STOCK & BOND FUND INC, 485APOS, 1996-07-01

STOCK & BOND FUND INC
485APOS, 1996-07-01

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1933 Act File No. 2-10415
1940 Act File No. 811-1

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X

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

Post-Effective Amendment No. 88 .......... X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 29 ......................... X
--

FEDERATED STOCK AND BOND FUND, INC.

(Exact Name of Registrant as Specified in Charter)

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

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

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

It is proposed that this filing will become effective:

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

If appropriate, check the following box:

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

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

x filed the Notice required by that Rule on December 15, 1995; or
intends to file the Notice required by that Rule on or about
; or
------------
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.

Copies to:

Matthew J. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037

CROSS-REFERENCE SHEET

This Amendment to the Registration Statement of FEDERATED STOCK AND
BOND FUND, INC., consisting of three classes of shares: (1) Class A Shares;
(2) Class B Shares; and Class C Shares and is comprised of the following:

PART A. INFORMATION REQUIRED IN A PROSPECTUS.

Prospectus Heading
(Rule 404(c) Cross Reference)

Item 1. Cover Page...............(1-3) Cover Page.
Item 2. Synopsis.................Not applicable.
Item 3. Condensed Financial
Information.............(1-3) Summary of Fund Expenses; (1)
Financial Highlights-Class A Shares; (3)
Financial Highlights - Class C Shares
Item 4. General Description of
Registrant..............(1-3) General Information; (1-3)
Investment Information; (1-3) Investment
Objectives; (1-3) Investment Policies;
(1-3) Investment Limitations.

Item 5. Management of the Fund...(1-3) Fund Information; (1-3) Management
of the Fund; (1-3) Distribution of
Shares; (1-3) Administration of the
Fund; (1-3) Brokerage Transactions.
Item 6. Capital Stock and Other
Securities..............(1-3) Dividends; (1-3) Capital Gains;
(1-3) Shareholder Information; (1-3)
Voting Rights; (1-3) Tax Information;
(1-3) Federal Income Tax; (1-3) State
and Local Taxes.
Item 7. Purchase of Securities Being
Offered.................How to Purchase Shares; (1) Investing in
Class A Shares; (2) Investing in Class B
Shares; (3) Investing in Class C Shares;
(1-3) Certificates and Confirmations;
(1-3) Net Asset Value; (1-3) Retirement
Plans.

Item 8. Redemption or Repurchase.(1) Redeeming Shares; (1-3) How to
Redeem Shares; (1-3) Telephone
Redemption; (1-3) Redeeming Shares
Through a Financial Institution; (1-3)
Redeeming Shares by Telephone; (1-3)
Redeeming Shares by Mail; (1-3)
Contingent Deferred Sales Charge; (1-3)
Elimination of Contingent Deferred Sales
Charge; (1-3) Systematic Withdrawal
Program; (1-3) Accounts with low
Balances.

Item 9. Pending Legal Proceedings None.

PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION

Item 10. Cover Page............... (1-3) Cover Page.

Item 11. Table of Contents........ (1-3) Table of Contents.

Item 12. General Information and
History.................(1-3) General Information About the
Fund; (1-3) About Federated Investors.

Item 13. Investment Objectives and
Policies................(1-3) Investment Objectives and
Policies; (1-3) Investment Limitations.

Item 14. Management of the Fund...(1-3) Federated Stock and Bond Fund,
Inc. Management.

Item 15. Control Persons and Principal
Holders of Securities...(1-3) Fund Ownership.

Item 16. Investment Advisory and Other
Services................(1-3) Investment Advisory Services; (1-
3) Other Services; (1-3) Shareholder
Services.

Item 17. Brokerage Allocation.....(1-3) Brokerage Transactions.

Item 18. Capital Stock and Other
Securities..............Not Applicable.

Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered...........(1-3) Purchasing Shares; (1-3)
Determining Net Asset Value; (1-3)
Redeeming Shares.

Item 20 Tax Status...............(1-3) Tax Status.

Item 21. Underwriters.............Not Applicable.

Item 22. Calculation of Performance
Data....................(1) Total Return; (1) Yield; (1-3)
Performance Comparisons.

Item 23. Financial Statements.....Filed in Part A.

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES

PROSPECTUS

The Class A Shares of Federated Stock and Bond Fund, Inc. (the "Fund")
represent interests in an open-end, diversified management investment
company (a mutual fund).
The investment objectives of the Fund are to provide relative safety of
capital with the possibility of long-term growth of capital and income.
Consideration is also given to current income. The Fund pursues these
objectives by investing in a professionally managed, diversified portfolio
of common and preferred stocks and other equity securities, bonds, notes,
and short-term obligations.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, 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 the Class A Shares of the Fund. Keep this prospectus for
future reference.
The Fund has also filed a Statement of Additional Information for Class
A Shares, Class B Shares, and Class C Shares dated August , 1996, with
---
the Securities and Exchange Commission. 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 to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet
Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated August , 1996
---

TABLE OFCONTENTS

Table of Contents will be generated when document is complete.

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
Summary of Fund Expenses Table -- Class A Shares

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 31.

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991 1990(a)
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.63 0.51 0.55 0.65 0.74 1.37
- ----------------------------------------
Net realized and unrealized gain
(loss) on investments 2.21 (0.59) 1.58 0.39 2.17 (2.22)
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
Total from investment operations 2.84 (0.08) 2.13 1.04 2.91 (0.85)
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
LESS DISTRIBUTIONS
- ----------------------------------------
Distributions from net investment
income (0.62) (0.54) (0.56) (0.68) (0.77) (0.66)
- ----------------------------------------
Distributions from net realized gain
on investment transactions (0.09) -- (0.61) (0.19) -- --
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
Total distributions (0.71) (0.54) (1.17) (0.87) (0.77) (0.66)
- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
Net asset value, end of period $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60

- ---------------------------------------- --------- ---------- --------- -------- -------- ---------
--------- ---------- --------- -------- -------- ---------
TOTAL RETURN (b) 17.99% (0.48%) 14.10% 7.94% 21.78% (5.90%)
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.07% 1.06% 1.04% 1.04% 1.01% 1.01%*
- ----------------------------------------
Net investment income 3.71% 3.23% 3.49% 4.15% 4.91% 5.77%*
- ----------------------------------------
Expense waiver/reimbursement (c) 0.31% 0.07% 0.20% 0.21% 0.45% 0.54%*
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000
omitted) $134,669 $125,382 $124,583 $95,387 $88,534 $79,003
- ----------------------------------------
Portfolio turnover 68% 45% 51% 43% 72% 49%
- ----------------------------------------

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1989 1988 1987 1986 1985
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.94 $ 14.89 $ 15.34 $ 15.24 $ 13.60
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS

- ----------------------------------------
Net investment income 0.91 0.85 0.81 0.85 0.90
- ----------------------------------------
Net realized and unrealized gain
(loss) on investments 0.91 0.52 (0.24) 1.17 2.18
- ---------------------------------------- -------- -------- -------- -------- --------
Total from investment operations 1.82 1.37 0.57 2.02 3.08
- ---------------------------------------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
- ----------------------------------------
Distributions from net investment
income (0.94) (0.86) (0.79) (0.86) (0.90)
- ----------------------------------------
Distributions from net realized gain
on investment transactions (0.71) (0.46) (0.23) (1.06) (0.54)
- ---------------------------------------- -------- -------- -------- -------- --------
Total distributions (1.65) (1.32) (1.02) (1.92) (1.44)
- ---------------------------------------- -------- -------- -------- -------- --------
Net asset value, end of period $ 15.11 $ 14.94 $ 14.89 $ 15.34 $ 15.24
- ---------------------------------------- -------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (b) 12.46% 9.28% 3.58% 13.77% 24.09%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.01% 1.00% 1.00% 1.00% 1.30%
- ----------------------------------------
Net investment income 5.82% 5.53% 5.07% 5.43% 6.42%
- ----------------------------------------

Expense waiver/reimbursement (c) 0.51% 0.39% 0.22% 0.30% 0.27%
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000
omitted) $88,367 $90,504 $92,105 $75,441 $37,792
- ----------------------------------------
Portfolio turnover 26% 131% 110% 40% 42%
- ----------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the ten month period ended October 31, 1990.

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

(See Notes which are an integral part of the Financial Statements)

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on
October 31, 1934. At a meeting of the Board of Directors ("Directors") held
on February 26, 1996, the Directors approved an amendment to the Articles
of Incorporation to change the name of Stock and Bond Fund, Inc. to
Federated Stock and Bond Fund, Inc. The Articles of Incorporation permit
the Fund to offer separate series of shares representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of
this prospectus, the Directors have established three classes of shares,
known as Class A Shares, Class B Shares, and Class C Shares. This
prospectus relates only to the Class A Shares ("Shares") of the Fund.
Shares of the Fund are designed for institutions, pension plans, and
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of common and preferred
stocks and other equity securities, bonds, notes and short-term
obligations. A minimum initial investment of $500 is required, unless the
investment is in a retirement account, in which case the minimum investment
is $50.
The Fund's current net asset value and offering price may be found in
the mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.
INVESTMENT INFORMATION

portfolio of common and preferred stocks and other equity securities,
bonds, notes, and short-term obligations. While there is no assurance that
the Fund will achieve its investment objectives, it endeavors to do so by
following the investment policies described in this prospectus. The
investment objectives cannot be changed without approval of
shareholders.
INVESTMENT POLICIES
As a matter of investment policy, which may be changed without
shareholder approval, under normal circumstances, the Fund will invest at
least 65% of its total assets in stocks and bonds. Unless indicated
otherwise, the investment policies and limitations described below and in
the Statement of Additional Information may be changed by the Directors
without shareholder approval. Shareholders will be notified before any
material change becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a diversified
portfolio of common stocks, bonds, convertible securities, and preferred
stocks which provide characteristics of stability and relative safety,
foreign securities, American Depository Receipts ("ADRs"), notes, bonds,
and discount notes issued or guaranteed by the U.S. government, its
agencies or instrumentalities, municipal securities, mortgage- and asset-
backed securities, and zero coupon convertible securities. The Fund
anticipates that it will experience characteristics of stability and
relative safety by investing primarily in securities of larger, well-
established companies which have a history of lower volatility in earnings
and price fluctuations. The bonds in which the Fund invests will generally
be rated investment grade, including repurchase agreements collateralized
by investment grade securities. Investment grade securities are generally
described as securities that are rated in one of the top four rating
categories by a nationally recognized statistical rating organization

("NRSRO"), such as Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P"), or Fitch Investor's Service, Inc. ("Fitch")
or that are unrated but determined by the Fund's investment adviser to be
of comparable quality. A description of the ratings categories is contained
in the Appendix to this prospectus. Permitted investments include:
. domestic and foreign common stocks;
. convertible securities;
. domestic or foreign debt obligations;
. obligations of the United States;
. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
. taxable municipal debt obligations (as a matter of operating
policy, the lowest rated municipal debt obligations in which the
Fund will invest will be rated BBB or better by an NRSRO, or which
are of comparable quality in the judgment of the Fund's investment adviser;
. asset-backed securities;
. commercial paper that matures in 270 days or less and is rated A-
1 or A-2 by S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
. time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), or in institutions whose accounts are insured
by the Savings Association Insurance Fund ("SAIF"), including
certificates of deposit issued by, and other time deposits in,
foreign branches of BIF-insured banks, which, if negotiable, mature
in six months or less, or if not negotiable, either mature in
ninety days or less, or may be withdrawn upon notice not exceeding
ninety days;
. bankers' acceptances issued by a BIF-insured bank, or issued by
the bank's Edge Act subsidiary and guaranteed by the bank, with

remaining maturities of nine months or less. The total acceptances of
any bank held by the Fund cannot exceed 0.25% of such bank's total
deposits according to the bank's last published statement of
condition preceding the date of acceptance;
. preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon and/or
convertible securities;
. other securities which are deemed by the Fund's investment
adviser to be consistent with the Fund's investment objectives; and
. repurchase agreements collateralized by acceptable
investments.
DOMESTIC AND FOREIGN COMMON STOCKS. The common stocks in which the
Fund invests are selected by the Fund's investment adviser ("Adviser")
on the basis of traditional research techniques, including assessment
of earnings and dividend growth, prospects and the risk and volatility
of the company's industry. However, other factors, such as product
position, market share, or profitability, will also be considered by
the Fund's Adviser.
CONVERTIBLE SECURITIES. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined
number of the issuer's underlying common stock at the option of the
holder during a specified time period. Convertible securities may take
the form of convertible preferred stock, convertible bonds or
debentures, units consisting of "usable" bonds and warrants, or a
combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for different
investment objectives. In selecting convertible securities for the
Fund, the Fund's Adviser evaluates the investment potential of the

underlying security for capital appreciation. The convertible
securities in which the Fund invests will be rated "investment grade"
or of comparable quality at the time of purchase. See "Acceptable
Investments" for a discussion of investment grade bonds.
DEBT OBLIGATIONS AND INVESTMENT RISKS. Although the debt obligations in
which the Fund will invest primarily are rated as investment grade by an
NRSRO, or of comparable quality in the judgment of the Fund's investment
adviser, the Fund may invest in debt obligations that are not investment
grade bonds, but are rated below BBB by an NRSRO (i.e., "junk bonds").
However, under normal circumstances, the Fund will not invest 35% or more
of its net assets in non-investment grade securities. Debt obligations that
are not determined to be investment grade are high-yield, high-risk bonds,
typically subject to greater market fluctuations and greater risk of loss
of income and principal due to an issuer's default. To a greater extent
than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower rated bonds
may be more difficult to dispose of or to value than higher rated, lower-
yielding bonds. Bonds rated "BBB" by S&P or Fitch, or "Baa" by Moody's,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than higher rated bonds.
The prices of fixed income securities generally fluctuate inversely to
the direction of interest rates.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's Adviser believes
that the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:

CREDIT RESEARCH. The Fund's Adviser will perform its own credit
analysis in addition to using nationally recognized statistical rating
organizations and other resources, including discussions with the
issuer's management, the judgment of other investment analysts, and its own
informed judgment. The Fund's Adviser's credit analysis will
consider the issuer's financial soundness, its responsiveness to changes
in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage and earnings. In evaluating an issuer,
the Fund's Adviser places special emphasis on the estimated current
value of the issuer's assets rather than historical costs.
DIVERSIFICATION. The Fund invests in securities of many
different issuers, industries, and economic sectors to reduce portfolio
risk.
ECONOMIC ANALYSIS. The Fund's Adviser will analyze current
developments and trends in the economy and in the financial markets. When
investing in lower-rated securities, timing and selection are critical, and
analysis of the business cycle can be important.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which
the Fund invests are either issued or guaranteed by the U.S. government,
its agencies, or instrumentalities. These securities include, but are not
limited to:
odirect obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and
onotes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal
National Mortgage Association, Government National Mortgage
Corporation, Farm Credit System (including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives),
Tennessee Valley Authority, Export-Import Bank of the United

States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities
of the U.S. government, such as Government National Mortgage Association
participation certificates, are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it
is not obligated to do so. These agencies and instrumentalities are
supported by:
othe issuer's right to borrow an amount limited to a specific
line of credit from the U.S. Treasury;
odiscretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or
othe credit of the agency or instrumentality.
MUNICIPAL SECURITIES. Municipal securities are generally issued to
finance public works such as airports, bridges, highways, housing,
hospitals, mass transportation projects, schools, streets, and water and
sewer works. They are also issued to repay outstanding obligations, to
raise funds for general operating expenses, and to make loans to other
public institutions and facilities. Municipal securities include industrial
development bonds issued by or on behalf of public authorities to provide
financing aid to acquire sites or construct and equip facilities for
privately or publicly owned corporations. The availability of this
financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government related and private loans,
receivables and other lender assets, including vehicle installment purchase

obligations and credit card receivables, into pools. Interests in these
pools are sold as individual securities and are not backed or guaranteed by
the U.S. government and may not be secured. Payments from the asset pools
may be divided into several different tranches of debt securities, with
some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and
accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage
securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may
also have less potential for capital appreciation. For certain types of
asset pools, such as collateralized mortgage obligations, prepayments may
be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that
the prepaid mortgage securities were purchased at a market premium over
their stated amount. Conversely, the prepayment of mortgage securities

purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the Fund, which would be
taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also 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.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in
non-mortgage related asset-backed securities including, but not limited to,
interests in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase obligations and
leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by non-
governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and
mortgage pass-through securities, which are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other
securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities
are issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the Fund invests are issued by

the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Fund may be:
ocollateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
ocollateralized by pools of mortgages in which payment of
principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or
osecurities in which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality of the
U.S. government.
All CMOs purchased by the Fund are investment grade, as rated by a NRSRO
or are of comparable quality as determined by the Adviser.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are
offerings of multiple class real estate mortgage-backed securities which
qualify and elect treatment as such under provisions of the Internal
Revenue Code (the "Code"). Issuers of REMICs may take several forms, such
as trusts, partnerships, corporations, associations, or segregated pools of

mortgages. Once REMIC status is elected and obtained, the entity is not
subject to federal income taxation. Instead, income is passed through the
entity and is taxed to the person or persons who hold interests in the
REMIC. A REMIC interest must consist of one or more classes of "regular
interests," some of which may offer adjustable rates of interest, and a
single class of "residual interests." To qualify as a REMIC, substantially
all the assets of the entity must be in assets directly or indirectly
secured principally by real property.
RESETS OF INTEREST. The interest rates paid on the ARMS, CMOs, and
REMICs in which the Fund invests generally are readjusted at intervals of
one year or less to an increment over some predetermined interest rate
index. There are two main categories of indices: those based on U.S.
Treasury securities and those derived from a calculated measure, such as a
cost of funds index or a moving average of mortgage rates. Commonly
utilized indices include the one-year and five-year constant maturity
Treasury Note rates, the three-month Treasury Bill rate, the 180-day
Treasury Bill rate, rates on longer-term Treasury securities, the National
Median Cost of Funds, the one-month or three-month London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less volatile.
To the extent that the adjusted interest rate on the mortgage security
reflects current market rates, the market value of an adjustable rate
mortgage security will tend to be less sensitive to interest rate changes
than a fixed rate debt security of the same stated maturity. Hence,
adjustable rate mortgage securities which use indices that lag changes in
market rates should experience greater price volatility than adjustable
rate mortgage securities that closely mirror the market. Certain residual

interest tranches of CMOs may have adjustable interest rates that deviate
significantly from prevailing market rates, even after the interest rate is
reset, and are subject to correspondingly increased price volatility. In
the event the Fund purchases such residual interest mortgage securities, it
will factor in the increased interest and price volatility of such
securities when determining its dollar-weighted average duration.
CAPS AND FLOORS. The underlying mortgages which collateralize the ARMS,
CMOs, and REMICs in which the Fund invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the
residential borrower may change up or down: (1) per reset or adjustment
interval; and (2) over the life of the loan. Some residential mortgage
loans restrict periodic adjustments by limiting changes in the borrower's
monthly principal and interest payments rather than limiting interest rate
changes.
These payment caps may result in negative amortization. The value of
mortgage securities in which the Fund invests may be affected if market
interest rates rise or fall faster and farther than the allowable caps or
floors on the underlying residential mortgage loans. Additionally, even
though the interest rates on the underlying residential mortgages are
adjustable, amortization and prepayments may occur, thereby causing the
effective maturities of the mortgage securities in which the Fund invests
to be shorter than the maturities stated in the underlying mortgages.
BANK INSTRUMENTS. The Fund only invests in bank instruments either
issued by an institution having capital, surplus and undivided profits over
$100 million or insured by BIF or SAIF. Bank instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs") and Eurodollar Time Deposits ("ETDs"). Due to the fact that
institutions issuing such instruments are not necessarily subject to the
same regulatory requirements that apply to domestic banks, such as the

reserve requirements, loan limitations, examination, accounting, auditing,
recordkeeping, and the public availability of information, these
investments may present additional risks to investors.
ZERO COUPON CONVERTIBLE SECURITIES. Zero coupon convertible securities
are debt securities which are issued at a discount to their face amount and
do not entitle the holder to any periodic payments of interest prior to
maturity. Rather, interest earned on zero coupon convertible securities
accretes at a stated yield until the security reaches its face amount at
maturity. Zero coupon convertible securities are convertible into a
specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the
holder with the opportunity to sell the bonds back to the issuer at a
stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, the Fund
will be required to distribute income accrued with respect to zero coupon
convertible securities which it owns, and may have to sell portfolio
securities (perhaps at disadvantageous times) in order to generate cash to
satisfy these distribution requirements.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in
restricted securities. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities determined by the

