FEDERATED INVESTMENT TRUST, 497, 1997-10-02

FEDERATED INVESTMENT TRUST
497, 1997-10-02

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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,
1997, 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
1-800-341-74001. 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated September 30, 1997

TABLE OF CONTENTS
Summary of Fund Expenses 1
Financial Highlights--Institutional Shares 2
General Information 3
Investment Information 3
Investment Objective 3
Investment Policies 4
Investment Philosophy and Strategies 4
Additional Investment Strategies and Techniques; Risk Factors 6
Investment Limitations 10
Special Information Concerning Hub and Spoke 10
Trust Information and Federated Portfolios 12
Management of the Trust and Federated Portfolios 12
Administration of the Trust 14
Net Asset Value 15
Investing in Institutional Shares 15
Share Purchases 15
Minimum Investment Required 15
Confirmations and Account Statements 16
Dividends 16
Capital Gains 16
Retirement Plans 16
Redeeming Institutional Shares 16
Telephone Redemption 16
Written Requests 17
Accounts with Low Balances 17
Shareholder Information 17
Voting Rights 17
Effect of Banking Laws 18
Tax Information 18
Performance Information 19
Other Classes of Shares 20
Miscellaneous 20

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>
<CAPTION>
INSTITUTIONAL SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <S>
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
</TABLE>

<TABLE>
<CAPTION>
ANNUAL INSTITUTIONAL SHARES OPERATING EXPENSES
<S> <C>
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 services fee is 0.25%.
(3) The Total Institutional Shares Operating Expenses are estimated to be
1.79% 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.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the 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
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.
<S> <C>
1 Year $ 3
3 Years $ 9
5 Years $16
10 Years $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 EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report, dated July 15, 1997, on the Fund's
financial statements for the year ended May 31, 1997, and on the following
table for each of the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.96 $ 7.25
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.48 0.12
Net realized and unrealized gain (loss) on investments in the Portfolio 0.06 (0.29)
Total from investment operations 0.54 (0.17)
LESS DISTRIBUTIONS
Distributions from net investment income (0.48) (0.12)
NET ASSET VALUE, END OF PERIOD $ 7.02 $ 6.96
TOTAL RETURN(b) 7.97% (2.32%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.29% 0.09%*
Net investment income 6.83% 7.01%*
Expense waiver/reimbursement(c) 1.73% 8.18%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $20,599 $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.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT DATED MAY 31, 1997, 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.
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 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; 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, 1997, the following classes of fixed income securities
represented the stated proportions of the total market value of the
Aggregate Bond Index:
U.S. Treasury and government agency securities 50.63%
Corporate Bonds 18.56%
Mortgage- and asset-backed securities 30.81%

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 domestic and foreign corporate and sovereign debt
securities denominated in U.S. dollars. The Portfolio may purchase debt
securities 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. 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 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.
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.
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.
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.
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.
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.
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.

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
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(R)
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 1-800-341-7400.

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.
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, 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" below.

TRUST INFORMATION 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.
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. 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 0.25% 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.
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 $110 billion invested across
more than 300 funds under management and/or administration by its
subsidiaries, as of December 31, 1996, Federated Investors is one of the
largest mutual fund investment managers in the United States. With more than
2,000 employees, Federated continues to be led by the management who founded
the company in 1955. Federated funds are presently at work in and through
4,500 financial institutions nationwide.
Susan M. Nason has been the Portfolio's portfolio manager since its
inception. Ms. Nason joined Federated Investors in 1987 and has been a
Senior Vice President of the Adviser since 1997. Ms. Nason served as a Vice
President of the Adviser from 1993 to 1997, and as an Assistant Vice
President from 1990 until 1992. Ms. Nason is a Chartered Financial Analyst
and received her M.B.A. concentrating in Finance from Carnegie Mellon
University.

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 0.12% 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, 1997, U.S. Trust Company's
Asset Management Group had approximately $53 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., Excelsior Tax-Exempt Funds,
Inc., and Excelsior Institutional Trust, all of which are registered
investment companies.
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.

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
FEE DAILY NET ASSETS
<C> <S>
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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.

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.
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 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.

CONFIRMATIONS AND ACCOUNT STATEMENTS
Shareholders will receive detailed confirmations of transactions. In
addition, shareholders will receive periodic statements reporting all
account activity, including dividends paid. The Fund will not issue share
certificates.

