachusetts, 02266-8600, is custodian for the cash and securities of the
Portfolio. Prior thereto, the Portfolio's custodian was Investors Bank & Trust
Company.
Federated Services Company through its subsidiary Federated Administrative
Services, Inc. also maintains the Trust's portfolio accounting records and
records of investors for which it receives a fee. The fee is based upon the
level of Federated Portfolio's average net assets for the period plus out-of-
pocket expenses.
INDEPENDENT AUDITORS
The Independent Auditors for the Portfolio are Ernst & Young LLP, One Oxford
Centre, Pittsburgh, Pennsylvania, 15219.
ABOUT FEDERATED INVESTORS

Federated Investors in dedicated to meeting investor needs which is reflected in
its investment decision making - structured, straightforward, and consistent.
This has resulted in a history of competitive performance with a range of
competitive investment products that have gained the confidence of thousands of
clients and their customers.
The company's disciplined security selection process is firmly rooted in sound
methodologies backed by fundamental and technical research. Investment decisions
are made and executed by teams of portfolio managers, analysts, and traders

dedicated to specific market sectors. These traders handle trillions of dollars
in annual trading volume.
In the corporate bond sector, as of December 31, 1995, Federated Investors
managed 10 money market funds, and 14 bond funds with assets approximating $11.5
billion and $2.7 billion, respectively. Federated's corporate bond decision
making--based on intensive, diligent credit analysis--is backed by over 20 years
of experience in the corporate bond sector. In 1972, Federated introduced one
of the first high-yield bond funds in the industry. In 17 years ended December
1995, Federated's high-yield portfolios experienced a default rate of just
1.86%, versus 3.10% for the market as a whole. In 1983, Federated was one of the
first fund managers to participate in the asset-backed securities market, a
market totaling more than $200 billion.
In the government sector, as of December 31, 1995, Federated Investors managed 9
mortgage-backed, 5 government/agency and 17 government money market mutual
funds, with assets approximating $7.7 billion, $1.7 billion, and $20.9 billion,
respectively. Federated trades approximately $300 million in U.S. government
and mortgage-backed securities daily and places approximately $13 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages nearly $10 billion in government funds within these
maturity ranges.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and high
yield corporate bond management while William D. Dawson, Executive Vice
President, oversees Federated's domestic fixed income management. Henry A.
Frantzen, Executive Vice President, oversees the management of Federated's
international portfolios.

MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3 trillion to the more than 5,500 funds available.*
Federated Investors, through its subsidiaries, distributes mutual funds for a
variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.

TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide including 200 New York Stock Exchange firms supported by more
wholesalers than any other mutual fund distributor. Federated's service to
financial professionals and institutions has earned it high rankings in

several DALBAR Surveys. The marketing effort to these firms is headed by
James F. Getz, President, Broker/Dealer Division.

*Source: Investment Company Institute

FINANCIAL STATEMENTS

Subsequent to the approval by its Board of Trustees, the shareholders of
Excelsior Institutional Bond Index Fund, a portfolio of Excelsior Institutional
Trust , ratified a restructuring whereby Excelsior Institutional Trust withdrew,
on December 29, 1995, the investment of all of the assets of the Excelsior
Institutional Bond Index Fund from the Predecessor Portfolio, a portfolio of St.
James Portfolios, and thereafter invested all of the investable assets of
Excelsior Institutional Bond Index Fund into Bond Index Portfolio, a series of
Federated Investment Portfolios.
The investment objective and policies of Federated Bond Index Fund are identical
to those of Excelsior Institutional Bond Index Fund, Bond Index Portfolio and
the Predecessor Portfolio. Since the Federated Bond Index Fund invests all of
its investable assets in Bond Index Portfolio, the historical financial
statements of Excelsior Institutional Bond Index Fund and the Predecessor
Portfolio are reflected in the financial statements of Bond Index Portfolio,
which reflect the past performance and financial history of these funds.

Therefore, the financial statements of Bond Index Portfolio, for the period
ended May 31, 1996 are included in the Annual Report of Federated Bond Index
Fund (File No. 811-07477) dated May 31, 1996. A copy of this Annual Report is
incorporated herein by reference and may be obtained without charge by calling
1-800-245-4270.
Past performance is not predictive of future performance. Investment returns
and principal values will vary and shares may be worth more or less at
redemption than their original cost.

APPENDIX

STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated `BBB'' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
NR--'NR'' indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy. S&P may apply a plus (+) or

minus (-) to the above rating classifications to show relative standing within
the classifications.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATINGS
AAA--Bonds which are rated `AAA'' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds which are rated `AA'' are judged to be of high quality by all
standards. Together with the `AAA'' group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in `AAA'' securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in `AAA'' securities.
A--Bonds which are rated `A'' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
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.
NR--Not rated by Moody's. Moody's applies numerical modifiers, 1, 2 and 3 in
each generic rating classification from `AA'' through ``B'' in its corporate

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

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