Directors to be illiquid, non-negotiable time deposits, unlisted options,
and repurchase agreements providing for settlement in more than seven days
after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act
of 1933. Section 4(2) commercial paper is restricted as to disposition
under the federal securities laws, and is generally sold to institutional
investors, such as the Fund, who agree that they are purchasing the paper
for investment purposes and not with a view to public distribution. Any
resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like
the Fund through or with the assistance of the issuer or investment dealers
who make a market in Section 4(2) commercial paper, thus providing
liquidity. The Fund believes that Section 4(2) commercial paper, and
possibly certain other restricted securities which meet the criteria for
liquidity established by the Directors, are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial
paper, as determined by the Adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities.
FOREIGN SECURITIES AND INVESTMENT RISKS. The Fund may invest in ADRs and
foreign securities.
Investments in foreign securities, particularly those of non-
governmental issuers, involve considerations which are not ordinarily
associated with investments in domestic securities. These considerations
include the possibility of expropriation, the unavailability of financial
information or the difficulty of interpreting financial information
prepared under foreign accounting standards, less liquidity and more
volatility in foreign securities markets, the impact of political, social,

or diplomatic developments, and the difficulty of assessing economic trends
in foreign countries. It may also be more difficult to enforce contractual
obligations abroad than would be the case in the United States because of
differences in the legal systems. Transaction costs in foreign securities
may be higher. The Adviser will consider these and other factors before
investing in foreign securities and will not make such investments unless,
in its opinion, such investments will meet the Fund's standards and
objectives.
With respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income securities of
foreign governmental units located within an individual foreign nation and
to purchase or sell various currencies on either a spot or forward basis in
connection with these investments. This would enable the Fund to
concentrate its investments in the securities of a foreign government which
would have the effect of magnifying the investment risks described
above.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may
invest in the securities of other investment companies, but it will not own
more than 3% of the total outstanding voting stock of any investment
company, invest more than 5% of its total assets in any one investment
company, or invest more than 10% of its total assets in investment
companies in general. The Fund will only invest in other investment
companies that are money market funds having an investment objective and
policies similar to its own and primarily for the purpose of investing
short-term cash which has not yet been invested in other portfolio
instruments. In addition to the advisory and other expenses the Fund bears
directly in connection with its own operations, as a shareholder of another
investment company the Fund 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. The Adviser will waive
its investment advisory fee on assets invested in securities of open-end
investment companies.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash and
cash items during times of unusual market conditions for defensive purposes
and to maintain liquidity.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or other securities to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and price.
To the extent that the original seller does not repurchase the securities
from the Fund, the Fund could receive less than the repurchase price on any
sale of such securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete the
transaction may cause the Fund to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may
vary from the purchase prices. Accordingly, the Fund may pay more/less than
the market value of the securities on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser
deems it appropriate to do so. In addition, the Fund may enter in
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 Fund may realize short-term profits
or losses upon the sale of such commitments.

LENDING OF PORTFOLIO SECURITIES. In order to generate additional
income, the Fund may lend portfolio securities on a short-term or long-term
basis up to one-third of the value of its total assets to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will only
enter into loan arrangements with broker/dealers, banks, or other
institutions which the Adviser has determined are creditworthy under
guidelines established by the Directors and will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned.
There is the risk that when lending portfolio securities, the securities
may not be available to the Fund on a timely basis and the Fund may,
therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file
for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
PUT AND CALL OPTIONS. The Fund may purchase put options on financial
futures contracts and put options on portfolio securities. Financial
futures may include index futures. These options will be used as a hedge to
attempt to protect securities which the Fund holds against decreases in
value. For the immediate future, the Fund will enter into futures contracts
directly only when it desires to exercise a financial futures put option in
its portfolio rather than either closing out the option or allowing it to
expire. The Fund will only purchase puts on financial futures contracts
which are traded on a nationally recognized exchange.
The Fund will generally purchase over-the-counter put options on
portfolio securities in negotiated transactions with the writers of the
options since options on the portfolio securities held by the Fund are
typically not traded on an exchange. The Fund purchases options only from
investment dealers and other financial associations (such as commercial

banks or savings and loan institutions) deemed creditworthy by the
Adviser.
In general, over-the-counter put options differ from exchange traded put
options in the following respects. Over-the-counter put options are two
party contracts with price and terms negotiated between buyer and seller,
and such options are endorsed and/or guaranteed by third parties (such as a
New York Stock Exchange member). Additionally, over-the-counter strike
prices are adjusted to reflect dividend payments, initial strike prices are
generally set at market, and option premiums (which are all time premiums)
are amortized on a straight line basis over the life of the option. In
contrast, exchange traded options are third-party contracts with
standardized strike prices and expiration dates and are purchased from the
Clearing Corporation. Strike prices are not adjusted for dividends, and
options are marked to market, thereby obviating the need to amortize the
time premium. Exchange traded options have a continuous liquid market while
over-the-counter options do not.
The Fund may also write call options on all or any portion of its
portfolio in an effort to generate income for the Fund. The Fund will write
call options on securities either held in its portfolio or which it has the
right to obtain without payment of further consideration or for which it
has segregated cash in the amount of any additional consideration. The call
options which the Fund writes and sells must be listed on a recognized
options exchange. Although the Fund reserves the right to write covered
call options on its entire portfolio, it will not write such options on
more than 25% of its total assets unless a higher limit is authorized by
the Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.

RISKS. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund purchases puts on financial futures contracts
to protect against declines in prices of portfolio securities, there is a
risk that the prices of the securities subject to the futures contracts
may not correlate perfectly with the prices of the securities in the
Fund's portfolio of investments. This may cause the futures contract and
its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect
in its expectations about the direction or extent of market factors such
as interest rate movements. In such an event, the Fund may lose the
purchase price of the put option. Finally, it is not certain that a
secondary market for options will exist at all times. Although the
Adviser will consider liquidity before entering into option transactions,
there is no assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. The Fund's
ability to establish and close out option positions depends on this
secondary market.
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 Fund will only use derivative contracts for
the purposes disclosed in the applicable prospectus sections above. To the
extent that the Fund invests in securities that could be characterized as
derivatives, such as asset-backed securities and mortgage-backed
securities, including ARMS, CMOs, and REMICs, it will only do so in a
manner consistent with its investment objectives, policies and
limitations.

INVESTMENT LIMITATIONS
The following investment limitations cannot be changed without
shareholder approval. The Fund will not:
o borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a portfolio
instrument for at least a percentage of its cash value with an
agreement to buy it back on a set date) except, under certain
circumstances, the Fund may borrow up to one-third of the value of
its net assets;
oinvest more than 5% of its total assets in securities of one
issuer (except U.S. government securities); invest in more than
10% of the voting securities of one issuer; or invest in more than
10% of any class of securities of one issuer.
NET ASSET VALUE

the interest of each class of Shares in the liabilities of the Fund and
those attributable to each class of Shares, and dividing the remainder by
the total number of each class of Shares outstanding. The net asset value
for each class of Shares may differ due to the variance in daily net income
realized by each class. Such variance will reflect only accrued net income
to which the shareholders of a particular class are entitled.
The net asset value is determined as of the close of trading (normally
4:00 p.m., Eastern time) on the New York Stock Exchange, Monday through
Friday, except on: (i) days on which there are not sufficient changes in
the value of the Fund's portfolio securities that its net asset value might
be materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange
is open. Shares of the Fund may be purchased as described below, either
through a financial institution (such as a bank or broker/dealer which has
a sales agreement with the distributor) or by wire or by check directly to
the Fund, with a minimum initial investment of $500. Additional investments
can be made for as little as $100. The minimum initial and subsequent
investment for retirement plans is only $50. (Financial institutions may
impose different minimum investment requirements on their customers.)
In connection with the sale of Shares, Federated Securities Corp. may,
from time to time, offer certain items of nominal value to any shareholder
or investor. The Fund reserves the right to reject any purchase request. An
account must be established at a financial institution or by completing,

signing, and returning the new account form available from the Fund before
Shares can be purchased.

INVESTING IN SHARES
Shares are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:
SALES
CHARGE DEALER
SALES CHARGE AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
AMOUNT OF OF PUBLIC AMOUNT OF PUBLIC
TRANSACTION OFFERING PRICE INVESTED OFFERING PRICE
------
Less than 50,000 5.50% 5.82% 5.00%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*
*See sub-section entitled "Dealer Concession."
No sales charge is imposed for Shares purchased through financial
intermediaries that do not receive a reallowance of a sales charge.
However, investors who purchase Shares through a trust department,
investment adviser, or other financial intermediary may be charged a
service or other fee by the financial intermediary. Additionally, no sales
charge is imposed on shareholders designated as Liberty Life Members or on
Shares purchased through "wrap accounts" or similar programs, under which
clients pay a fee for services.

DEALER CONCESSION. For sales of Shares, a dealer will normally receive
up to 90% of the applicable sales charge. Any portion of the sales charge
which is not paid to a dealer will be retained by the distributor. However,
the distributor may offer to pay dealers up to 100% of the sales charge
retained by it. Such payments may take the form of cash or promotional
incentives, such as reimbursement of certain expenses of qualified
employees and their spouses to attend informational meetings about the Fund
or other special events at recreational-type facilities, or items of
material value. In some instances, these incentives will be made available
only to dealers whose employees have sold or may sell a significant amount
of Shares. On purchases of $1 million or more, the investor pays no sales
charge; however, the distributor will make twelve monthly payments to the
dealer totaling .25% of the public offering price over the first year
following the purchase. Such payments are based on the original purchase
price of Shares outstanding at each month end.
The sales charge for Shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp. Federated
Securities Corp. may pay fees to banks out of the sales charge in exchange
for sales and/or administrative services performed on behalf of the bank's
customers in connection with the initiation of customer accounts and
purchases of Shares.

REDUCING OR ELIMINATING THE SALES CHARGE
The sales charge can be reduced or eliminated on the purchase of Shares
through:
o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent;

o using the reinvestment privilege; or
o purchases with proceeds from redemptions of unaffiliated
investment companies.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table
above, larger purchases reduce the sales charge paid. The Fund will combine
purchases of Shares made on the same day by the investor, the investor's
spouse, and the investor's children under age 21 when it calculates the
sales charge. In addition, the sales charge, if applicable, is reduced for
purchases made at one time by a trustee or fiduciary for a single trust
estate or a single fiduciary account.
If an additional purchase of Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public
offering price of $90,000 and he purchases $10,000 more at the current
public offering price, the sales charge on the additional purchase
according to the schedule now in effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must
be notified by the shareholder in writing or by his financial institution
at the time the purchase is made that Shares are already owned or that
purchases are being combined. The Fund will reduce the sales charge after
it confirms the purchases.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of Class A Shares of two or more funds for which affiliates of
Federated Investors serve as investment adviser or principal underwriter
(the "Federated Funds"), the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $80,000 in the
Class A Shares of one of the other Federated Funds with a sales charge, and
$20,000 in the Fund, the sales charge would be reduced.

To receive this sales charge reduction, Federated Securities Corp. must
be notified by the shareholder in writing or by his financial institution
at the time the concurrent purchases are made. The Fund will reduce the
sales charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $50,000
of Class A Shares of Federated Funds (excluding money market funds) over
the next 13 months, the sales charge may be reduced by signing a letter of
intent to that effect. This letter of intent includes a provision for a
sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the custodian to hold up to 5.50%
of the total amount intended to be purchased in escrow (in Shares) until
such purchase is completed.
The Shares held in escrow in the shareholder's account will be released
upon fulfillment of the letter of intent or the end of the 13-month period,
whichever comes first. If the amount specified in the letter of intent is
not purchased, an appropriate number of escrowed Shares may be redeemed in
order to realize the difference in the sales charge.
While this letter of intent will not obligate the shareholder to
purchase Shares, each purchase during the period will be at the sales
charge applicable to the total amount intended to be purchased. At the time
a letter of intent is established, current balances in accounts in any
Class A Shares of Federated Funds, excluding money market accounts, will be
aggregated to provide a purchase credit towards fulfillment of the letter
of intent. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If Shares in the Fund have been redeemed, the
shareholder has the privilege within 120 days, to reinvest the redemption
proceeds at the next-determined net asset value without any sales charge.
Federated Securities Corp. must be notified by the shareholder in writing
or by his financial institution of the reinvestment in order to eliminate a

sales charge. If the shareholder redeems his Class A Shares in the Fund,
there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES. Investors may purchase Shares at net asset value, without a
sales charge, with the proceeds from the redemption of shares of an
unaffiliated investment company that were purchased or sold with a sales
charge or commission and were not distributed by Federated Securities Corp.
The purchase must be made within 60 days of the redemption, and Federated
Securities Corp. must be notified by the investor in writing, or by his
financial institution, at the time the purchase is made. From time to time,
the Fund may offer dealers a payment of .50% for Shares purchased under
this program. If Shares are purchased in this manner, redemptions of those
Shares will be subject to a contingent deferred sales charge for one year
from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering as described above.
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION. An investor may call
his financial institution (such as a bank or an investment dealer) to place
an order to purchase Shares. Orders placed through a financial institution
are considered received when the Fund is notified of the purchase order or
when payment is converted into federal funds. Purchase orders through a
registered broker/dealer must be received by the broker before 4:00 p.m.
(Eastern time) and must be transmitted by the broker to the Fund before
5:00 p.m. (Eastern time) in order for Shares to be purchased at that day's
price. Purchase orders through other financial institutions must be
received by the financial institution and transmitted to the Fund before
4:00 p.m. (Eastern time) in order for Shares to be purchased at that day's
price. It is the financial institution's responsibility to transmit orders
promptly. Financial institutions may charge additional fees for their
services.

PURCHASING SHARES BY WIRE. Once an account has been established, Shares
may be purchased by wire by calling the Fund. All information needed will
be taken over the telephone, and the order is considered received when
State Street Bank receives payment by wire. Federal funds should be wired
as follows: Federated Shareholder Services Company, c/o State Street Bank
and Trust Company, Boston, MA; Attention: EDGEWIRE; For Credit to: (Fund
Name) (Fund Class); (Fund Number-this number can be found on the account
statement or by contacting the Fund); Account Number; Trade Date and Order
Number; Group Number or Dealer 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 client service representative at the telephone number listed on your
account statement.
PURCHASING SHARES BY CHECK. Once an account has been established, Shares
may be purchased by mailing a check made payable to the name of the Fund
(designate class of Shares and account number) to: Federated Shareholder
Services Company, P.O. Box 8600, Boston, MA 02266-8600. Orders by mail are
considered received when payment by check is converted into federal funds
(normally the business day after the check is received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM. Once a Fund account has been opened,
shareholders may add to their investment on a regular basis in a minimum
amount of $100. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund at the net asset
value next determined after an order is received by the Fund, plus the
applicable sales charges. Shareholders should contact their financial
institution or the Fund to participate in this program.

RETIREMENT PLANS. Fund Shares can be purchased as an investment for
retirement plans or for IRA accounts. For further details, contact the Fund
and consult a tax adviser.
EXCHANGE PRIVILEGE

Class A shareholders may exchange all or some of their Shares for Class
A Shares of other Federated Funds at net asset value. Neither the Fund nor
any of the Federated Funds imposes any additional fees on exchanges.
Shareholders in certain other Federated Funds may exchange all or some of
their Shares for Class A Shares.
Please contact your financial institution directly or Federated
Securities Corp. at 1-800-341-7400 for information on and prospectuses for
the Federated Funds into which your Shares may be exchanged free of
charge.
Shareholders of Class A Shares who have been designated as Liberty Life
Members are exempt from sales charges on future purchases in and exchanges
between the Class A Shares of any Federated Fund, as long as they maintain
a $500 balance in one of the Federated Funds.
REQUIREMENTS FOR EXCHANGE. Shareholders using this privilege must
exchange Shares having a net asset value equal to the minimum investment
requirements of the fund into which the exchange is being made. Before the
exchange, the shareholder must receive a prospectus of the fund for which
the exchange is being made.
This privilege is available to shareholders resident in any state in
which the Shares being acquired may be sold. Upon receipt of proper
instructions and required supporting documents, Shares submitted for
exchange are redeemed and proceeds invested in shares of the other fund.
The exchange privilege may be modified or terminated at any time.