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(R)."
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 7, 1997, Frojack Co., who was the owner of
record of 1,149,889 (37%) of the Institutional Shares of the Fund and
Bankers Trust Company as Trustee of Framatome Technologies Thrift Plan who
was the owner of record of 896,635 (51.68%), and Resource Trust Company for
the exclusive benefit of various customers of IMS who was the owner of
record of 693,572 (39.98%) 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, or any affiliate thereof, such as U.S. Trust Company, 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.
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 "regulated investment company," 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.

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 Taxpayer Relief Act of 1997 significantly modifies the taxation of
capital gains realized by individuals, providing reduced rates for gain from
the sale of certain assets held for specified periods. Fund Shares are
eligible for such reduced rates if held for the requisite period. Portions
of distributions from the Fund may also qualify for reduced rates.

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 SEC) 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 1-800-341-7400.

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.
[Graphic]
Federated Bond Index Fund

(A Portfolio of Federated Investment Trust)
Institutional Shares
PROSPECTUS
SEPTEMBER 30, 1997
An Open-End, Diversified Management Investment Company
FEDERATED BOND INDEX FUND INSTITUTIONAL SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR FOR FEDERATED BOND INDEX FUND AND
PLACEMENT AGENT FOR BOND INDEX
PORTFOLIO
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
INVESTMENT ADVISER FOR BOND INDEX PORTFOLIO
Federated Research Corp.
Federated Investors Tower
Pittsburgh, PA 15222-3779
SUB-ADVISER FOR BOND INDEX PORTFOLIO
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
CUSTODIAN FOR FEDERATED BOND INDEX FUND AND BOND INDEX PORTFOLIO
State Street Bank and Trust Company
P.O. Box 8600
Boston, MA 02266-8600
ADMINISTRATOR FOR FEDERATED BOND INDEX FUND
Federated Services Company
Federated Investors Tower
Pittsburgh, PA 15222-3779
ADMINISTRATOR FOR BOND INDEX PORTFOLIO
Federated Administrative Services, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Federated Shareholder
Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
Federated Securities Corp., Distributor
Cusip 313909103
G01556-02-IS (9/97)

[Graphic]

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<registered trademark>."

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 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,
1997, 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
1-800-341-7400. 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated September 30, 1997

TABLE OF CONTENTS

SUMMARY OF FUND EXPENSES 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 6
Investment Limitations 10
Special Information Concerning Hub and
Spoke<registered trademark> 10
Trust Information 12
Management of the Trust and Federated Portfolios 12
Distribution of Institutional Service Shares 14
Administration of the Trust 14
Administrative Services 14
Service Providers of the Portfolio 15
Net Asset Value 15
Investing in Institutional Service Shares 15
Share Purchases 15
Minimum Investment Required 15
What Shares Cost 16
Confirmations and Account Statements 16
Dividends 16
Capital Gains 16
Retirement Plans 16
Redeeming Institutional Service Shares 16
Telephone Redemption 17
Written Requests 17
Accounts with Low Balances 17
Shareholder Information 17
Voting Rights 17
Effect of Banking Laws 18
Tax Information 18
Performance Information 19
Other Classes of Shares 20
Miscellaneous 20

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>
<CAPTION>
INSTITUTIONAL SERVICE SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
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
<CAPTION>
ANNUAL INSTITUTIONAL SERVICE SHARES OPERATING EXPENSES
(As a percentage of average net assets)
<S> <C> <C>
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>
(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 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 2.04% 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.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the 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
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.
<S> <C>
1 Year $ 6
3 Years $17
5 Years $30
10 Years $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 15, 1997, on the Fund's
financial statements for the year ended May 31, 1997, and on the following
table for each of the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
1997 1996(a)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 6.96 $ 7.25
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.46 0.12
Net realized and unrealized gain (loss) on investments in the Portfolio 0.06 (0.29)
Total from investment operations 0.52 (0.17)
LESS DISTRIBUTIONS
Distributions from net investment income (0.46) (0.12)
NET ASSET VALUE, END OF PERIOD $ 7.02 $ 6.96
TOTAL RETURN(b) 7.70% (2.32%)
RATIOS TO AVERAGE NET ASSETS
Expenses 0.54% 0.09%*
Net investment income 6.64% 7.01%*
Expense waiver/reimbursement(c) 1.37% 8.18%*
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $4,396 $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.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT DATED MAY 31, 1997, WHICH CAN BE OBTAINED FREE OF CHARGE.