Shareholders will be notified of the modification or termination of the
exchange privilege.
TAX CONSEQUENCES. An exercise of the exchange privilege is treated as a
sale for federal income tax purposes. Depending upon the circumstances, a
capital gain or loss may be realized.
MAKING AN EXCHANGE. Instructions for exchanging for Federated Funds may
be given in writing or by telephone. Written instructions may require a
signature guarantee. Shareholders of the Fund may have difficulty in making
exchanges by telephone through brokers and other financial institutions
during times of drastic economic or market changes. If a shareholder cannot
contact his broker or financial institution by telephone, it is recommended
that an exchange request be made in writing and sent by overnight mail to:
Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may
be carried out only if a telephone authorization form completed by the
investor is on file with the Fund. If the instructions are given by a
broker, a telephone authorization form completed by the broker must be on
file with the Fund. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. Shares may be exchanged between two funds by telephone only
if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but
must be forwarded to Federated Shareholder Services Company, P.O. Box 8600,
Boston, Massachusetts 02266-8600 and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and
will be binding upon the shareholder. Such instructions will be processed
as of 4:00 p.m. (Eastern time) and must be received by the Fund before that
time for Shares to be exchanged the same day. Shareholders exchanging into

a Fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.
HOW TO REDEEM SHARES

Shares are redeemed at their net asset value, less any applicable
contingent deferred sales charge, next determined after the Fund receives
the redemption request. Redemptions will be made on days on which the Fund
computes its net asset value. Investors who redeem Shares through a
financial intermediary may be charged a fee by that financial intermediary.
Redemption requests must be received in proper form and can be made as
described below.
REDEEMING SHARES THROUGH A FINANCIAL INSTITUTION. Shares of the Fund
may be redeemed by calling your financial institution to request the
redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to
the Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed
at that day's net asset value. Redemption requests through other financial
institutions (such as banks) must be received by the financial institution
and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for
Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this
service.
REDEEMING SHARES BY TELEPHONE. Shares may be redeemed in any amount by
calling the Fund provided the Fund has a properly completed authorization

form. These forms can be obtained from Federated Securities Corp. Proceeds
will be mailed in the form of a check, to the shareholder's address of
record or wire-transfered to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. The minimum
amount for a wire transfer is $1,000. Proceeds from redeemed Shares
purchased by check or through ACH will not be wired until that method of
payment has cleared. 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 client service representative at the
telephone number listed on your account statement.
Telephone instructions will be recorded. If reasonable procedures are
not followed by the Fund, it may be liable for losses due to unauthorized
or fraudulent telephone instructions. In the event of drastic economic or
market changes, a shareholder may experience difficulty in redeeming by
telephone. If this occurs, "Redeeming Shares By Mail" should be considered.
If at any time the Fund shall determine it necessary to terminate or modify
the telephone redemption privilege, shareholders would be promptly
notified.
REDEEMING SHARES BY MAIL. Shares may be redeemed in any amount by
mailing a written request to: Federated Shareholder Services Company, Fund
Name, Fund Class, P.O. Box 8600, Boston, MA 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: Fund Name and the Share Class name;
the account name as registered with the Fund; 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 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.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM. Shareholders who desire to receive
payments of a predetermined amount not less than $100 may take advantage of
the Systematic Withdrawal Program. Under this program, Shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Shares, and
the fluctuation of the net asset value of Shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must
have an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that Shares are sold with a sales charge, it is not advisable for

shareholders to continue to purchase Shares while participating in this
program.
CONTINGENT DEFERRED SALES CHARGE
Shares purchased under a periodic special offering with the proceeds of
a redemption of shares of an unaffiliated investment company purchased or
redeemed with a sales charge and not distributed by Federated Securities
Corp. may be charged a contingent deferred sales charge of .50% for
redemptions made within one full year of purchase. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed Shares at the time of purchase or the net asset
value of the redeemed Shares at the time of redemption.
The contingent deferred sales charge will be deducted from the
redemption proceeds otherwise payable to the shareholder and will be
retained by the distributor. The contingent deferred sales charge will not
be imposed with respect to: (1) Shares acquired through the reinvestment of
dividends or distributions of long-term capital gains; and (2) Shares held
for more than one full year from the date of purchase. Redemptions will be
processed in a manner intended to maximize the amount of redemption which
will not be subject to a contingent deferred sales charge. In computing the
amount of the applicable contingent deferred sales charge, redemptions are
deemed to have occurred in the following order: (1) Shares acquired through
the reinvestment of dividends and long-term capital gains; (2) Shares held
for more than one full year from the date of purchase; (3) Shares held for
less than one full year from the date of purchase on a first-in, first-out
basis. A contingent deferred sales charge is not assessed in connection
with an exchange of Fund Shares for Shares of other Federated Funds in the
same class (see "Exchange Privilege"). Any contingent deferred sales charge
imposed at the time the exchanged-for Shares are redeemed is calculated as
if the shareholder had held the Shares from the date on which he became a

shareholder of the exchanged-from Shares. Moreover, the contingent deferred
sales charge will be eliminated with respect to certain redemptions (see
"Elimination of Contingent Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to
the following redemptions: (1) redemptions following the death or
disability, as defined in Section 72(m)(7) of the Internal Revenue Code of
1986, of a shareholder; (2) redemptions representing minimum required
distributions from an Individual Retirement Account or other retirement
plan to a shareholder who has attained the age of 70-1/2; and (3)
involuntary redemptions by the Fund of Shares in shareholder accounts that
do not comply with the minimum balance requirements. No contingent deferred
sales charge will be imposed on redemptions of Shares held by Directors,
employees and sales representatives of the Fund, the distributor, or
affiliates of the Fund or distributor and their immediate family members;
employees of any financial institution that sells Shares of the Fund
pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of
Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any
other financial institution, to the extent that no payments were advanced
for purchases made through such entities. The Directors reserve the right
to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased
prior to the termination of such waiver would have the contingent deferred
sales charge eliminated as provided in the Fund's prospectus at the time of

the purchase of the Shares. If a shareholder making a redemption qualifies
for an elimination of the contingent deferred sales charge, the shareholder
must notify Federated Securities Corp. or the transfer agent in writing
that he is entitled to such elimination.

ACCOUNT AND SHARE INFORMATION

. CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested in writing to Federated Shareholder Services
Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid
during that quarter.
. DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested
in the Fund on the record date. Dividends and distributions are
automatically reinvested in additional Shares of the Fund on payment dates
at the ex-dividend date net asset value without a sales charge, unless
shareholders request cash payments on the new account form or by writing to
the transfer agent. All shareholders on the record date are entitled to the
dividend. If Shares are redeemed or exchanged prior to the record date or
purchased after the record date, those Shares are not entitled to that
quarter's dividend.
. CAPITAL GAINS
Net long term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.

. ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund
may redeem Shares in any account, except retirement plans, and pay the
proceeds to the shareholder if the account balance falls below the required
minimum value of $500. This requirement does not apply, however, if the
balance falls below $500 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.
FUND INFORMATION

MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The
Directors are responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by
Federated Management, the Fund's investment adviser, subject to direction
by the Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the
Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory
fee equal to .55% of the Fund's average daily net assets plus 4.5%
of the Fund's annual gross income, excluding capital gains or
losses. Gross income includes interest accrued, including discount
earned on U.S. Treasury bills and agency discount notes, interest
received or receivable on all interest-bearing obligations and

dividend income. Under the investment advisory contract which
provides for the voluntary waiver and reimbursement of expenses by
the Adviser, the Adviser may voluntarily waive a portion of its fee
or reimburse the Fund for certain operating expenses. The Adviser
can terminate this voluntary waiver at any time at its sole
discretion. The Adviser has also undertaken to reimburse the Fund
for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business
trust organized on April 11, 1989, 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 Management and other subsidiaries of Federated
Investors serve as investment advisers to a number of investment
companies and private accounts. Certain other subsidiaries also
provide administrative services to a number of investment companies.
With over $80 billion invested across more than 250 funds under
management and/or administration by its subsidiaries, as of December
31, 1995, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 1,800
employees, Federated continues to be led by the management who
founded the company in 1955. Federated funds are presently at work
in and through 4,000 financial institutions nationwide. More than
100,000 investment professionals have selected Federated funds for
their clients.

Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Directors and could result in severe penalties.
PORTFOLIO MANAGERS' BACKGROUND. Christopher H. Wiles has been the
Fund's portfolio manager since May 1996 and is responsible for the
overall allocation of the assets between fixed and equity. Mr. Wiles
also manages the equity portion of the Fund. Mr. Wiles joined
Federated Investors in 1990 and has been a Vice President of the
Fund's investment adviser since 1992. Mr. Wiles served as Assistant
Vice President of the Fund's investment adviser in 1991. Mr. Wiles
is a Chartered Financial Analyst and received his M.B.A. in Finance
from Cleveland State University.
Joseph M. Balestrino has been the Fund's co-portfolio manager
since May 1996 and is responsible for the allocation of fixed income
assets (between investment grade and high yield). Mr. Balestrino
also manages the investment grade portion of the Fund. Mr.
Balestrino joined Federated Investors in 1986 and has been a Vice
President of the Fund's investment adviser since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment
adviser from 1991 to 1995. Mr. Balestrino is a Chartered Financial

Analyst and received his Master's Degree in Urban and Regional
Planning from the University of Pittsburgh.
Mark E. Durbiano has been the Fund's sub-portfolio manager since
May 1996 and is responsbile for managing the high yield portion of
the Fund. Mr. Durbiano joined Federated Investors in 1982 and has
been a Senior Vice President of the Fund's investment adviser since
January 1996. From 1988 through 1995, Mr. Durbiano was a Vice
President of the Fund's investment adviser. Mr. Durbiano is a
Chartered Financial Analyst and received his M.B.A. in Finance from
the University of Pittsburgh.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of
the Fund. Federated Securities Corp. is located at Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779. 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan
adopted in accordance with Investment Company Act Rule 12b-1 (the
"Distribution Plan"), Class A Shares may pay a fee to the distributor in an
amount computed at an annual rate of .25% of the average daily net assets
of Class A Shares to finance any activity which is principally intended to
result in the sale of Class A Shares subject to the Distribution Plan. The
Fund is not currently making payments for Class A Shares under the
Distribution Plan, nor does it anticipate doing so in the immediate
future.

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 Class A Shares under the
Plan.
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 .25% of the average daily net asset
value of the Fund on behalf of Class A Shares, computed at an annual rate,
to obtain certain personal services for shareholders and to provide the
maintenance of shareholder accounts ("Shareholder Services"). From time to
time and for such periods as deemed appropriate, the amount stated may be
reduced voluntarily. 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 schedule of such
fees and the basis upon which such fees will be paid will be determined
from time to time by the Fund and Federated Shareholder Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities
Corp. will pay financial institutions, at the time of purchase of Class A
Shares, an amount equal to .50% of the net asset value of Class A Shares
purchased by their clients or customers under certain qualified retirement
plans as approved by Federated Securities Corp. (Such payments are subject
to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase.)

Furthermore, with respect to Class A Shares, in addition to payments
made pursuant to the Shareholder Services Agreement, Federated Securities
Corp. and Federated Shareholder Services, from their own assets, may offer
to 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all funds
advised by affiliates of Federated Investors as specified below:

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria, the
adviser may give consideration to those firms which have sold or are
selling shares of the Fund and other funds distributed by Federated
Securities Corp. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Directors.
EXPENSES OF THE FUND AND SHARES
Holders of Class A Shares pay their allocable portion of Fund and
portfolio expenses.
The Fund expenses for which holders of Class A Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Fund
and continuing its existence; registering the Fund with federal and state
securities authorities; Directors' fees; auditors' fees; the cost of
meetings of Directors; legal fees of the Fund; association membership dues;
and such non-recurring and extraordinary items as may arise from time to
time.
The portfolio expenses for which holders of Class A Shares pay their
allocable portion include, but are not limited to: registering the
portfolio and Shares of the portfolio; investment advisory services; taxes
and commissions; custodian fees; insurance premiums; auditors' fees; and

such non-recurring and extraordinary items as may arise from time to
time.
At present, the only expenses which are allocated specifically to Class
A Shares as a class are fees for Shareholder Services. However, the
Directors reserve the right to allocate certain other expenses to holders
of Class A Shares as it deems appropriate ("Class Expenses"). In any case,
Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Class A
Shares; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange
Commission and registration fees paid to state securities commissions;
expenses related to administrative personnel and services as required to
support holders of Class A Shares; legal fees relating solely to Class A
Shares; and Directors' fees incurred as a result of issues relating solely
to Class A Shares.
SHAREHOLDER INFORMATION

VOTING RIGHTS
Each Share of the Fund gives the shareholder one vote in Director
elections and other matters submitted to shareholders for vote. All shares
of each portfolio or class in the Fund have equal voting rights, except
that only shares of that particular portfolio or class are entitled to vote
in matters affecting that portfolio or class.
As a Maryland corporation, the Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under
certain circumstances.

Directors may be removed by the Directors or by shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Directors upon the written request of shareholders owning at least 25% of
the Fund's outstanding Shares of all series entitled to vote.
TAX INFORMATION

FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income
tax on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions
are received in cash or as additional Shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-
term capital gains no matter how long the shareholders have held the
Shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed, so long as such IRA or
qualified retirement plan meets the applicable requirements of the Code.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.
PERFORMANCE INFORMATION

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

Total return represents the change, over a specific period of time, in
the value of an investment in Class A Shares after reinvesting all income
and capital gains distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of Class A Shares is calculated by dividing the net investment
income per share (as defined by the Securities and Exchange Commission)
earned by Class A Shares over a thirty-day period by the maximum offering
price per share of Class A 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 Class A Shares and,
therefore, may not correlate to the dividends or other distributions paid
to shareholders.
The performance information reflects the effect of non-recurring charges
such as the maximum sales charge and contingent deferred sales charges,
which, if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares,
Class B Shares, and Class C Shares.
From time to time, advertisements for Class A Shares, Class B Shares,
and Class C Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, and Class C Shares to
certain indices.
OTHER CLASSES OF SHARES

The Fund also offers other classes of shares called Class B Shares and
Class C Shares which are sold primarily to customers of financial
institutions subject to certain differences.
Class B Shares are sold at net asset value and are subject to a Rule
12b-1 Plan, a Shareholder Services Agreement, and a minimum initial

investment of $1,500, unless the investment is in a retirement account in
which case the minimum investment is $50. A contingent deferred sales
charge is imposed on certain Shares which are redeemed within six full
years of purchase.
Class C Shares are sold at net asset value and are subject to a Rule
12b-1 Plan, a Shareholder Services Agreement, and a minimum initial
investment of $1,500, unless the investment is in a retirement account in
which case the minimum investment is $50. A contingent deferred sales
charge is imposed on assets redeemed within the first full 12 months
following purchase.
Class A Shares, Class B Shares, and Class C Shares are subject to
certain of the same expenses. Expense differences, however, between Class A
Shares, Class B Shares, and Class C Shares may affect the performance of
each class.
To obtain more information and a combined prospectus for Class B Shares
and Class C Shares, investors may call 1-800-341-7400 or contact their
financial institution.

APPENDIX

in circumstances and economic conditions than debt in higher-rated
categories.
BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher-rated
categories.
BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "CC" the
highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties of major risk exposures to adverse conditions.
CI-The rating "CI" is reversed for income bonds on which no interest is
being paid.
D-Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or 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
near future.
BAA-Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.
BA-Bonds which are "Ba" are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

CA-Bonds which are "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATING DEFINITIONS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered 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 economicc conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.

BB-Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D-Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.
STOCK AND BOND FUND, INC.

FINANCIAL HIGHLIGHTS--CLASS C SHARES

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 31.

<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
AUGUST 31, OCTOBER 31,
1994(a) 1993(b)
- -------------------------------------------------------- ------------ ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $16.84 $16.18
- --------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------
Net investment income 0.23 0.38
- --------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.26) 0.48
- -------------------------------------------------------- ------ ------
Total from investment operations (0.03) 0.86
- -------------------------------------------------------- ------ ------
LESS DISTRIBUTIONS
- --------------------------------------------------------
Distributions from net investment income (0.40) (0.20)
- -------------------------------------------------------- ------ ------
Net asset value, end of period $16.41 $16.84
- -------------------------------------------------------- ------ ------
------ ------
TOTAL RETURN (c) 0.17% 5.54%
- --------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------
Expenses 1.95%* 2.04%*

- --------------------------------------------------------
Net investment income 2.38%* 2.01%*
- --------------------------------------------------------
Expense waiver/reimbursement (d) -- 0.20%*
- --------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------
Net assets, end of period (000 omitted) $ 573 $ 96
- --------------------------------------------------------
Portfolio turnover 45% 51%
- --------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from November 1, 1993 to August 31,
1994 (date share class ceased operations).

(b) Reflects operations for the period from April 19, 1993 (Start of
performance) to October 31, 1993.

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

(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--41.6%
- -------------------------------------------------------------------------
CONSUMER DURABLES--2.1%
-------------------------------------------------------
16,200 Eastman Kodak Co. $ 1,014,525
-------------------------------------------------------
33,500 Mattel, Inc. 963,125
-------------------------------------------------------
37,600 Volvo, ADR 855,400
------------------------------------------------------- ------------
Total 2,833,050
------------------------------------------------------- ------------
CONSUMER NON-DURABLES--3.7%
-------------------------------------------------------
14,100 Avon Products, Inc. 1,002,863
-------------------------------------------------------
21,200 IBP, Inc. 1,269,350
-------------------------------------------------------
19,700 Philip Morris Cos., Inc. 1,664,650
-------------------------------------------------------
8,100 RJR Nabisco Holdings Corp. 249,075
-------------------------------------------------------

24,100 Reebok International Ltd. 819,400
------------------------------------------------------- ------------
Total 5,005,338
------------------------------------------------------- ------------
CONSUMER SERVICES--0.4%
-------------------------------------------------------
9,800 Gannett Co., Inc. 532,875
------------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY--5.4%
-------------------------------------------------------
14,600 Hewlett-Packard Co. 1,352,325
-------------------------------------------------------
15,500 Intel Corp. 1,083,062
-------------------------------------------------------
10,000 International Business Machines Corp. 972,500
-------------------------------------------------------
15,100 (a) Litton Industries, Inc. 598,338
-------------------------------------------------------
22,900 Lockheed Martin Corp. 1,560,063
-------------------------------------------------------
14,800 Raytheon Co. 645,650
-------------------------------------------------------
25,400 Rockwell International Corp. 1,130,300
------------------------------------------------------- ------------
Total 7,342,238
------------------------------------------------------- ------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
ENERGY MINERALS--2.7%
-------------------------------------------------------
21,700 Chevron Corp. $ 1,014,475
-------------------------------------------------------
12,100 Exxon Corp. 924,137
-------------------------------------------------------
27,600 Occidental Petroleum Corp. 593,400
-------------------------------------------------------
15,200 Texaco, Inc. 1,035,500
------------------------------------------------------- ------------
Total 3,567,512
------------------------------------------------------- ------------
FINANCE--8.1%
-------------------------------------------------------
27,749 Allstate Corp. 1,019,776
-------------------------------------------------------
14,900 American Express Co. 605,313
-------------------------------------------------------
20,800 Bank of Boston Corp. 925,600
-------------------------------------------------------

10,200 CIGNA Corp. 1,011,075
-------------------------------------------------------
15,000 Chemical Banking Corp. 853,125
-------------------------------------------------------
22,200 Citicorp 1,440,225
-------------------------------------------------------
18,714 Dean Witter, Discover & Co. 931,021
-------------------------------------------------------
8,400 First Interstate Bancorp 1,083,600
-------------------------------------------------------
26,600 Mellon Bank Corp. 1,333,325
-------------------------------------------------------
18,000 Providian Corp. 706,500
-------------------------------------------------------
18,866 Travelers Group, Inc. 952,733
------------------------------------------------------- ------------
Total 10,862,293
------------------------------------------------------- ------------
HEALTH SERVICES--0.5%
-------------------------------------------------------
12,800 Smithkline Beecham Corp., ADR 664,000
------------------------------------------------------- ------------
HEALTH TECHNOLOGY--3.4%
-------------------------------------------------------
11,900 American Home Products Corp. 1,054,638
-------------------------------------------------------
18,900 Becton, Dickinson & Co. 1,228,500
-------------------------------------------------------
18,800 Bristol-Myers Squibb Co. 1,433,500