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.
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 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; 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.
As of June 30, 1997, the following classes of fixed income securities
represented the stated proportions of the total market value of the
Aggregate Bond Index:
U.S. Treasury and government agency securities 50.63%
Corporate Bonds 18.56%
Mortgage- and asset-backed securities 30.81%

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 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 when-issued or forward commitment 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. 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.

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.
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.
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.

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 the 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
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<registered trademark>

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<registered trademark> financial
services method. Hub and Spoke<registered trademark> 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 1-800-341-7400.

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.
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.
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.

TRUST INFORMATION
MANAGEMENT OF THE TRUST AND FEDERATED PORTFOLIOS
BOARD OF DIRECTORS
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.
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. 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.

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 0.12% 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

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 SERVICE 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.
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 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
FEE DAILY NET ASSETS
<C> <S>
0.150% on the first $250 million
0.125% on the next $250 million
0.100% on the next $250 million
0.075% 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.

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 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.
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.
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
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.

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 SERVICE 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 $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

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 "regulated investment company," 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.

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.

The Taxpayer Relief Act of 1997 significantly modifies the taxation of
capital gains realized by individuals, providing reduced rates for gain from
the sale of certain assets held for specified periods. Fund Shares are
eligible for such reduced rates if held for the requisite period. Portions
of distributions from the Fund may also qualify for reduced rates.

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 1-800-341-7400.

FEDERATED BOND
INDEX FUND
INSTITUTIONAL SERVICE SHARES
Federated Investors Tower
Pittsburgh, PA 15222-3779
DISTRIBUTOR FOR FEDERATED BOND INDEX FUND AND
PLACEMENT AGENT FOR
BOND INDEX PORTFOLIO
Federated Securities Corp. Federated Investors Tower Pittsburgh, PA
15222-3779
SUB-ADVISER FOR BOND INDEX PORTFOLIO
United States Trust Company
of New York
114 West 47th Street
New York, NY 10036
CUSTODIAN FOR FEDERATED BOND
INDEX FUND AND
BOND INDEX PORTFOLIO
State Street Bank and
Trust Company
P.O. Box 8600
Boston, MA 02266-8600
ADMINISTRATOR FOR
FEDERATED BOND
INDEX FUND
Federated Services Company
Federated Investors Tower
Pittsburgh, PA 15222-3779
ADMINISTRATOR FOR BOND INDEX PORTFOLIO
Federated Administrative
Services, Inc.
Federated Investors Tower
Pittsburgh, PA 15222-3779
TRANSFER AGENT
AND DIVIDEND
DISBURSING AGENT
Federated Shareholder Services Company
P.O. Box 8600
Boston, MA 02266-8600
INDEPENDENT AUDITORS
Ernst & Young LLP
One Oxford Centre
Pittsburgh, PA 15219
[Graphic]
FEDERATED BOND INDEX FUND
(A Portfolio of Federated
Investment Trust)
Institutional Service Shares
PROSPECTUS
SEPTEMBER 30, 1997
AN OPEN-END, DIVERSIFIED
MANAGEMENT INVESTMENT COMPANY
Federated Securities Corp., Distributor
Cusip 313909202
G01556-01-SS (9/97)

[Graphic]

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, 1997. 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 1-800-341-7400. 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, 1997

[Graphic]
Cusip 313909202
Cusip 313909103

G01556-03 (9/97)

TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES 1
Asset-Backed Securities 1
Bank Obligations 1
Commercial Paper 2
Lending of Portfolio Securities 2
Variable Rate and Floating Securities 3
Participation Interests 3
Illiquid Securities 3
Unsecured Promissory Notes 4
Repurchase Agreements and Reverse Repurchase Agreements 4
Guaranteed Investment Contracts 4
When-Issued Securities 5
Zero Coupon Obligations 5
Futures Contracts and Options on Futures Contracts 5
Options on Securities 7
Options on Securities Indices 8
Short Sales "Against the Box" 9
Certain Other Obligations 9
Rating Services 9
Portfolio Turnover 10
Investment Limitations 10
MANAGEMENT OF THE TRUST AND FEDERATED PORTFOLIOS 12
Fund Ownership 15
Trustee Liability 16
Trustees' Compensation 16
INVESTMENT ADVISORY AND SUB-ADVISORY SERVICES 17
Adviser and Sub-Adviser to the Portfolio 17
BROKERAGE TRANSACTIONS 17
OTHER SERVICES 18
Trust Administration 18
Custodian and Portfolio Recordkeeper 19
Transfer Agent and Dividend Disbursing Agent 19
Independent Auditors 19
PURCHASING SHARES 19
Distribution Plan (Institutional Service Shares only) and Shareholder
Services Agreement 19
Conversion to Federal Funds 19
DETERMINING NET ASSET VALUE 19
Determining Market Value of Securities 19
REDEEMING SHARES 20
Redemption In Kind 20
MASSACHUSETTS PARTNERSHIP LAW 21
TAX STATUS 21
The Fund's Tax Status 21
Taxation of the Portfolio 21
Taxation of Fund Distributions 22
Other Taxation 22
TOTAL RETURN 22
YIELD 22
PERFORMANCE COMPARISONS 23
Economic and Market Information 23
DESCRIPTION OF FEDERATED PORTFOLIOS 24
Beneficial Interests 24
Service Providers 25
Custodian and Portfolio Recordkeeper 25
Independent Auditors 25
ABOUT FEDERATED INVESTORS 25
Mutual Fund Market 26
FINANCIAL STATEMENTS 26
APPENDIX 27