-------------------------------------------------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
HEALTH TECHNOLOGY--CONTINUED
-------------------------------------------------------
16,000 Merck & Co., Inc. $ 920,000
------------------------------------------------------- ------------
Total 4,636,638
------------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.8%
-------------------------------------------------------
26,600 Baker Hughes, Inc. 522,025
-------------------------------------------------------
13,000 (a) Western Atlas, Inc. 570,375
------------------------------------------------------- ------------
Total 1,092,400
------------------------------------------------------- ------------
NON-ENERGY MINERALS--1.5%
-------------------------------------------------------
16,400 Aluminum Co. of America 836,400
-------------------------------------------------------
19,200 Phelps Dodge Corp. 1,216,800
------------------------------------------------------- ------------

Total 2,053,200
------------------------------------------------------- ------------
PROCESS INDUSTRIES--2.0%
-------------------------------------------------------
15,800 Du Pont (E.I.) de Nemours & Co. 985,525
-------------------------------------------------------
12,700 Eastman Chemical Co. 755,650
-------------------------------------------------------
34,300 Praxair, Inc. 926,100
------------------------------------------------------- ------------
Total 2,667,275
------------------------------------------------------- ------------
PRODUCER MANUFACTURING--5.0%
-------------------------------------------------------
17,300 (a) FMC Corp. 1,239,112
-------------------------------------------------------
21,200 General Electric Co. 1,340,900
-------------------------------------------------------
7,400 ITT Corp. 906,500
-------------------------------------------------------
7,900 Loews Corp. 1,158,338
-------------------------------------------------------
15,400 Philips Electronics N.V., ADR 594,825
-------------------------------------------------------
22,100 Textron, Inc. 1,519,375
------------------------------------------------------- ------------
Total 6,759,050
------------------------------------------------------- ------------
RETAIL TRADE--1.3%

-------------------------------------------------------
24,100 American Stores Co. 719,988
-------------------------------------------------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
RETAIL TRADE--CONTINUED
-------------------------------------------------------
29,900 Sears, Roebuck & Co. $ 1,016,600
------------------------------------------------------- ------------
Total 1,736,588
------------------------------------------------------- ------------
TECHNOLOGY SERVICES--1.1%
-------------------------------------------------------
5,000 (a) DST Systems, Inc. 105,000
-------------------------------------------------------
28,100 General Motors Corp., Class E 1,324,212
------------------------------------------------------- ------------
Total 1,429,212
------------------------------------------------------- ------------
TRANSPORTATION--0.4%
-------------------------------------------------------
8,100 Consolidated Rail Corp. 556,875
------------------------------------------------------- ------------
UTILITIES--3.2%
-------------------------------------------------------

23,500 AT&T Corp. 1,504,000
-------------------------------------------------------
8,500 CMS Energy Corp. 234,812
-------------------------------------------------------
13,900 (a) Columbia Gas System, Inc. 535,150
-------------------------------------------------------
15,700 Enron Corp. 539,687
-------------------------------------------------------
14,800 FPL Group, Inc. 619,750
-------------------------------------------------------
36,000 MCI Communications Corp. 897,750
------------------------------------------------------- ------------
Total 4,331,149
------------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $43,015,880) 56,069,693
------------------------------------------------------- ------------
------------
PREFERRED STOCKS--4.3%
- -------------------------------------------------------------------------
CONSUMER NON-DURABLES--1.0%
-------------------------------------------------------
203,800 RJR Nabisco Holdings Corp., Conv. Pfd., Series C, $.60 1,273,750
------------------------------------------------------- ------------
FINANCE--1.6%
-------------------------------------------------------
29,000 Merrill Lynch & Co., MTG, Inc., STRYPES, Series MGIC,
$3.12 1,562,375
-------------------------------------------------------
9,700 Sunamerica, Inc., Conv. Pfd., Series E, $3.10 601,400

------------------------------------------------------- ------------
Total 2,163,775
------------------------------------------------------- ------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
PREFERRED STOCKS--CONTINUED
- -------------------------------------------------------------------------
PRODUCER MANUFACTURING--1.7%
-------------------------------------------------------
168,200 Westinghouse Electric Corp., PEPS, Series C, $1.30 $ 2,350,931
------------------------------------------------------- ------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $6,233,439) 5,788,456
------------------------------------------------------- ------------
------------
CORPORATE BONDS--13.9%
- -------------------------------------------------------------------------
CONSUMER DURABLES--1.1%
-------------------------------------------------------
$ 1,000,000 Chrysler Auburn Hills, Deb., 12.00%, 5/1/2020 1,504,770
------------------------------------------------------- ------------
CONSUMER NON-DURABLES--0.9%
-------------------------------------------------------
1,281,000 Philip Morris Cos., Inc., Deb., 6.00%, 7/15/2001 1,244,620
------------------------------------------------------- ------------
EDUCATION--0.8%
-------------------------------------------------------
1,000,000 Harvard University, Deb., 8.125%, 4/15/2007 1,126,680

------------------------------------------------------- ------------
ENERGY MINERALS--1.5%
-------------------------------------------------------
1,000,000 Exxon Capital Corp., Deb., 7.875%, 4/15/1996 1,009,460
-------------------------------------------------------
1,000,000 Occidental Petroleum Corp., Sr. Note, 11.75%, 3/15/2011 1,070,350
------------------------------------------------------- ------------
Total 2,079,810
------------------------------------------------------- ------------
FINANCE--5.8%
-------------------------------------------------------
1,000,000 American General Corp., S.F. Deb., 9.625%, 2/1/2018 1,099,910
-------------------------------------------------------
1,250,000 CNA Financial Corp., Deb., 7.25%, 11/15/2023 1,187,300
-------------------------------------------------------
1,300,000 Equitable Cos., Inc., Sr. Note, 9.00%, 12/15/2004 1,488,526
-------------------------------------------------------
1,000,000 Ford Motor Credit Co., Note, 6.85%, 8/15/2000 1,021,140
-------------------------------------------------------
1,000,000 Lehman Brothers Holdings, Inc., Note, 5.04%, 12/15/1996 986,090
-------------------------------------------------------
1,000,000 Norwest Financial, Inc., Note, 6.23%, 9/1/1998 1,006,490
-------------------------------------------------------
1,000,000 Santander Finance Issuance, Bank Guarantee, 7.875%,
4/15/2005 1,070,110
------------------------------------------------------- ------------
Total 7,859,566
------------------------------------------------------- ------------
HEALTH SERVICES--0.9%

-------------------------------------------------------
1,000,000 Columbia/HCA Healthcare Corp., Note, 9.00%, 12/15/2014 1,193,430
------------------------------------------------------- ------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
CORPORATE BONDS--CONTINUED
- -------------------------------------------------------------------------
PRODUCER MANUFACTURING--0.8%
-------------------------------------------------------
$ 1,000,000 General Electric Co., Deb., 7.875%, 5/1/1996 $ 1,009,700
------------------------------------------------------- ------------
RETAIL TRADE--0.8%
-------------------------------------------------------
1,000,000 Penney (J.C.) Co., Inc., Deb., 9.45%, 7/15/2002 1,125,790
------------------------------------------------------- ------------
SOVEREIGN GOVERNMENT--0.5%
-------------------------------------------------------
500,000 Kingdom of Sweden, Deb., 10.25%, 11/1/2015 652,210
------------------------------------------------------- ------------
UTILITIES--0.8%
-------------------------------------------------------
1,000,000 Michigan Bell Telephone Co., Deb., 7.85%, 1/15/2022 1,108,830
------------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $22,777,371) 18,905,406
------------------------------------------------------- ------------
------------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.7%

- -------------------------------------------------------------------------
1,000,000 Prudential Home Mortgage Security 1993-32, Class A-6,
7.50%, 10/25/2022 996,950
------------------------------------------------------- ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(IDENTIFIED COST $957,500) 996,950
------------------------------------------------------- ------------
------------
GOVERNMENT OBLIGATIONS--21.7 %
- -------------------------------------------------------------------------
GOVERNMENT AGENCIES SECURITIES--1.7%
-------------------------------------------------------
500,000 Federal Home Loan Bank System, Deb., 4.21%, 1/15/1998 472,460
-------------------------------------------------------
1,500,000 Federal Home Loan Mortgage Corp., Deb., 4.13%,
3/25/1996 1,488,105
-------------------------------------------------------
350,000 Federal National Mortgage Association, 5.86%, 6/1/1998 347,994
------------------------------------------------------- ------------
Total 2,308,559
------------------------------------------------------- ------------
MORTGAGE-BACKED SECURITIES--5.8%
-------------------------------------------------------
1,376,866 Federal Home Loan Mortgage Corp., Pool G50030, 8.50%,
8/1/1996 1,387,606
-------------------------------------------------------
183,621 Federal Home Loan Mortgage Corp., Pool M10771, 8.50%,
4/1/1996 185,053
-------------------------------------------------------

178,066 Federal Home Loan Mortgage Corp., Pool M10914, 8.50%,
5/1/1996 179,454
-------------------------------------------------------
190,312 Federal Home Loan Mortgage Corp., Pool M10975, 8.50%,
5/1/1996 191,796
-------------------------------------------------------
130,307 Federal Home Loan Mortgage Corp., Pool M11105, 8.50%,
6/1/1996 131,323
-------------------------------------------------------
100,063 Federal Home Loan Mortgage Corp., Pool M11145, 8.50%,
5/1/1996 100,843
-------------------------------------------------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
GOVERNMENT OBLIGATIONS--CONTINUED
- -------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES--CONTINUED
-------------------------------------------------------
$ 12,791 Federal Home Loan Mortgage Corp., Pool M11179, 8.50%,
6/1/1996 $ 12,891
-------------------------------------------------------
365,551 Federal Home Loan Mortgage Corp., Pool M11243, 8.50%,
7/1/1996 368,403
-------------------------------------------------------
63,857 Federal Home Loan Mortgage Corp., Pool M11318, 8.50%,
7/1/1996 64,355
-------------------------------------------------------
7,278 Federal Home Loan Mortgage Corp., Pool M19004, 8.50%,
5/1/1997 7,335
-------------------------------------------------------
137,079 Federal Home Loan Mortgage Corp., Pool M90043, 8.50%,
4/1/1996 138,148
-------------------------------------------------------
108,107 Federal Home Loan Mortgage Corp., Pool M90048, 8.50%,
5/1/1996 108,950
-------------------------------------------------------

647,233 Federal National Mortgage Association, Pool 124009,
9.00%, 11/1/2021 676,352
-------------------------------------------------------
902,775 Federal National Mortgage Association, Pool 50659,
7.00%, 11/1/2007 895,427
-------------------------------------------------------
37,065 Federal National Mortgage Association, Pool 50796,
7.50%, 9/1/2023 37,470
-------------------------------------------------------
433,038 Government National Mortgage Association, Pool 299165,
9.50%, 12/15/2020 462,532
-------------------------------------------------------
936,003 Government National Mortgage Association, Pool 369457,
8.00%, 9/15/2024 963,484
-------------------------------------------------------
996,068 Government National Mortgage Association, Pool 385622,
6.50%, 5/15/2024 968,348
-------------------------------------------------------
861,076 Government National Mortgage Association, Pool 392923,
9.50%, 2/15/2025 919,724
------------------------------------------------------- ------------
Total 7,799,494
------------------------------------------------------- ------------
TREASURY SECURITIES--14.2%
-------------------------------------------------------
4,000,000 United States Treasury Bond, 11.625%, 11/15/2004 5,534,080
-------------------------------------------------------
3,540,000 United States Treasury Bond, 7.25%, 5/15/2016 3,882,884
-------------------------------------------------------

6,460,000 United States Treasury Bond, 8.875%, 2/15/2019 8,349,550
-------------------------------------------------------
1,070,000 United States Treasury Bond, 9.375%, 2/15/2006 1,337,532
------------------------------------------------------- ------------
Total 19,104,046
------------------------------------------------------- ------------
TOTAL GOVERNMENT OBLIGATIONS (IDENTIFIED COST
$21,385,708) 29,212,099
------------------------------------------------------- ------------
------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
(b)REPURCHASE AGREEMENT--16.3%
- -------------------------------------------------------------------------
$21,975,000 J.P. Morgan Securities, Inc., 5.90%, dated 10/31/1995,
due 11/1/1995 (at amortized cost) $ 21,975,000
------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $116,344,898)(c) $132,947,604
------------------------------------------------------- ------------
------------
</TABLE>

(a) Non-income producing security.

(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.

(c) The cost of investments for federal tax purposes amounts to $116,344,898.
The net unrealized appreciation of investments on a federal tax basis
amounts to $16,602,706 which is comprised of $17,394,200 appreciation and
$791,494 depreciation at October 31, 1995.

Note: The categories of investments are shown as a percentage of net assets
($134,668,796) at October 31, 1995.

The following acronyms are used throughout this portfolio:

ADR --American Depository Receipt
PEPS --Participating Equity Preferred Stock
STRYPES --Structured Yield Product Exchangeable for Stock
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------
Investments in repurchase agreement $ 21,975,000
- ----------------------------------------------------
Investments in securities 110,972,604
- ---------------------------------------------------- ------------
Total investments in securities, at value
(identified and tax cost $116,344,898) $132,947,604
- ------------------------------------------------------------------
Income receivable 1,089,338
- ------------------------------------------------------------------
Receivable for investments sold 1,770,297
- ------------------------------------------------------------------
Receivable for shares sold 112,674
- ------------------------------------------------------------------
Prepaid expenses 7,392
- ------------------------------------------------------------------ ------------
Total assets 135,927,305
- ------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------
Payable for investments purchased $ 979,154
- ----------------------------------------------------
Payable for shares redeemed 109,042
- ----------------------------------------------------
Payable to Bank 113,014
- ----------------------------------------------------

Accrued expenses 57,299
- ---------------------------------------------------- ------------
Total liabilities 1,258,509
- ------------------------------------------------------------------ ------------
NET ASSETS for 7,327,906 shares outstanding $134,668,796
- ------------------------------------------------------------------ ------------
------------
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------
Paid in capital $106,005,023
- ------------------------------------------------------------------
Net unrealized appreciation of investments 16,602,706
- ------------------------------------------------------------------
Accumulated net realized gain on investments 9,527,064
- ------------------------------------------------------------------
Undistributed net investment income 2,534,003
- ------------------------------------------------------------------ ------------
Total Net Assets $134,668,796
- ------------------------------------------------------------------ ------------
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ------------------------------------------------------------------
$134,668,796 / 7,327,906 shares outstanding $ 18.38
- ------------------------------------------------------------------ ------------
------------
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------
Dividends $ 1,580,455
- -------------------------------------------------------------------
Interest 4,530,147
- ------------------------------------------------------------------- -----------
Total income 6,110,602
- -------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------
Investment advisory fee $ 979,379
- -------------------------------------------------------
Administrative personnel and services fee 125,000
- -------------------------------------------------------
Custodian fees 45,676
- -------------------------------------------------------
Transfer and dividend disbursing agent fees and
expenses 99,653
- -------------------------------------------------------
Directors'/Trustees' fees 9,666
- -------------------------------------------------------
Auditing fees 16,445
- -------------------------------------------------------
Legal fees 12,377
- -------------------------------------------------------
Portfolio accounting fees 41,369
- -------------------------------------------------------

Shareholder services fee 320,244
- -------------------------------------------------------
Share registration costs 23,736
- -------------------------------------------------------
Printing and postage 56,085
- -------------------------------------------------------
Insurance premiums 3,986
- -------------------------------------------------------
Taxes 19,719
- -------------------------------------------------------
Miscellaneous 4,364
- ------------------------------------------------------- ----------
Total expenses 1,757,699
- -------------------------------------------------------
Waivers--
- --------------------------------------------
Waiver of investment advisory fee $(215,192)
- --------------------------------------------
Waiver of shareholder services fee (178,558)
- -------------------------------------------- ---------
Total waivers (393,750)
- ------------------------------------------------------- ----------
Net expenses 1,363,949
- ------------------------------------------------------------------- -----------
Net investment income 4,746,653
- ------------------------------------------------------------------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -------------------------------------------------------------------
Net realized gain on investments 9,527,257

- -------------------------------------------------------------------
Net change in unrealized appreciation of investments 7,067,004
- ------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 16,594,261
- ------------------------------------------------------------------- -----------
Change in net assets resulting from operations $21,340,914
- ------------------------------------------------------------------- -----------
-----------
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------
OPERATIONS--
- ----------------------------------------------------
Net investment income $ 4,746,653 $ 3,988,625
- ----------------------------------------------------
Net realized gain (loss) on investments ($9,527,257
and $1,349,184, respectively, as computed for
federal tax purposes) 9,527,257 1,349,184
- ----------------------------------------------------
Net change in unrealized appreciation (depreciation) 7,067,004 (5,913,664)
- ---------------------------------------------------- ------------ ------------
Change in net assets resulting from operations 21,340,914 (575,855)
- ---------------------------------------------------- ------------ ------------
NET EQUALIZATION (DEBITS) CREDITS-- (98,118) 26,597
- ---------------------------------------------------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS--
- ----------------------------------------------------
Distributions from net investment income:
- ----------------------------------------------------
Class A Shares (4,670,579) (4,128,685)
- ----------------------------------------------------

Class C Shares -- (13,593)
- ----------------------------------------------------
Distributions from net realized gains (700,551) --
- ---------------------------------------------------- ------------ ------------
Change in net assets resulting from
distributions to shareholders (5,371,130) (4,142,278)
- ---------------------------------------------------- ------------ ------------
SHARE TRANSACTIONS--
- ----------------------------------------------------
Proceeds from sale of shares 28,842,050 38,530,728
- ----------------------------------------------------
Net asset value of shares issued to shareholders in
payment of distributions declared 3,810,223 2,833,419
- ----------------------------------------------------
Cost of shares redeemed (39,237,007) (35,969,675)
- ---------------------------------------------------- ------------ ------------
Change in net assets resulting from share
transactions (6,584,734) 5,394,472
- ---------------------------------------------------- ------------ ------------
Change in net assets 9,286,932 702,936
- ----------------------------------------------------
NET ASSETS:
- ----------------------------------------------------
Beginning of period 125,381,864 124,678,928
- ---------------------------------------------------- ------------ ------------
End of period (including undistributed net
investment income of $2,534,003 and $2,556,047,
respectively) $134,668,796 $125,381,864
- ---------------------------------------------------- ------------ ------------

------------ ------------
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------

(1) ORGANIZATION

Stock and Bond Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a diversified, open-end,
no-load, management investment company. Previously, the Fund provided two
classes of shares ("Class A Shares" and "Class C Shares"). On May 19, 1994, the
Board of Directors ( the "Directors") authorized the combination of Class C
Shares with Class A Shares, the termination of all contracts entered into by the
Fund on behalf of Class C shares, and the amendment of the Articles of
Incorporation to reclassify Class A Shares and Class C Shares as unclassified
shares. In connection with these actions, as of August 31, 1994, the "Class C
Shares" were no longer offered.
(2) SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently

followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

INVESTMENT VALUATIONS--Short-term securities with remaining maturities of
sixty days or less at the time of purchase may be valued at amortized cost,
which approximates fair market value. All other securities are valued at
prices provided by an independent pricing service.

REPURCHASE AGREEMENTS--It is the policy of the Fund to require the custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Fund to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to
be paid under the repurchase agreement transaction.

The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Directors (the
"Directors"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral securities.

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as

amended (the "Code").

STOCK AND BOND FUND, INC.

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

FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.

EQUALIZATION--The Fund follows the accounting practice known as
equalization, in which a portion of the proceeds from sales and costs of
redemptions of fund shares equivalent, on a per share basis, equal to the
amount of undistributed net investment income on the date of the
transaction, is credited or charged to undistributed net investment income.
As a result, undistributed net investment income per share is unaffected by
sales or redemptions of fund shares.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK

At October 31, 1995, there were 2,000,000,000 shares of $0.001 par value capital
stock authorized : Transactions in capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED
1995 OCTOBER 31, 1994
------------------------ -------------------------
CLASS A SHARES SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold 1,746,255 28,842,050 2,338,641 $ 37,487,658
- ----------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 233,136 3,810,223 174,458 2,825,356
- ----------------------------------------------------
Shares redeemed (2,369,562) (39,237,007) (2,181,393) (34,829,553)
- ---------------------------------------------------- ---------- ------------ ----------- ------------
Net change resulting from Class A share
transactions (390,171) (6,584,734) 331,706 $ 5,483,461
- ---------------------------------------------------- ---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED
1995 OCTOBER 31, 1994
------------------------ -------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold -- -- 64,355 $ 1,043,070
- ----------------------------------------------------
Shares issued to shareholders in payment of
distributions declared -- -- 497 8,063
- ----------------------------------------------------
Shares redeemed -- -- (70,562) (1,140,122)
- ---------------------------------------------------- ---------- ------------ ----------- ------------
Net change resulting from Class C share
transactions -- -- (5,710) ($ 88,989)
- ---------------------------------------------------- ---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
Net change resulting from fund share transactions (390,171) (6,584,734) 325,996 $ 5,394,472
- ---------------------------------------------------- ---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE--Federated Management, the Fund's investment
adviser, (the "Adviser"), receives for its services an annual investment
advisory fee equal to (a) a maximum of .55 of 1% of the average daily net
assets of the Fund, and (b) 4.5% of the gross income of the Fund, excluding
capital gains or losses.

The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/ or reimbursement at any time at its
sole discretion.

ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. This fee is based on the level of average aggregate
daily net assets of all funds advised by subsidiaries of Federated Investors
for the period. The administrative fee received during the period of the
Administrative Services Agreement shall be at least $125,000 per portfolio
and $30,000 per each additional class of shares.

SHAREHOLDER SERVICES FEE--Under the terms of a Shareholder Services
Agreement with Federated Shareholder Services ("FSS"), the Fund will pay FSS
up to .25 of 1% of daily average net assets of the Fund for the period. This
fee is to obtain certain services for shareholders and to maintain
shareholder accounts. FSS may voluntarily choose to waive a portion of its
fee. FSS can modify or terminate this voluntary waiver at any time at its

sole discretion.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated
Services Company ("Fserv") serves as transfer and dividend disbursing agent
for the Fund. The fee is based on the size, type, and number of accounts and
transactions made by shareholders.

STOCK AND BOND FUND, INC.

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

PORTFOLIO ACCOUNTING FEES--FServ maintains the Fund's accounting records for
which it receives a fee. The fee is based on the level of the Fund's average
daily net assets for the period, plus out-of-pocket expenses.

GENERAL--Certain of the Officers and Trustees/Directors of the
Trust/Corporation are Officers and Directors or Trustees of the above
companies.

(5) INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended October 31, 1995, were as follows:

<TABLE>
<S> <C>
PURCHASES $ 77,996,628
- ------------------------------------------------------------------ ------------
SALES $105,043,890
- ------------------------------------------------------------------ ------------
</TABLE>

INDEPENDENT AUDITORS' REPORT

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

To the Board of Directors and Shareholders of
FEDERATED STOCK AND BOND FUND, INC.:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Stock and Bond Fund, Inc. (formerly,
Stock and Bond Fund, Inc.) as of October 31, 1995, the related statement of
operations for the year then ended, and the statement of changes in net assets
for the years October 31, 1995 and 1994, and the financial highlights (see
pages 2 and 15) for the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of October 31, 1995, by correspondence with the
custodian and broker. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
Stock and Bond Fund, Inc. as of October 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
December 15, 1995
(Revised June 27, 1996)

ADDRESSES

Federated Stock and Bond Fund, Inc.
Class A Shares Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Investment Adviser
Federated Management Federated Investors Tower

Pittsburgh, Pennsylvania 15222-3779

Custodian
State Street Bank and Trust Company P.O. Box
8600
Boston, Massachusetts 02266-8600

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

Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401

FEDERATED STOCK AND BOND FUND, INC.
(formerly, Stock and Bond Fund, Inc.)
Class A Shares

PROSPECTUS

An Open-End, Diversified Management
Investment Company

August , 1996
----

Cusip 313911109
8012905A-A (8/96)

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

PROSPECTUS
The shares of Federated Stock and Bond Fund, Inc. (the "Fund") represent
interests in an open-end, diversified management investment company (a
mutual fund).
The investment objectives of the Fund are to provide relative safety of
capital with the possibility of long-term growth of capital and income.
Consideration is also given to current income. The Fund pursues these
objectives by investing in a professionally managed, diversified portfolio
of common and preferred stocks and other equity securities, bonds, notes,
and short-term obligations.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF
ANY BANK, 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 the Class A Shares, Class B Shares, and Class C Shares of the
Fund. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class A
Shares, Class B Shares, and Class C Shares dated August , 1996, with the
---

Securities and Exchange Commission. 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 to make inquiries about the Fund, contact your
financial institution. The Statement of Additional Information, material
incorporated by reference into this document, and other information
regarding the Fund is maintained electronically with the SEC at Internet
Web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated August , 1996
----

TABLE OFCONTENTS

Table of Contents will be generated when document is complete.

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
SUMMARY OF FUND EXPENSES TABLE
CLASS A SHARES

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
SUMMARY OF FUND EXPENSES TABLE
CLASS B SHARES

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
SUMMARY OF FUND EXPENSES TABLE
CLASS C SHARES

STOCK AND BOND FUND, INC.

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 31.

* Computed on an annualized basis.

(a) Reflects operations for the ten month period ended October 31, 1990.

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

(See Notes which are an integral part of the Financial Statements)

GENERAL INFORMATION

The Fund was incorporated under the laws of the State of Maryland on
October 31, 1934. At a meeting of the Board of Directors ("Directors") held
on February 26, 1996, the Directors approved an amendment to the Articles
of Incorporation to change the name of Stock and Bond Fund, Inc. to
Federated Stock and Bond Fund, Inc. The Articles of Incorporation permit
the Fund to offer separate series of shares representing interests in
separate portfolios of securities. The shares in any one portfolio may be
offered in separate classes. With respect to this Fund, as of the date of
this prospectus, the Directors have established three classes of shares,
known as Class A Shares, Class B Shares, and Class C Shares (individually
and collectively as the context requires, "Shares").
Shares of the Fund are designed for institutions, pension plans, and
individuals as a convenient means of accumulating an interest in a
professionally managed, diversified portfolio of common and preferred
stocks and other equity securities, bonds, notes and short-term
obligations. The minimum initial investment for Class A Shares is $500. The
minimum initial investment for Class B Shares and Class C Shares is $1,500.
However, the minimum initial investment for a retirement account in any
class is $50. Subsequent investments in any class must be in amounts of at
least $100, except for retirement plans which must be in amounts of at
least $50.
The Fund's current net asset value and offering price may be found in the
mutual funds section of local newspapers under "Federated" and the
appropriate class designation listing.

INVESTMENT INFORMATION

INVESTMENT OBJECTIVES
The investment objectives of the Fund are to provide relative safety of
capital with the possibility of long-term growth of capital and income.
Consideration is also given to current income. The Fund pursues these
investment objectives by investing in a professionally managed, diversified
portfolio of common and preferred stocks and other equity securities,
bonds, notes, and short-term obligations. While there is no assurance that
the Fund will achieve its investment objectives, it endeavors to do so by
following the investment policies described in this prospectus. The
investment objectives cannot be changed without approval of shareholders.
INVESTMENT POLICIES
As a matter of investment policy, which may be changed without shareholder
approval, under normal circumstances, the Fund will invest at least 65% of
its total assets in stocks and bonds. Unless indicated otherwise, the
investment policies and limitations described below and the in the
Statement of Additional Information may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material
change becomes effective.
ACCEPTABLE INVESTMENTS. The Fund invests primarily in a diversified
portfolio of common stocks, bonds, convertible securities, and preferred
stocks which provide characteristics of stability and relative safety,
foreign securities, American Depository Receipts ("ADRs"), notes, bonds,
and discount notes issued or guaranteed by the U.S. government, its
agencies or instrumentalities, municipal securities, mortgage- and asset-
backed securities, and zero coupon convertible securities. The Fund
anticipates that it will experience characteristics of stability and
relative safety by investing primarily in securities of larger, well-

established companies which have a history of lower volatility in earnings
and price fluctuations. The bonds in which the Fund invests will generally
be rated investment grade, including repurchase agreements collateralized
by investment grade securities. Investment grade securities are generally
described as securities that are rated in one of the top four rating
categories by a nationally recognized statistical rating organization
("NRSRO"), such as Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Group ("S&P"), or Fitch Investor's Service, Inc. ("Fitch")
or that are unrated but determined by the Fund's investment adviser to be
of comparable quality. A description of the ratings categories is contained
in the Appendix to this prospectus. Permitted investments include:
. domestic and foreign common stocks;
. convertible securities;
. domestic or foreign debt obligations;
. obligations of the United States;
. notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
. taxable municipal debt obligations (as a matter of operating
policy, the lowest rated municipal debt obligations in which the
Fund will invest will be rated BBB or better by an NRSRO, or which
are of comparable quality in the judgment of the Fund's investment
adviser);
. asset-backed securities;
. commercial paper that matures in 270 days or less and is rated A-
1 or A-2 by S&P, P-1 or P-2 by Moody's, or F-1 or F-2 by Fitch;
. time and savings deposits (including certificates of deposit) in
commercial or savings banks whose accounts are insured by the Bank
Insurance Fund ("BIF"), or in institutions whose accounts are insured
by the Savings Association Insurance Fund ("SAIF"), including

certificates of deposit issued by, and other time deposits in,
foreign branches of BIF-insured banks, which, if negotiable, mature
in six months or less, or if not negotiable, either mature in
ninety days or less, or may be withdrawn upon notice not exceeding
ninety days;
. bankers' acceptances issued by a BIF-insured bank, or issued by
the bank's Edge Act subsidiary and guaranteed by the bank, with
remaining maturities of nine months or less. The total acceptances of
any bank held by the Fund cannot exceed 0.25% of such bank's total
deposits according to the bank's last published statement of
condition preceding the date of acceptance;
. preferred stock and other equity-related securities which
generally have bond-like attributes, including zero coupon and/or
convertible securities;
. other securities which are deemed by the Fund's investment
adviser to be consistent with the Fund's investment objectives; and
. repurchase agreements collateralized by acceptable investments.
DOMESTIC AND FOREIGN COMMON STOCKS. The common stocks in which the
Fund invests are selected by the Fund's investment adviser ("Adviser")
on the basis of traditional research techniques, including assessment
of earnings and dividend growth, prospects and the risk and volatility
of the company's industry. However, other factors, such as product
position, market share, or profitability, will also be considered by
the Fund's Adviser.
CONVERTIBLE SECURITIES. Convertible securities are fixed income
securities which may be exchanged or converted into a predetermined
number of the issuer's underlying common stock at the option of the
holder during a specified time period. Convertible securities may take
the form of convertible preferred stock, convertible bonds or

debentures, units consisting of "usable" bonds and warrants, or a
combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allows convertible securities to be employed for different
investment objectives. In selecting convertible securities for the
Fund, the Fund's Adviser evaluates the investment potential of the
underlying security for capital appreciation. The convertible
securities in which the Fund invests will be rated "investment grade"
or of comparable quality at the time of purchase. See "Acceptable
Investments" for a discussion of investment grade bonds.
DEBT OBLIGATIONS AND INVESTMENT RISKS. Although the debt obligations in
which the Fund will invest primarily are rated as investment grade by an
NRSRO, or of comparable quality in the judgment of the Fund's investment
adviser, the Fund may invest in debt obligations that are not investment
grade bonds, but are rated below BBB by an NRSRO (i.e., "junk bonds").
However, under normal circumstances, the Fund will not invest 35% or more
of its net assets in non-investment grade securities. Debt obligations that
are not determined to be investment grade are high-yield, high-risk bonds,
typically subject to greater market fluctuations and greater risk of loss
of income and principal due to an issuer's default. To a greater extent
than investment grade bonds, lower rated bonds tend to reflect short-term
corporate, economic, and market developments, as well as investor
perceptions of the issuer's credit quality. In addition, lower rated bonds
may be more difficult to dispose of or to value than higher rated, lower-
yielding bonds. Bonds rated "BBB" by S&P or Fitch, or "Baa" by Moody's,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than higher rated bonds.

The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.
REDUCING RISKS OF LOWER-RATED SECURITIES. The Fund's Adviser believes that
the risks of investing in lower-rated securities can be reduced. The
professional portfolio management techniques used by the Fund to attempt to
reduce these risks include:
CREDIT RESEARCH. The Fund's Adviser will perform its own credit
analysis in addition to using nationally recognized statistical rating
organizations and other resources, including discussions with the
issuer's management, the judgment of other investment analysts, and its own
informed judgment. The Fund's Adviser's credit analysis will
consider the issuer's financial soundness, its responsiveness to changes
in interest rates and business conditions, and its anticipated cash
flow, interest or dividend coverage and earnings. In evaluating an issuer,
the Fund's Adviser places special emphasis on the estimated current
value of the issuer's assets rather than historical costs.
DIVERSIFICATION. The Fund invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.
ECONOMIC ANALYSIS. The Fund's Adviser will analyze current developments
and trends in the economy and in the financial markets. When investing in
lower-rated securities, timing and selection are critical, and analysis of
the business cycle can be important.
U.S. GOVERNMENT OBLIGATIONS. The U.S. government obligations in which the
Fund invests are either issued or guaranteed by the U.S. government, its
agencies, or instrumentalities. These securities include, but are not
limited to:
o direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and

o notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as Federal Home Loan Banks, Federal
National Mortgage Association, Government National Mortgage
Corporation, Farm Credit System (including the National Bank for
Cooperatives, Farm Credit Banks, and Banks for Cooperatives),
Tennessee Valley Authority, Export-Import Bank of the United
States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
Some obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government, such as Government National Mortgage Association
participation certificates, are backed by the full faith and credit of the
U.S. Treasury. No assurances can be given that the U.S. government will
provide financial support to other agencies or instrumentalities, since it
is not obligated to do so. These agencies and instrumentalities are
supported by:
o the issuer's right to borrow an amount limited to a specific line
of credit from the U.S. Treasury;
o discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or
o the credit of the agency or instrumentality.
MUNICIPAL SECURITIES. Municipal securities are generally issued to finance
public works such as airports, bridges, highways, housing, hospitals, mass
transportation projects, schools, streets, and water and sewer works. They
are also issued to repay outstanding obligations, to raise funds for
general operating expenses, and to make loans to other public institutions
and facilities. Municipal securities include industrial development bonds
issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct and equip facilities for privately or publicly

owned corporations. The availability of this financing encourages these
corporations to locate within the sponsoring communities and thereby
increases local employment.
ASSET-BACKED SECURITIES. Asset-backed securities are created by the
grouping of certain governmental, government related and private loans,
receivables and other lender assets, including vehicle installment purchase
obligations and credit card receivables, into pools. Interests in these
pools are sold as individual securities and are not backed or guaranteed by
the U.S. government and may not be secured. Payments from the asset pools
may be divided into several different tranches of debt securities, with
some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of
interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and
accrued interest at maturity or upon specified call dates. Different
tranches of securities will bear different interest rates, which may be
fixed or floating.
Because the loans held in the asset pool often may be prepaid without
penalty or premium, asset-backed securities are generally subject to higher
prepayment risks than most other types of debt instruments. Prepayment
risks on mortgage securities tend to increase during periods of declining
mortgage interest rates, because many borrowers refinance their mortgages
to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the
yield on the original mortgage security. As a consequence, mortgage
securities may be a less effective means of "locking in" interest rates
than other types of debt securities having the same stated maturity and may
also have less potential for capital appreciation. For certain types of

asset pools, such as collateralized mortgage obligations, prepayments may
be allocated to one tranch of securities ahead of other tranches, in order
to reduce the risk of prepayment for the other tranches.
Prepayments may result in a capital loss to the Fund to the extent that the
prepaid mortgage securities were purchased at a market premium over their
stated amount. Conversely, the prepayment of mortgage securities purchased
at a market discount from their stated principal amount will accelerate the
recognition of interest income by the Fund, which would be taxed as
ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also 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.
NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may invest in non-
mortgage related asset-backed securities including, but not limited to,
interests in pools of receivables, such as credit card and accounts
receivable and motor vehicle and other installment purchase obligations and
leases. These securities may be in the form of pass-through instruments or
asset-backed obligations. The securities, all of which are issued by non-
governmental entities and carry no direct or indirect government guarantee,
are structurally similar to collateralized mortgage obligations and
mortgage pass-through securities, which are described below.
MORTGAGE RELATED ASSET-BACKED SECURITIES. The Fund may also invest in
various mortgage related asset-backed securities. These types of
investments may include adjustable rate mortgage securities, collateralized
mortgage obligations, real estate mortgage investment conduits, or other

securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities
are issued or guaranteed by government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through
mortgage securities representing interests in adjustable rather than fixed
interest rate mortgages. The ARMS in which the Fund invests are issued by
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage
Corporation ("FHLMC") and are actively traded. The underlying mortgages
which collateralize ARMS issued by GNMA are fully guaranteed by the Federal
Housing Administration ("FHA") or Veterans Administration ("VA"), while
those collateralizing ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting size
and maturity constraints.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are bonds issued by
single-purpose, stand-alone finance subsidiaries or trusts of financial
institutions, government agencies, investment bankers, or companies related
to the construction industry. CMOs purchased by the Fund may be:
o collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government;
o collateralized by pools of mortgages in which payment of principal
and interest is guaranteed by the issuer and such guarantee is
collateralized by U.S. government securities; or
o securities in which the proceeds of the issuance are invested in
mortgage securities and payment of the principal and interest is
supported by the credit of an agency or instrumentality of the
U.S. government.