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 years
ended May 31, 1997 and 1996, the Portfolio's turnover rates were 49% and
43%, 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.

FEDERAL RESTRICTIONS
In order to comply with certain 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 of any
investment company 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) 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;

Policies (i) through (v) 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

15 Old Timber Trail

Pittsburgh, PA
Birthdate: February 3, 1934
Trustee

Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member
of Executive Committee, 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, Naples Property
Management, Inc. and Northgate Village Development Corporation; 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.;
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

203 Kensington Ct.

Pittsburgh, PA
Birthdate: October 6, 1926
Trustee

Chairman, Meritcare, Inc.; Director, Eat'N Park Restaurants, Inc.; Retired
from the law firm of Miller, Ament, Henny & Kochuba; 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; 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 and U.S. Space Foundation;
President Emeritus, University of Pittsburgh; Founding Chairman, National
Advisory Council for Environmental Policy and Technology, Federal Emergency
Management Advisory Board and Czech Management Center, Prague; Director or
Trustee of the Funds.

Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee

Public Relations/Marketing/Conference Planning; 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; Trustee or Director of some of the
Funds; President, Executive Vice President and Treasurer 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, 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.
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.
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the Board of
Trustees handles the responsibilities of the Board between meetings of the
Board.
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; 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.; 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 Obligations Trust II; 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; Wesmark Funds; and World Investment Series, Inc.

FUND OWNERSHIP

Officers and Trustees own less than 1% of the Fund's outstanding shares. As
of September 7, 1997, the following shareholders of record owned 5% or more
of the outstanding Institutional Shares of the Fund: Century Bank & Trust,
Coldwater, Michigan owned approximately 207,451 (6.67%); Droves & Company,
York, Pennsylvania owned approximately 194,446 (6.25%); Temple First Stock
Co., Temple, Texas owned approximately 184,321 (5.93%); and Frojack Co.,
Grand Forks, Maryland owned approximately 1,149,889 (37%). As of September
7, 1997, the following shareholders of record owned 5% or more of the
outstanding Institutional Service Shares of the Fund: Bankers Trust Company
as Trustee of Framatome Technologies Thrift Plan, Jersey City, New Jersey
owned approximately 896,635 (51.68%); Resources Trust Company for the
Exclusive Benefit of Various Customers of IMS, Englewood, Colorado owned
approximately 693,572 (39.98%); and FTC & Co., Denver, Colorado owned
approximately 109,660 (6.32%).

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

<TABLE>
<CAPTION>
AGGREGATE
NAME, COMPENSATION FROM
POSITION WITH THE FEDERATED TOTAL COMPENSATION PAID
TRUST TRUST* PORTFOLIOS* FROM FUND COMPLEX+
<S> <C> <C> <S>
John F. Donahue, $0 $0 $0 for the Trust, Federated Portfolios and
President and Trustee 56 other investment companies in the Fund Complex
Thomas G. Bigley, $505 $767 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
John T. Conroy, Jr., $555 $843 $119,615 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
William J. Copeland, $555 $843 $119,615 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
J. Christopher Donahue, $0 $0 $0 for the Trust, Federated Portfolios and
President and Trustee 15 other investment companies in the Fund Complex
James E. Dowd, $555 $843 $119,615 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Lawrence D. Ellis, M.D., $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Edward L. Flaherty, Jr., $555 $843 $119,615 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Peter E. Madden, $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Gregor F. Meyer, $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
John E. Murray, Jr., $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Wesley W. Posvar, $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
Marjorie P. Smuts, $505 $766 $108,725 for the Trust, Federated Portfolios and
Trustee 56 other investment companies in the Fund Complex
</TABLE>
* Information is furnished for Trust and Federated Portfolios for the fiscal
year ended May 31, 1997.