All CMOs purchased by the Fund are investment grade, as rated by a NRSRO or
are of comparable quality as determined by the Adviser.
REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS"). REMICs are offerings
of multiple class real estate mortgage-backed securities which qualify and
elect treatment as such under provisions of the Internal Revenue Code (the
"Code"). Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages.
Once REMIC status is elected and obtained, the entity is not subject to
federal income taxation. Instead, income is passed through the entity and
is taxed to the person or persons who hold interests in the REMIC. A REMIC
interest must consist of one or more classes of "regular interests," some
of which may offer adjustable rates of interest, and a single class of
"residual interests." To qualify as a REMIC, substantially all the assets
of the entity must be in assets directly or indirectly secured principally
by real property.
RESETS OF INTEREST. The interest rates paid on the ARMS, CMOs, and REMICs
in which the Fund invests generally are readjusted at intervals of one year
or less to an increment over some predetermined interest rate index. There
are two main categories of indices: those based on U.S. Treasury securities
and those derived from a calculated measure, such as a cost of funds index
or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime
rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury Note rate, closely mirror changes
in market interest rate levels. Others tend to lag changes in market rate
levels and tend to be somewhat less volatile.

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

BANK INSTRUMENTS. The Fund only invests in bank instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs") and Eurodollar Time Deposits ("ETDs"). Due to the fact that
institutions issuing such instruments are not necessarily subject to the
same regulatory requirements that apply to domestic banks, such as the
reserve requirements, loan limitations, examination, accounting, auditing,
recordkeeping, and the public availability of information, these
investments may present additional risks to investors.
ZERO COUPON CONVERTIBLE SECURITIES. Zero coupon convertible securities are
debt securities which are issued at a discount to their face amount and do
not entitle the holder to any periodic payments of interest prior to
maturity. Rather, interest earned on zero coupon convertible securities
accretes at a stated yield until the security reaches its face amount at
maturity. Zero coupon convertible securities are convertible into a
specific number of shares of the issuer's common stock. In addition, zero
coupon convertible securities usually have put features that provide the
holder with the opportunity to sell the bonds back to the issuer at a
stated price before maturity. Generally, the prices of zero coupon
convertible securities may be more sensitive to market interest rate
fluctuations than conventional convertible securities.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a regulated
investment company and avoid liability of federal income taxes, the Fund
will be required to distribute income accrued with respect to zero coupon
convertible securities which it owns, and may have to sell portfolio

securities (perhaps at disadvantageous times) in order to generate cash to
satisfy these distribution requirements.
RESTRICTED AND ILLIQUID SECURITIES. The Fund intends to invest in
restricted securities. Restricted securities are any securities in which
the Fund may otherwise invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. However, the Fund will limit investments in illiquid
securities, including certain restricted securities determined by the
Directors to be illiquid, non-negotiable time deposits, unlisted options,
and repurchase agreements providing for settlement in more than seven days
after notice, to 15% of its net assets.
The Fund may invest in commercial paper issued in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
Section 4(2) commercial paper is restricted as to disposition under the
federal securities laws, and is generally sold to institutional investors,
such as the Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale
by the purchaser must be in an exempt transaction. Section 4(2) commercial
paper is normally resold to other institutional investors like the Fund
through or with the assistance of the issuer or investment dealers who make
a market in Section 4(2) commercial paper, thus providing liquidity. The
Fund believes that Section 4(2) commercial paper, and possibly certain
other restricted securities which meet the criteria for liquidity
established by the Directors, are quite liquid. The Fund intends,
therefore, to treat the restricted securities which meet the criteria for
liquidity established by the Directors, including Section 4(2) commercial
paper, as determined by the Adviser, as liquid and not subject to the
investment limitations applicable to illiquid securities.

FOREIGN SECURITIES AND INVESTMENT RISKS. The Fund may invest in ADRs and
foreign securities.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investments in domestic securities. These considerations include the
possibility of expropriation, the unavailability of financial information
or the difficulty of interpreting financial information prepared under
foreign accounting standards, less liquidity and more volatility in foreign
securities markets, the impact of political, social, or diplomatic
developments, and the difficulty of assessing economic trends in foreign
countries. It may also be more difficult to enforce contractual obligations
abroad than would be the case in the United States because of differences
in the legal systems. Transaction costs in foreign securities may be
higher. The Adviser will consider these and other factors before investing
in foreign securities and will not make such investments unless, in its
opinion, such investments will meet the Fund's standards and objectives.
With respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income securities of
foreign governmental units located within an individual foreign nation and
to purchase or sell various currencies on either a spot or forward basis in
connection with these investments. This would enable the Fund to
concentrate its investments in the securities of a foreign government which
would have the effect of magnifying the investment risks disclosed above.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest
in the securities of other investment companies, but it will not own more
than 3% of the total outstanding voting stock of any investment company,
invest more than 5% of its total assets in any one investment company, or
invest more than 10% of its total assets in investment companies in
general. The Fund will only invest in other investment companies that are

money market funds having an investment objective and policies similar to
its own and primarily for the purpose of investing short-term cash which
has not yet been invested in other portfolio instruments. In addition to
the advisory and other expenses the Fund bears directly in connection with
its own operations, as a shareholder of another investment company the Fund
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. The Adviser will waive its investment advisory fee on
assets invested in securities of open-end investment companies.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in cash and
cash items during times of unusual market conditions for defensive purposes
and to maintain liquidity.
REPURCHASE AGREEMENTS. Repurchase agreements are arrangements in which
banks, broker/dealers, and other recognized financial institutions sell
U.S. government securities or other securities of deposit to the Fund and
agree at the time of sale to repurchase them at a mutually agreed upon time
and price. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued or delayed delivery basis. These transactions
are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time. The seller's failure to complete the
transaction may cause the Fund to miss a price or yield considered to be
advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may
vary from the purchase prices. Accordingly, the Fund may pay more/less than
the market value of the securities on the settlement date.

The Fund may dispose of a commitment prior to settlement if the Adviser
deems it appropriate to do so. In addition, the Fund may enter in
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 Fund may realize short-term profits
or losses upon the sale of such commitments.
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Fund may lend portfolio securities on a short-term or long-term basis
up to one-third of the value of its total assets to broker/dealers, banks,
or other institutional borrowers of securities. The Fund will only enter
into loan arrangements with broker/dealers, banks, or other institutions
which the Adviser has determined are creditworthy under guidelines
established by the Directors and will receive collateral in the form of
cash or U.S. government securities equal to at least 100% of the value of
the securities loaned.
There is the risk that when lending portfolio securities, the securities
may not be available to the Fund on a timely basis and the Fund may,
therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file
for bankruptcy or become insolvent, disposition of the securities may be
delayed pending court action.
PUT AND CALL OPTIONS. The Fund may purchase put options on financial
futures contracts and put options on portfolio securities. Financial
futures may include index futures. These options will be used as a hedge to
attempt to protect securities which the Fund holds against decreases in
value. For the immediate future, the Fund will enter into futures contracts
directly only when it desires to exercise a financial futures put option in
its portfolio rather than either closing out the option or allowing it to

expire. The Fund will only purchase puts on financial futures contracts
which are traded on a nationally recognized exchange.
The Fund will generally purchase over-the-counter put options on portfolio
securities in negotiated transactions with the writers of the options since
options on the portfolio securities held by the Fund are typically not
traded on an exchange. The Fund purchases options only from investment
dealers and other financial associations (such as commercial banks or
savings and loan institutions) deemed creditworthy by the Adviser.
In general, over-the-counter put options differ from exchange traded put
options in the following respects. Over-the-counter put options are two
party contracts with price and terms negotiated between buyer and seller,
and such options are endorsed and/or guaranteed by third parties (such as a
New York Stock Exchange member). Additionally, over-the-counter strike
prices are adjusted to reflect dividend payments, initial strike prices are
generally set at market, and option premiums (which are all time premiums)
are amortized on a straight line basis over the life of the option. In
contrast, exchange traded options are third-party contracts with
standardized strike prices and expiration dates and are purchased from the
Clearing Corporation. Strike prices are not adjusted for dividends, and
options are marked to market, thereby obviating the need to amortize the
time premium. Exchange traded options have a continuous liquid market while
over-the-counter options do not.
The Fund may also write call options on all or any portion of its portfolio
in an effort to generate income for the Fund. The Fund will write call
options on securities either held in its portfolio or which it has the
right to obtain without payment of further consideration or for which it
has segregated cash in the amount of any additional consideration. The call
options which the Fund writes and sells must be listed on a recognized
options exchange. Although the Fund reserves the right to write covered

call options on its entire portfolio, it will not write such options on
more than 25% of its total assets unless a higher limit is authorized by
the Directors.
The Fund may attempt to hedge the portfolio by entering into financial
futures contracts and to write calls on financial futures contracts.
RISKS. When the Fund writes a call option, the Fund risks not
participating in any rise in the value of the underlying security. In
addition, when the Fund purchases puts on financial futures contracts
to protect against declines in prices of portfolio securities, there is a
risk that the prices of the securities subject to the futures contracts
may not correlate perfectly with the prices of the securities in the
Fund's portfolio of investments. This may cause the futures contract and
its corresponding put to react differently than the portfolio
securities to market changes. In addition, the Adviser could be incorrect
in its expectations about the direction or extent of market factors such
as interest rate movements. In such an event, the Fund may lose the
purchase price of the put option. Finally, it is not certain that a
secondary market for options will exist at all times. Although the
Adviser will consider liquidity before entering into option transactions,
there is no assurance that a liquid secondary market on an exchange will
exist for any particular option or at any particular time. The Fund's
ability to establish and close out option positions depends on this
secondary market.
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 Fund will only use derivative contracts for
the purposes disclosed in the applicable prospectus sections above. To the
extent that the Fund invests in securities that could be characterized as
derivatives, such as asset-backed securities and mortgage-backed
securities, including ARMS, CMOs, and REMICs, it will only do so in a
manner consistent with its investment objectives, policies and limitations.
INVESTMENT LIMITATIONS
The following investment limitations cannot be changed without shareholder
approval. The Fund will not:
o borrow money directly or through reverse repurchase
agreements (arrangements in which the Fund sells a portfolio
instrument for at least a percentage of its cash value with an
agreement to buy it back on a set date) except, under certain
circumstances, the Fund may borrow up to one-third of the value of
its net assets;
. invest more than 5% of its total assets in securities of one
issuer (except U.S. government securities); invest in more than
10% of the voting securities of one issuer; or invest in more than
10% of any class of securities of one issuer.

NET ASSET VALUE

The Fund's net asset value per Share fluctuates. The net asset value for
Shares is determined by adding the interest of each class of Shares in the
market value of all securities and other assets of the Fund, subtracting
the interest of each class of Shares in the liabilities of the Fund and
those attributable to each class of Shares, and dividing the remainder by
the total number of each class of Shares outstanding. The net asset value
for each class of Shares may differ due to the variance in daily income
realized by each class. Such variance will reflect only accrued net income
to which the shareholders of a particular class are entitled.
The net asset value is determined as of the close of trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange, Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value
of the Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase shares are received; and (iii) the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
INVESTING IN THE FUND

The Fund offers investors three classes of Shares that carry sales charges
and contingent deferred sales charges in different forms and amounts and
which bear different levels of expenses.
CLASS A SHARES
An investor who purchases Class A Shares pays a maximum sales charge of
5.50% at the time of purchase. As a result, Class A Shares are not subject
to any charges when they are redeemed (except for special programs offered
under "Purchases with Proceeds From Redemptions of Unaffiliated Investment
Companies.") Certain purchases of Class A Shares qualify for reduced sales

charges. See "Reducing the Sales Charge- Class A Shares." Class A Shares
have no conversion feature.
CLASS B SHARES
Class B Shares are sold without an initial sales charge, but are subject to
a contingent deferred sales charge of up to 5.50% if redeemed within six
full years following purchase. Class B Shares also bear a higher 12b-1 fee
than Class A Shares. Class B Shares will automatically convert into Class A
Shares, based on relative net asset value, on or around the fifteenth of
the month eight full years after the purchase date. Class B Shares provide
an investor the benefit of putting all of the investor's dollars to work
from the time the investment is made, but (until conversion) will have a
higher expense ratio and pay lower dividends than Class A Shares due to the
higher 12b-1 fee.
CLASS C SHARES
Class C Shares are sold without an initial sales charge, but are subject to
a 1.00% contingent deferred sales charge on assets redeemed within the
first 12 months following purchase. Class C Shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but will have a higher expense ratio and pay lower
dividends than Class A Shares due to the higher 12b-1 fee. Class C Shares
have no conversion feature.
HOW TO PURCHASE SHARES

Shares of the Fund are sold on days on which the New York Stock Exchange is
open. Shares of the Fund may be purchased, as described below, either
through a financial institution (such as a bank or broker/dealer which has
a sales agreement with the distributor) or by wire or by check directly to
the Fund, with a minimum initial investment of $500 for Class A Shares and
$1,500 for Class B Shares and Class C Shares. Additional investments can be

made for as little as $100. The minimum initial and subsequent investment
for retirement plans is only $50. (Financial institutions may impose
different minimum investment requirements on their customers).
In connection with any sale, Federated Securities Corp. may, from time to
time, offer certain items of nominal value to any shareholder or investor.
The Fund reserves the right to reject any purchase request. An account must
be established at a financial institution or by completing, signing, and
returning the new account form available from the Fund before Shares can be
purchased.
INVESTING IN CLASS A SHARES
Class A Shares are sold at their net asset value next determined after an
order is received, plus a sales charge as follows:
SALES CHARGE AS SALES CHARGE
AS DEALER CONCESSION AS
A PERCENTAGE OF A PERCENTAGE OF
A PERCENTAGE OF
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE NET AMOUNT
INVESTED PUBLIC OFFERING PRICE
Less than $50,000 5.50%
5.82% 5.00%
$50,000 but less than $100,0004.50% 4.71% 4.00%
$100,000 but less than $250,0003.75% 3.90% 3.25%
$250,000 but less than $500,0002.50% 2.56% 2.25%
$500,000 but less than $1 million 2.00% 2.04% 1.80%
$1 million or greater 0.00% 0.00% 0.25%*
*See sub-section entitled
"Dealer Concession."
No sales charge is imposed for Class A Shares purchased through financial
intermediaries that do not receive a reallowance of the sales charge.

However, investors who purchase Class A Shares through a trust department,
investment adviser, or other financial intermediary may be charged a
service fee or other fee by the financial intermediary. Additionally, no
sales charge is imposed on shareholders designated as Liberty Life Members
or on Class A Shares purchased through "wrap accounts" or similar programs,
under which clients pay a fee for services.
DEALER CONCESSION. For sales of Class A Shares, a dealer will normally
receive up to 90% of the applicable sales charge. Any portion of the sales
charge which is not paid to a dealer will be retained by the distributor.
However, the distributor may offer to pay dealers up to 100% of the sales
charge retained by it. Such payments may take the form of cash or
promotional incentives, such as reimbursement of certain expenses of
qualified employees and their spouses to attend informational meetings
about the Fund or other special events at recreational-type facilities, or
items of material value. In some instances, these incentives will be made
available only to dealers whose employees have sold or may sell a
significant amount of Shares. On purchases of $1 million or more, the
investor pays no sales charge; however, the distributor will make twelve
monthly payments to the dealer totaling 0.25% of the public offering price
over the first year following the purchase. Such payments are based on the
original purchase price of Shares outstanding at each month end.
The sales charge for Shares sold other than through registered
broker/dealers will be retained by Federated Securities Corp. Federated
Securities Corp. may pay fees to banks out of the sales charge in exchange
for sales and/or administrative services performed on behalf of the bank's
customers in connection with the initiation of customer accounts and
purchases of Shares.
REDUCING OR ELIMINATING THE SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of Class A
Shares through:
o quantity discounts and accumulated purchases;
o concurrent purchases;
o signing a 13-month letter of intent;
o using the reinvestment privilege; or
o purchases with proceeds from redemptions of unaffiliated investment
companies.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES. As shown in the table above,
larger purchases reduce the sales charge paid. The Fund will combine
purchases of Class A Shares made on the same day by the investor, the
investor's spouse, and the investor's children under age 21 when it
calculates the sales charge. In addition, the sales charge, if applicable,
is reduced or eliminated for purchases made at one time by a trustee or
fiduciary for a single trust estate or a single fiduciary account.
If an additional purchase of Class A Shares is made, the Fund will consider
the previous purchases still invested in the Fund. For example, if a
shareholder already owns Class A Shares having a current value at the
public offering price of $90,000 and he purchases $10,000 more at the
current public offering price, the sales charge on the additional purchase
according to the schedule now in effect would be 3.75%, not 4.50%.
To receive the sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at
the time the purchase is made that Class A Shares are already owned or that
purchases are being combined. The Fund will reduce the sales charge after
it confirms the purchases.
CONCURRENT PURCHASES. For purposes of qualifying for a sales charge
reduction, a shareholder has the privilege of combining concurrent
purchases of Class A Shares of two or more funds for which affiliates of

Federated Investors serve as investment adviser or principal underwriter
(the "Federated Funds"), the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $80,000 in one
of the Class A Shares in the Federated Funds with a sales charge, and
$20,000 in the Class A Shares of this Fund, the sales charge would be
reduced.
To receive this sales charge reduction, Federated Securities Corp. must be
notified by the shareholder in writing or by his financial institution at
the time the concurrent purchases are made. The Fund will reduce the sales
charge after it confirms the purchases.
LETTER OF INTENT. If a shareholder intends to purchase at least $50,000 of
Class A Shares of Federated Funds (excluding money market funds) over the
next 13 months, the sales charge may be reduced by signing a letter of
intent to that effect. This letter of intent includes a provision for a
sales charge adjustment depending on the amount actually purchased within
the 13-month period and a provision for the custodian to hold up to 5.50%
of the total amount intended to be purchased in escrow (in Shares) until
such purchase is completed.
The Shares held in escrow in the shareholder's account will be released
upon fulfillment of the letter of intent or the end of the 13-month period,
whichever comes first. If the amount specified in the letter of intent is
not purchased, an appropriate number of escrowed Shares may be redeemed in
order to realize the difference in the sales charge.
While this letter of intent will not obligate the shareholder to purchase
Shares, each purchase during the period will be at the sales charge
applicable to the total amount intended to be purchased. At the time a
letter of intent is established, current balances in accounts in any Class
A Shares of any Federated Funds, excluding money market accounts, will be

aggregated to provide a purchase credit towards fulfillment of the letter
of intent. Prior trade prices will not be adjusted.
REINVESTMENT PRIVILEGE. If Class A Shares in the Fund have been redeemed,
the shareholder has the privilege, within 120 days, to reinvest the
redemption proceeds at the next-determined net asset value without any
sales charge. Federated Securities Corp. must be notified by the
shareholder in writing or by his financial institution of the reinvestment
in order to eliminate a sales charge. If the shareholder redeems his Class
A Shares in the Fund, there may be tax consequences.
PURCHASES WITH PROCEEDS FROM REDEMPTIONS OF UNAFFILIATED INVESTMENT
COMPANIES. Investors may purchase Class A Shares at net asset value,
without a sales charge, with the proceeds from the redemption of shares of
an unaffiliated investment company that were purchased or redeemed with a
sales charge or commission and were not distributed by Federated Securities
Corp. The purchase must be made within 60 days of the redemption, and
Federated Securities Corp. must be notified by the investor in writing, or
by his financial institution, at the time the purchase is made. From time
to time, the Fund may offer dealers a payment of .50% for Shares purchased
under this program. If Shares are purchased in this manner, redemptions of
these Shares will be subject to a contingent deferred sales charge for one
year from the date of purchase. Shareholders will be notified prior to the
implementation of any special offering as described above.
INVESTING IN CLASS B SHARES
Class B Shares are sold at their net asset value next determined after an
order is received. While Class B Shares are sold without an initial sales
charge, under certain circumstances described under "Contingent Deferred
Sales Charge-Class B Shares," a contingent deferred sales charge may be
applied by the distributor at the time Class B Shares are redeemed.

CONVERSION OF CLASS B SHARES. Class B Shares will automatically convert
into Class A Shares on or around the fifteenth of the month eight full
years after the purchase date, except as noted below, and will no longer be
subject to a fee under the Fund's Distribution Plan (see "Distribution of
Shares"). Such conversion will be on the basis of the relative net asset
values per Share, without the imposition of any sales charge, fee or other
charge. Class B Shares acquired by exchange from Class B Shares of another
Federated Fund will convert into Class A Shares based on the time of the
initial purchase. For purposes of conversion to Class A Shares, Shares
purchased through the reinvestment of dividends and distributions paid on
Class B Shares will be considered to be held in a separate sub-account.
Each time any Class B Shares in the shareholder's account (other than those
in the sub-account) convert to Class A Shares, an equal pro rata portion of
the Class B Shares in the sub-account will also convert to Class A Shares.
The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute taxable events
for federal tax purposes. There can be no assurance that such ruling or
opinion will be available, and the conversion of Class B Shares to Class A
Shares will not occur if such ruling or opinion is not available. In such
event, Class B Shares would continue to be subject to higher expenses than
Class A Shares for an indefinite period.
Orders for $250,000 or more of Class B Shares will automatically be
invested in Class A Shares.
INVESTING IN CLASS C SHARES
Class C Shares are sold at net asset value next determined after an order
is received. A contingent deferred sales charge of 1.00% will be charged on
assets redeemed within the first full 12 months following purchase. For a

complete description of this charge see "Contingent Deferred Sales Charge-
Class C Shares."
PURCHASING SHARES THROUGH A FINANCIAL INSTITUTION
An investor may call his financial institution (such as a bank or an
investment dealer) to place an order to purchase Shares. Orders placed
through a financial institution are considered received when the Fund is
notified of the purchase order or when payment is converted into federal
funds. Purchase orders through a registered broker/dealer must be received
by the broker before 4:00 p.m. (Eastern time) and must be transmitted by
the broker to the Fund before 5:00 p.m. (Eastern time) in order for Shares
to be purchased at that day's price. Purchase orders through other
financial institutions must be received by the financial institution and
transmitted to the Fund before 4:00 p.m. (Eastern time) in order for Shares
to be purchased at that day's price. It is the financial institution's
responsibility to transmit orders promptly. Financial institutions may
charge additional fees for their services.
The financial institution which maintains investor accounts in Class B
Shares or Class C Shares with the Fund must do so on a fully disclosed
basis unless it accounts for share ownership periods used in calculating
the contingent deferred sales charge (see "Contingent Deferred Sales
Charge"). In addition, advance payments made to financial institutions may
be subject to reclaim by the distributor for accounts transferred to
financial institutions which do not maintain investor accounts on a fully
disclosed basis and do not account for share ownership periods.

PURCHASING SHARES BY WIRE
Once an account has been established, Shares may be purchased by Federal
Reserve wire by calling the Fund. All information needed will be taken over

the telephone, and the order is considered received when State Street Bank
receives payment by wire. Federal funds should be wired as follows:
Federated Shareholder Services Company, c/o State Street Bank and Trust
Company, Boston, MA; Attention: EDGEWIRE; For Credit to: (Fund Name) (Fund
Class); Fund Number (this number can be found on the account statement or
by contacting the Fund); Group Number or 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 client service representative at the
telephone number listed on your account statement.
PURCHASING SHARES BY CHECK
Once an account has been established, Shares may be purchased by mailing a
check made payable to the name of the Fund (designate class of Shares and
account number) to: Federated Shareholder Services Company, P.O. Box 8600,
Boston, MA 02266-8600. Orders by mail are considered received when payment
by check is converted into federal funds (normally the business day after
the check is received).
SPECIAL PURCHASE FEATURES
SYSTEMATIC INVESTMENT PROGRAM. Once a Fund account has been opened,
shareholders may add to their investment on a regular basis in a minimum
amount of $100. Under this program, funds may be automatically withdrawn
periodically from the shareholder's checking account at an Automated
Clearing House ("ACH") member and invested in the Fund at the net asset
value next determined after an order is received by the Fund, plus the
sales charge, if applicable. Shareholders should contact their financial
institution or the Fund to participate in this program.
RETIREMENT PLANS. Fund Shares can be purchased as an investment for
retirement plans or for IRA accounts. For further details contact the Fund
and consult a tax adviser.

EXCHANGE PRIVILEGE

CLASS A SHARES. Class A shareholders may exchange all or some of their
Shares for Class A Shares of other Federated Funds at net asset value.
Neither the Fund nor any of the Federated Funds imposes any additional fees
on exchanges. Shareholders in certain other Federated Funds may exchange
all or some of their shares for Class A Shares.
CLASS B SHARES. Class B shareholders may exchange all or some of their
Shares for Class B Shares of other Federated Funds. (Not all Federated
Funds currently offer Class B Shares. Contact your financial institution
regarding the availability of Class B Shares of the Federated Funds).
Exchanges are made at net asset value without being assessed a contingent
deferred sales charge on the exchanged Shares. To the extent that a
shareholder exchanges Shares for Class B Shares in other Federated Funds,
the time for which the exchanged-for Shares are to be held will be added to
the time for which exchanged-from Shares were held for purposes of
satisfying the applicable holding period.
CLASS C SHARES. Class C shareholders may exchange all or some of their
Shares for Class C Shares of other Federated Funds at net asset value
without a contingent deferred sales charge. (Not all Federated Funds
currently offer Class C Shares. Contact your financial institution
regarding the availability of Class C Shares of the Federated Funds). To
the extent that a shareholder exchanges Shares for Class C Shares of other
Federated Funds, the time for which the exchanged-for Shares are to be held
will be added to the time for which exchanged-from Shares were held for
purposes of satisfying the applicable holding period. For more information,
see "Contingent Deferred Sales Charge."

Please contact your financial institution directly or Federated Securities
Corp. at 1-800-341-7400 for information on and prospectuses for the
Federated Funds into which your Shares may be exchanged free of charge.
Shareholders of Class A Shares who have been designated as Liberty Life
Members are exempt from sales charges on future purchases in and exchanges
between the Class A Shares of any Federated Funds, as long as they maintain
a $500 balance in one of the Federated Funds.
REQUIREMENTS FOR EXCHANGE. Shareholders using this privilege must exchange
Shares having a net asset value equal to the minimum investment
requirements of the fund into which the exchange is being made. Before the
exchange, the shareholder must receive a prospectus of the fund for which
the exchange is being made.
This privilege is available to shareholders resident in any state in which
the Shares being acquired may be sold. Upon receipt of proper instructions
and required supporting documents, Shares submitted for exchange are
redeemed and proceeds invested in the same class of shares of the other
fund. The exchange privilege may be modified or terminated at any time.
Shareholders will be notified of the modification or termination of the
exchange privilege.
TAX CONSEQUENCES. An exercise of the exchange privilege is treated as a
sale for federal income tax purposes. Depending upon the circumstances, a
capital gain or loss may be realized.
MAKING AN EXCHANGE. Instructions for exchanging may be given in writing or
by telephone. Written instructions may require a signature guarantee.
Shareholders of the Fund may have difficulty in making exchanges by
telephone through brokers and other financial institutions during times of
drastic economic or market changes. If a shareholder cannot contact his
broker or financial institution by telephone, it is recommended that an
exchange request be made in writing and sent by overnight mail to:

Federated Shareholder Services Company, 1099 Hingham Street, Rockland,
Massachusetts 02370-3317.
TELEPHONE INSTRUCTIONS. Telephone instructions made by the investor may be
carried out only if a telephone authorization form completed by the
investor is on file with the Fund. If the instructions are given by a
broker, a telephone authorization form completed by the broker must be on
file with the Fund. If reasonable procedures are not followed by the Fund,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions. Shares may be exchanged between two funds by telephone only
if the two funds have identical shareholder registrations.
Any Shares held in certificate form cannot be exchanged by telephone but
must be forwarded to Federated Shareholder Services Company, P.O. Box 8600,
Boston, Massachusetts 02266-8600 and deposited to the shareholder's account
before being exchanged. Telephone exchange instructions are recorded and
will be binding upon the shareholder. Such instructions will be processed
as of 4:00 p.m. (Eastern time) and must be received by the Fund before that
time for Shares to be exchanged the same day. Shareholders exchanging into
a Fund will begin receiving dividends the following business day. This
privilege may be modified or terminated at any time.
HOW TO REDEEM SHARES

REDEEMING SHARES THROUGH YOUR FINANCIAL INSTITUTION. Shares of the Fund
may be redeemed by calling your financial institution to request the
redemption. Shares will be redeemed at the net asset value, less any
applicable contingent deferred sales charge, next determined after the Fund
receives the redemption request from the financial institution. Redemption
requests through a registered broker/dealer must be received by the broker
before 4:00 p.m. (Eastern time) and must be transmitted by the broker to
the Fund before 5:00 p.m. (Eastern time) in order for Shares to be redeemed
at that day's net asset value. Redemption requests through other financial
institutions (such as banks) must be received by the financial institution
and transmitted to the Fund before 4:00 p.m. (Eastern time) in order for
Shares to be redeemed at that day's net asset value. The financial
institution is responsible for promptly submitting redemption requests and
providing proper written redemption instructions. Customary fees and
commissions may be charged by the financial institution for this service.
REDEEMING SHARES BY TELEPHONE. Shares may be redeemed in any amount by
calling the Fund provided the Fund has a properly completed authorization
form. These forms can be obtained from Federated Securities Corp. Proceeds
will be mailed in the form of a check, to the shareholder's address of
record or wire-transfered to the shareholder's account at a domestic
commercial bank that is a member of the Federal Reserve System. The minimum
amount for a wire transfer is $1,000. Proceeds from redeemed Shares
purchased by check or through ACH will not be wired until that method of
payment has cleared. 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 client service representative at the
telephone number listed on your account statement.

Telephone instructions will be recorded. If reasonable procedures are not
followed by the Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions. In the event of drastic economic or
market changes, a shareholder may experience difficulty in redeeming by
telephone. If this occurs, "Redeeming Shares By Mail" should be considered.
If at any time the Fund shall determine it necessary to terminate or modify
the telephone redemption privilege, shareholders would be promptly
notified.
REDEEMING SHARES BY MAIL. Shares may be redeemed in any amount by mailing
a written request to: Federated Shareholder Services Company, Fund Name,
Fund Class, P.O. Box 8600, Boston, MA 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: Fund Name and the Share Class name; the
account name as registered with the Fund; 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 Act of 1934. The Fund does not accept signatures guaranteed by a
notary public.
SPECIAL REDEMPTION FEATURES
SYSTEMATIC WITHDRAWAL PROGRAM. Shareholders who desire to receive payments
of a predetermined amount not less than $100 may take advantage of the
Systematic Withdrawal Program. Under this program, Shares are redeemed to
provide for periodic withdrawal payments in an amount directed by the
shareholder.
Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Shares, and
the fluctuation of the net asset value of Shares redeemed under this
program, redemptions may reduce, and eventually deplete, the shareholder's
investment in the Fund. For this reason, payments under this program should
not be considered as yield or income on the shareholder's investment in the
Fund. To be eligible to participate in this program, a shareholder must
have an account value of at least $10,000. A shareholder may apply for
participation in this program through his financial institution. Due to the
fact that Class A Shares are sold with a sales charge, it is not advisable
for shareholders to continue to purchase Class A Shares while participating
in this program. A contingent deferred sales charge may be imposed on Class
B Shares and Class C Shares.
CONTINGENT DEFERRED SALES CHARGE
Shareholders may be subject to a contingent deferred sales charge upon
redemption of their Shares under the following circumstances:
o CLASS A SHARES
Class A Shares purchased under a periodic special offering with the
proceeds of a redemption of Shares of an unaffiliated investment company
purchased or redeemed with a sales charge and not distributed by Federated
Securities Corp. may be charged a contingent deferred sales charge of .50%

for redemptions made within one full year of purchase. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed Shares at the time of purchase or the net asset
value of the redeemed Shares at the time of redemption.
o CLASS B SHARES
Shareholders redeeming Class B Shares from their Fund accounts within six
full years of the purchase date of those Shares will be charged a
contingent deferred sales charge by the Fund's distributor. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed Shares at the time of redemption in accordance
with the following schedule:

YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
First......................................................................
........... 5.50%
Second.....................................................................
....... 4.75%
Third......................................................................
......... 4.00%
Fourth.....................................................................
........ 3.00%
Fifth......................................................................
........... 2.00%
Sixth......................................................................
.......... 1.00%
Seventh and thereafter.................................................
0.00%

oCLASS C SHARES
Shareholders redeeming Class C Shares from their Fund accounts within one
full year of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor of 1.00%. Any applicable
contingent deferred sales charge will be imposed on the lesser of the net
asset value of the redeemed Shares at the time of purchase or the net asset
value of the redeemed Shares at the time of redemption.
o CLASS A SHARES, CLASS B SHARES , AND CLASS C SHARES
The contingent deferred sales charge will be deducted from the redemption
proceeds otherwise payable to the shareholder and will be retained by the
distributor. The contingent deferred sales charge will not be imposed with
respect to: (1) Shares acquired through the reinvestment of dividends or
distributions of long-term capital gains; and (2) Shares held for more than
six full years from the date of purchase with respect to Class B Shares and
one full year from the date of purchase with respect to Class C Shares and
applicable Class A Shares. Redemptions will be processed in a manner
intended to maximize the amount of redemption which will not be subject to
a contingent deferred sales charge. In computing the amount of the
applicable contingent deferred sales charge, redemptions are deemed to have
occurred in the following order: (1) Shares acquired through the
reinvestment of dividends and long-term capital gains; (2) Shares held for
more than six full years from the date of purchase with respect to Class B
Shares and one full year from the date of purchase with respect to Class C
Shares and applicable Class A Shares; (3) Shares held for fewer than six
years with respect to Class B Shares and for less than one full year from
the date of purchase with respect to Class C Shares and applicable Class A
Shares on a first-in, first-out basis. A contingent deferred sales charge
is not assessed in connection with an exchange of Fund Shares for Shares of

other Federated Funds in the same class (see "Exchange Privilege"). Any
contingent deferred sales charge imposed at the time the exchanged-for
Shares are redeemed is calculated as if the shareholder had held the Shares
from the date on which he became a shareholder of the exchanged-from
Shares. Moreover, the contingent deferred sales charge will be eliminated
with respect to certain redemptions (see "Elimination of Contingent
Deferred Sales Charge").
ELIMINATION OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge will be eliminated with respect to the
following redemptions: (1) redemptions following the death or disability,
as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, of a
shareholder; (2) redemptions representing minimum required distributions
from an Individual Retirement Account or other retirement plan to a
shareholder who has attained the age of 70-1/2; and (3) involuntary
redemptions by the Fund of Shares in shareholder accounts that do not
comply with the minimum balance requirements. No contingent deferred sales
charge will be imposed on redemptions of Shares held by Directors,
employees and sales representatives of the Fund, the distributor, or
affiliates of the Fund or distributor, and their immediate family members;
employees of any financial institution that sells Shares of the Fund
pursuant to a sales agreement with the distributor; and spouses and
children under the age of 21 of the aforementioned persons. Finally, no
contingent deferred sales charge will be imposed on the redemption of
Shares originally purchased through a bank trust department, an investment
adviser registered under the Investment Advisers Act of 1940 or retirement
plans where the third party administrator has entered into certain
arrangements with Federated Securities Corp. or its affiliates, or any
other financial institution, to the extent that no payments were advanced
for purchases made through such entities. The Directors reserve the right

to discontinue elimination of the contingent deferred sales charge.
Shareholders will be notified of such elimination. Any Shares purchased
prior to the termination of such waiver would have the contingent deferred
sales charge eliminated as provided in the Fund's prospectus at the time of
the purchase of the Shares. If a shareholder making a redemption qualifies
for an elimination of the contingent deferred sales charge, the shareholder
must notify Federated Securities Corp. or the transfer agent in writing
that he is entitled to such elimination.
ACCOUNT AND SHARE INFORMATION

O CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Fund, Federated Shareholder Services Company
maintains a share account for each shareholder. Share certificates are not
issued unless requested in writing to Federated Shareholder Services
Company.
Detailed confirmations of each purchase and redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid
during that quarter.
O DIVIDENDS
Dividends are declared and paid quarterly to all shareholders invested in
the Fund on the record date. Dividends and distributions are automatically
reinvested in additional Shares of the Fund on payment dates at the ex-
dividend date net asset value without a sales charge, unless shareholders
request cash payments on the new account form or by writing to the transfer
agent. All shareholders on the record date are entitled to the dividend. If
Shares are redeemed or exchanged prior to the record date or purchased
after the record date, those Shares are not entitled to that quarter's
dividend.

. CAPITAL GAINS
Net long-term capital gains realized by the Fund, if any, will be
distributed at least once every twelve months.
O ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Fund
may redeem Shares in any account, except retirement plans, and pay the
proceeds to the shareholder if the account balance falls below the Class A
Shares required minimum value of $500 or the required minimum value of
$1,500 for Class B Shares and Class C Shares. This requirement does not
apply, however, if the balance falls below the required minimum value
because of changes in the net asset value of the respective Share class.
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.
FUND INFORMATION

MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The Fund is managed by a Board of Directors. The
Directors are responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the
shareholders. An Executive Committee of the Board of Directors handles the
Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Fund are made by Federated
Management, the Fund's investment adviser, subject to direction by the
Directors. The Adviser continually conducts investment research and
supervision for the Fund and is responsible for the purchase or sale of
portfolio instruments, for which it receives an annual fee from the Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory
fee equal to .55% of the Fund's average daily net assets plus 4.5%

of the Fund's annual gross income, excluding any capital gains or
losses. Gross income includes interest accrued, including discount
earned on U.S. Treasury bills and agency discount notes, interest
received or receivable on all interest-bearing obligations and
dividend income. Under the investment advisory contract which
provides for the voluntary waiver and reimbursement of expenses by
the Adviser, the Adviser may voluntarily choose to waive a portion
of its fee or reimburse the Fund for certain operating expenses. The
Adviser can terminate this voluntary reimbursement of expenses at
any time at its sole discretion. The Adviser has also undertaken to
reimburse the Fund for operating expenses in excess of limitations
established by certain states.
ADVISER'S BACKGROUND. Federated Management, a Delaware business
trust organized on April 11, 1989, 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 Management and other subsidiaries of Federated Investors
serve as investment advisers to a number of investment companies and
private accounts. Certain other subsidiaries also provide
administrative services to a number of investment companies. With
over $80 billion invested across more than 250 funds under
management and/or administration by its subsidiaries, as of December
31, 1995, Federated Investors is one of the largest mutual fund
investment managers in the United States. With more than 1,800
employees, Federated continues to be led by the management who

founded the company in 1955. Federated funds are presently at work
in and through 4,000 financial institutions nationwide. More than
100,000 investment professionals have selected Federated funds for
their clients.
Both the Fund and the Adviser have adopted strict codes of ethics
governing the conduct of all employees who manage the Fund and its
portfolio securities. These codes recognize that such persons owe a
fiduciary duty to the Fund's shareholders and must place the interests
of shareholders ahead of the employees' own interest. Among other
things, the codes: require preclearance and periodic reporting of
personal securities transactions; prohibit personal transactions in
securities being purchased or sold, or being considered for purchase
or sale by the Fund; prohibit purchasing securities in initial public
offerings; and prohibit taking profits on securities held for less
than sixty days. Violations of the codes are subject to review by the
Directors and could result in severe penalties.
PORTFOLIO MANAGERS' BACKGROUND. Christopher H. Wiles has been the
Fund's portfolio manager since May 1996 and is responsible for the
overall allocation of the assets between fixed and equity. Mr. Wiles
also manages the equity portion of the Fund. Mr. Wiles joined
Federated Investors in 1990 and has been a Vice President of the
Fund's investment adviser since 1992. Mr. Wiles served as Assistant
Vice President of the Fund's investment adviser in 1991. Mr. Wiles
is a Chartered Financial Analyst and received his M.B.A. in Finance
from Cleveland State University.
Joseph M. Balestrino has been the Fund's co-portfolio manager since
May 1996 and is responsible for managing the allocation of fixed
income assets (between investment grade and high yield). Mr.
Balestrino also manages the investment grade portion of the Fund.