+ The information is provided for the last calendar year.
INVESTMENT ADVISORY AND SUB-ADVISORY SERVICES
ADVISER AND SUB-ADVISER TO THE PORTFOLIO

The Portfolio's investment adviser is Federated Research Corp. (the
"Adviser"). As of September 30, 1996, Federated Research Corp. replaced
Federated Management as the Adviser. 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. 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 of New York (the
"Sub-Adviser"), 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
were 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 fiscal year ended May 31, 1997, Federated Research Corp. and
Federated Management collectively earned investment advisory fees of
$73,686, all of which was voluntarily waived. For the same period the
Sub-Adviser earned sub-advisory fees of $35,369, all of which was
voluntarily waived. 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 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.
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 years ended May 31, 1997, 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, 1997, the Portfolio owned approximately $262,840 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 fiscal year ended May 31, 1997 and for the period
from February 22, 1996 (date of initial public investment) to May 31, 1996,
Federated Services Company earned $89,754 and $24,098, respectively, all of
which were 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 fiscal year ended May 31, 1997, 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 Shareholder
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 Institutional Shares' average annual total returns for the
one-year period ended May 31, 1997 and for the period from February 22, 1996
(start of performance) to May 31, 1997 were 7.97% and 7.98%, respectively.
The Fund's Institutional Service Shares' average annual total returns for
the one-year period ended May 31, 1997 and for the period from February 22,
1996 (start of performance) to May 31, 1997 were 7.70% and 7.88%,
respectively.

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 yields for the period ended May 31, 1997 for Institutional
Shares and Institutional Services Shares, were 7.06% and 6.81%,
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 SEC) 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 SEC and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in 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:
* portfolio quality;
* average portfolio maturity;
* type of instruments in which the Portfolio is invested;
* changes in interest rates and market value of portfolio securities;
* changes in the expenses of the Portfolio, the Fund, or either class of
Shares; and
* 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:
* 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.
* 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. Any amendment submitted to investors which the
Trustees determine would affect the investors of such Series shall be
authorized by vote of the investors of such Series and no vote will be
required of investors in a Series not affected.

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:
MAXIMUM AVERAGE AGGREGATE DAILY
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
fiscal year ended May 31, 1997, Federated Administrative Services, Inc.
earned $60,000, all of which was voluntarily waived. 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

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
to June 5, 1996, 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 is 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, 1996, Federated Investors
managed 12 money market funds, and 17 bond funds with assets approximating
$17.2 billion and $4.0 billion, respectively. Federated's corporate bond
decision making--based on intensive, diligent credit analysis--is backed by
over 21 years of experience in the corporate bond sector. In 1972, Federated
introduced one of the first high-yield bond funds in the industry. 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, 1996, Federated Investors
managed 9 mortgage-backed, 5 government/agency and 17 government money
market mutual funds, with assets approximating $6.3 billion, $1.7 billion,
and $23.6 billion, respectively. Federated trades approximately $309 million
in U.S. government and mortgage-backed securities daily and places
approximately $17 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
$30 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 and global portfolios.

MUTUAL FUND MARKET

Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3.5 trillion to the more than 6,000 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.

BANK MARKETING
Other institutional clients include close relationships with more than 1,600
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 Timothy C.
Pillion, Senior Vice President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES

Federated funds are available to consumers through major brokerage firms
nationwide -- we have over 2,200 broker/dealer and bank broker/dealer
relationships across the country -- supported by more wholesalers than any
other mutual fund distributor. Federated's service to financial
professionals and institutions has earned it high ratings in several surveys
performed by DALBAR, Inc. DALBAR, Inc. is recognized as the industry
benchmark for service quality measurement. The marketing effort to these
firms is headed by James F. Getz, President, Federated Securities Corp.

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, 1997 are included in the Annual Report of Federated Bond Index
Fund (File No. 811-07477) dated May 31, 1997. A copy of this Annual Report
is incorporated herein by reference and may be obtained without charge by
calling 1-800-341-7400.

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.
* Source: Investment Company Institute
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:
* leading market positions in well-established industries;
* high rates of return on funds employed;
* conservative capitalization structure with moderate reliance on debt
and ample asset protection;
* broad margins in earnings coverage of fixed financial charges and high
internal cash generation; or
* 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+."