Mr. Balestrino joined Federated Investors in 1986 and has been a
Vice President of the Fund's investment adviser since 1995. Mr.
Balestrino served as an Assistant Vice President of the investment
adviser from 1991 to 1995. Mr. Balestrino is a Chartered Financial
Analyst and received his Master's Degree in Urban and Regional
Planning from the University of Pittsburgh.
Mark E. Durbiano has been the Fund's sub-portfolio manager since May
1996 and is responsible for managing the high yield portion of the
Fund. Mr. Durbiano joined Federated Investors in 1982 and has been a
Senior Vice President of the Fund's investment adviser since January
1996. From 1988 through 1995, Mr. Durbiano was a Vice President of
the Fund's investment adviser. Mr. Durbiano is a Chartered Financial
Analyst and received his M.B.A. in Finance from the University of
Pittsburgh.
DISTRIBUTION OF SHARES
Federated Securities Corp. is the principal distributor for Shares of the
Fund. Federated Securities Corp. is located at Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. 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.
State securities laws may require certain financial institutions such as
depository institutions to register as dealers.
The distributor may offer to pay financial institutions an amount up to 1%
of the net asset value of Class C Shares purchased by their clients or
customers at the time of purchase. These payments will be made directly by
the distributor from its assets, and will not be made from assets of the
Fund. Financial institutions may elect to waive the initial payment

described above; such waiver will result in the waiver by the Fund of the
otherwise applicable contingent deferred sales charge.
The distributor will pay dealers an amount equal to 5.50% of the net asset
value of Class B Shares purchased by their clients or customers. These
payments will be made directly by the distributor from its assets, and will
not be made from the assets of the Fund. Dealers may voluntarily waive
receipt of all or any portion of these payments. The distributor may pay a
portion of the distribution fee discussed below to financial institutions
that waive all or any portion of the advance payments.
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES. Under a distribution plan
adopted in accordance with Investment Company Act Rule 12b-1 (the
"Distribution Plan"), Class A Shares, Class B Shares, and Class C Shares
may pay a fee to the distributor in an amount computed at an annual rate of
.25%, .75%, and .75%, respectively, of the average daily net assets of each
class of Shares to finance any activity which is principally intended to
result in the sale of Shares subject to the Distribution Plan. For Class C
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. With respect to Class B
Shares, because distribution fees to be paid by the Fund to the distributor
may not exceed an annual rate of .75% of each class of Shares' average
daily net assets, it will take the distributor a number of years to recoup
the expenses it has incurred for its distribution and distribution-related
services pursuant to the Plan. The Fund is not currently making payments
for Class A Shares under the Distribution Plan, nor does it anticipate
doing so in the immediate future.
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 Shares 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 .25% of the average daily net
asset value of Class A Shares, Class B Shares, and Class C Shares to obtain
certain personal services for shareholders and for the maintenance of
shareholder accounts ("Shareholder Services"). 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 such fees will be paid will be
determined from time to time by the Fund and Federated Shareholder
Services.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INSTITUTIONS. Federated Securities
Corp. will pay financial institutions, at the time of purchase of Class A
Shares, an amount equal to .50% of the net asset value of Class A Shares
purchased by their clients or customers under certain qualified retirement
plans as approved by Federated Securities Corp. (Such payments are subject
to a reclaim from the financial institution should the assets leave the
program within 12 months after purchase).
Furthermore, with respect to Class A Shares, Class B Shares, and Class C
Shares, in addition to payments made pursuant to the Distribution Plan and
Sharesholder Services Agreement, Federated Securities Corp. and Federated

Shareholder Services, from their own assets, may offer to pay to 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.
ADMINISTRATION OF THE FUND
ADMINISTRATIVE SERVICES. Federated Services Company, a subsidiary of
Federated Investors, provides administrative personnel and services
(including certain legal and financial reporting services) necessary to
operate the Fund. Federated Services Company provides these at an annual
rate which relates to the average aggregate daily net assets of all
Federated Funds as specified below:

MAXIMUM ADMINISTRATIVE FEE AVERAGE AGGREGATE DAILY NET
ASSETS
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750
million
The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may choose voluntarily to waive a portion of its
fee.

BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale of
portfolio instruments, the adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the adviser will generally
use those who are recognized dealers in specific portfolio instruments,
except when a better price and execution of the order can be obtained
elsewhere. In selecting among firms believed to meet these criteria, the
adviser may give consideration to those firms which have sold or are
selling shares of the Fund and other funds distributed by Federated
Securities Corp. The adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Directors.
EXPENSES OF THE FUND AND SHARES
Holders of Class A Shares, Class B Shares, and Class C Shares pay their
allocable portion of Fund and portfolio expenses.
The Fund expenses for which holders of Class A Shares, Class B Shares, and
Class C Shares pay their allocable portion include, but are not limited to:
the cost of organizing the Fund and continuing its existence; registering
the Fund with federal and state securities authorities; Directors' fees;
auditors' fees; the cost of meetings of Directors; legal fees of the Fund;
association membership dues; and such non-recurring and extraordinary items
as may arise from time to time.
The portfolio expenses for which holders of Class A Shares, Class B Shares,
and Class C Shares pay their allocable portion include, but are not limited
to: registering the portfolio and Shares of the portfolio; investment
advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such non-recurring and extraordinary items as
may arise from time to time.
At present, the only expenses which are allocated specifically to Class A
Shares, Class B Shares, and Class C Shares as classes are expenses under

the Fund's Distribution Plan and fees for Shareholder Services. However,
the Directors reserve the right to allocate certain other expenses to
holders of Class A Shares, Class B Shares, and Class C Shares as it deems
appropriate ("Class Expenses"). In any case, Class Expenses would be
limited to: transfer agent fees as identified by the transfer agent as
attributable to holders of Class A Shares, Class B Shares, and Class C
Shares; printing and postage expenses related to preparing and distributing
materials such as shareholder reports, prospectuses and proxies to current
shareholders; registration fees paid to the Securities and Exchange
Commission and registration fees paid to state securities commissions;
expenses related to administrative personnel and services as required to
support holders of Class A Shares, Class B Shares, and Class C Shares;
legal fees relating solely to Class A Shares, Class B Shares, and Class C
Shares and Directors' fees incurred as a result of issues relating solely
to Class A Shares, Class B Shares, and Class C Shares.
SHAREHOLDER INFORMATION

VOTING RIGHTS
Each share of the Fund gives the shareholder one vote in Director elections
and other matters submitted to shareholders for vote. All Shares of each
portfolio in the Fund have equal voting rights, except that in matters
affecting only a particular portfolio or class, only shares of that
portfolio or class are entitled to vote.
As a Maryland corporation, the Fund is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Fund's operation and for the election of Directors under
certain circumstances.
Directors may be removed by Directors or by shareholders at a special
meeting. A special meeting of shareholders shall be called by the Directors

upon the request of shareholders owning at least 25% of the Fund's
outstanding Shares of all series entitled to vote.
TAX INFORMATION

FEDERAL INCOME TAX
The Fund will pay no federal income tax because it expects to meet
requirements of the Internal Revenue Code of 1986, as amended (the "Code")
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies.
Unless otherwise exempt, shareholders are required to pay federal income
tax on any dividends and other distributions, including capital gains
distributions, received. This applies whether dividends and distributions
are received in cash or as additional Shares. Distributions representing
long-term capital gains, if any, will be taxable to shareholders as long-
term capital gains no matter how long the shareholders have held their
Shares. No federal income tax is due on any dividends earned in an IRA or
qualified retirement plan until distributed, so long as such IRA or
qualified retirement plan meets the applicable requirements of the Code.
STATE AND LOCAL TAXES
Shares are exempt from personal property taxes imposed by counties,
municipalities, and school districts in Pennsylvania.
Shareholders are urged to consult their own tax advisers regarding the
status of their accounts under state and local tax laws.

PERFORMANCE INFORMATION

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

Total return represents the change, over a specified period of time, in the
value of an investment in each class of Shares after reinvesting all income
and capital gains distributions. It is calculated by dividing that change
by the initial investment and is expressed as a percentage.
The yield of each class of Shares is calculated by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of Shares over a thirty-day period by the
maximum offering price per share of each class 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 each class
of Shares, and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
The performance information reflects the effect of non-recurring charges
such as the maximum sales charge or contingent deferred sales charge,
which, if excluded, would increase the total return and yield.
Total return and yield will be calculated separately for Class A Shares,
Class B Shares, and Class C Shares.
From time to time, advertisements for Class A Shares, Class B Shares, and
Class C Shares of the Fund may refer to ratings, rankings, and other
information in certain financial publications and/or compare the
performance of Class A Shares, Class B Shares, and Class C Shares to
certain indices.

APPENDIX

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

D-Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or 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
near future.
BAA-Bonds which are rated "Baa" are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and, in fact, have speculative characteristics as well.

BA-Bonds which are "Ba" are judged to have speculative elements; their
future cannot be considered well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA-Bonds which are "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C-Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATING DEFINITIONS
AAA-Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA-Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in
the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."

A-Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered 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 economicc conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
BB-Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B-Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC-Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC-Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C-Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D-Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the

obligor. "DDD" represents the highest potential for recovery on these
bonds, and "D" represents the lowest potential for recovery.

STOCK AND BOND FUND, INC.

FINANCIAL HIGHLIGHTS--CLASS C SHARES

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

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Reference is made to the Independent Auditors' Report on page 31.

* Computed on an annualized basis.

(a) Reflects operations for the period from November 1, 1993 to August 31, 1994
(date share class ceased operations).

(b) Reflects operations for the period from April 19, 1993 (Start of
performance) to October 31, 1993.

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

(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1995

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

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
ENERGY MINERALS--2.7%
-------------------------------------------------------
21,700 Chevron Corp. $ 1,014,475
-------------------------------------------------------
12,100 Exxon Corp. 924,137
-------------------------------------------------------
27,600 Occidental Petroleum Corp. 593,400
-------------------------------------------------------
15,200 Texaco, Inc. 1,035,500
------------------------------------------------------- ------------
Total 3,567,512
------------------------------------------------------- ------------
FINANCE--8.1%
-------------------------------------------------------
27,749 Allstate Corp. 1,019,776
-------------------------------------------------------
14,900 American Express Co. 605,313
-------------------------------------------------------
20,800 Bank of Boston Corp. 925,600
-------------------------------------------------------

-------------------------------------------------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
HEALTH TECHNOLOGY--CONTINUED
-------------------------------------------------------
16,000 Merck & Co., Inc. $ 920,000
------------------------------------------------------- ------------
Total 4,636,638
------------------------------------------------------- ------------
INDUSTRIAL SERVICES--0.8%
-------------------------------------------------------
26,600 Baker Hughes, Inc. 522,025
-------------------------------------------------------
13,000 (a) Western Atlas, Inc. 570,375
------------------------------------------------------- ------------
Total 1,092,400
------------------------------------------------------- ------------
NON-ENERGY MINERALS--1.5%
-------------------------------------------------------
16,400 Aluminum Co. of America 836,400
-------------------------------------------------------
19,200 Phelps Dodge Corp. 1,216,800
------------------------------------------------------- ------------

-------------------------------------------------------
24,100 American Stores Co. 719,988
-------------------------------------------------------
</TABLE>

STOCK AND BOND FUND, INC.

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

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
- --------------- ------------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
- -------------------------------------------------------------------------
RETAIL TRADE--CONTINUED
-------------------------------------------------------
29,900 Sears, Roebuck & Co. $ 1,016,600
------------------------------------------------------- ------------
Total 1,736,588
------------------------------------------------------- ------------
TECHNOLOGY SERVICES--1.1%
-------------------------------------------------------
5,000 (a) DST Systems, Inc. 105,000
-------------------------------------------------------
28,100 General Motors Corp., Class E 1,324,212
------------------------------------------------------- ------------
Total 1,429,212
------------------------------------------------------- ------------
TRANSPORTATION--0.4%
-------------------------------------------------------
8,100 Consolidated Rail Corp. 556,875
------------------------------------------------------- ------------
UTILITIES--3.2%
-------------------------------------------------------

------------------------------------------------------- ------------
Total 2,163,775
------------------------------------------------------- ------------
</TABLE>

STOCK AND BOND FUND, INC.

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

STOCK AND BOND FUND, INC.

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

STOCK AND BOND FUND, INC.

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

STOCK AND BOND FUND, INC.

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

(a) Non-income producing security.

Note: The categories of investments are shown as a percentage of net assets
($134,668,796) at October 31, 1995.

The following acronyms are used throughout this portfolio:

ADR --American Depository Receipt
PEPS --Participating Equity Preferred Stock
STRYPES --Structured Yield Product Exchangeable for Stock
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
- --------------------------------------------------------------------------------

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
- --------------------------------------------------------------------------------

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

------------ ------------
</TABLE>

(See Notes which are an integral part of the Financial Statements)

STOCK AND BOND FUND, INC.

NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
- --------------------------------------------------------------------------------

(1) ORGANIZATION

The following is a summary of significant accounting policies consistently

followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

amended (the "Code").

STOCK AND BOND FUND, INC.

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

OTHER--Investment transactions are accounted for on the trade date.
(3) CAPITAL STOCK

At October 31, 1995, there were 2,000,000,000 shares of $0.001 par value capital
stock authorized : Transactions in capital stock were as follows:

STOCK AND BOND FUND, INC.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, YEAR ENDED
1995 OCTOBER 31, 1994
------------------------ -------------------------
CLASS C SHARES SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold -- -- 64,355 $ 1,043,070
- ----------------------------------------------------
Shares issued to shareholders in payment of
distributions declared -- -- 497 8,063
- ----------------------------------------------------
Shares redeemed -- -- (70,562) (1,140,122)
- ---------------------------------------------------- ---------- ------------ ----------- ------------
N

et change resulting from Class C share
transactions -- -- (5,710) ($ 88,989)
- ---------------------------------------------------- ---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
Net change resulting from fund share transactions (390,171) (6,584,734) 325,996 $ 5,394,472
- ---------------------------------------------------- ---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>

(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

STOCK AND BOND FUND, INC.

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

GENERAL--Certain of the Officers and Trustees/Directors of the
Trust/Corporation are Officers and Directors or Trustees of the above
companies.

(5) INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended October 31, 1995, were as follows:

INDEPENDENT AUDITORS' REPORT

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

To the Board of Directors and Shareholders of
FEDERATED STOCK AND BOND FUND, INC.:

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
December 15, 1995
(REVISED JUNE 27, 1996)

ADDRESSES

Federated Stock and Bond Fund, Inc.
Class A Shares Federated Investors Tower

Class B Shares Pittsburgh, Pennsylvania 15222-3779
Federated Investors Tower
Class C Shares
Pittsburgh, Pennsylvania 15222-3779

Distributor
Federated Securities Corp. Federated Investors Tower

Pittsburgh, Pennsylvania 15222-3779

Investment Adviser
Federated Management Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Custodian
State Street Bank and Trust Company P.O. Box
8600
Boston, Massachusetts 02266-8600

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

Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222-5401

FEDERATED STOCK AND BOND FUND, INC.
(formerly, Stock and Bond Fund, Inc.)
F Shares

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

PROSPECTUS

An Open-End, Diversified Management
Investment Company

August , 1996
---

Cusip 313911109
8012905A-A (8/96)

FEDERATED STOCK AND BOND FUND, INC.
(FORMERLY, STOCK AND BOND FUND, INC.)
CLASS A SHARES
CLASS B SHARES

CLASS C SHARES
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information should be read with the
prospectus for Class A Shares, Class B Shares, and Class C Shares and
the stand-alone prospectus for Class A shares of Federated Stock and
Bond Fund, Inc. (the "Fund"), each dated August , 1996. This
---
Statement is not a prospectus itself. You may request a copy of a
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.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779

Statement dated August , 1996
----

FEDERATED INVESTORS
Federated Investors Tower
pittsburgh, PA 15222-3779

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

Cusip 313911109
8012905B (8/96)

GENERAL INFORMATION ABOUT THE FUND 2

INVESTMENT OBJECTIVES AND POLICIES 2

TYPES OF INVESTMENTS 3
FUTURES AND OPTIONS TRANSACTIONS 1
INVESTING IN FOREIGN CURRENCIES 3
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS 4
LENDING PORTFOLIO SECURITIES 4
REPURCHASE AGREEMENTS 4
REVERSE REPURCHASE AGREEMENTS 4
PORTFOLIO TURNOVER 5
INVESTMENT LIMITATIONS 5

FEDERATED STOCK AND BOND FUND, INC. MANAGEMENT 7

FUND OWNERSHIP 11
DIRECTORS COMPENSATION 12
DIRECTOR LIABILITY 12
INVESTMENT ADVISORY SERVICES 13

ADVISER TO THE FUND 13
ADVISORY FEES 13
BROKERAGE TRANSACTIONS 13

OTHER RELATED SERVICES 14
OTHER SERVICES 14

FUND ADMINISTRATION 14
CUSTODIAN AND PORTFOLIO ACCOUNTANT 14
TRANSFER AGENT 14
INDEPENDENT AUDITORS 14

PURCHASING SHARES 14

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES 14
PURCHASES BY SALES REPRESENTATIVES, FUND
DIRECTORS, AND EMPLOYEES 15
EXCHANGING SECURITIES FOR FUND SHARES 15
DETERMINING NET ASSET VALUE 16

DETERMINING MARKET VALUE OF SECURITIES 16
REDEEMING SHARES 16

REDEMPTION IN KIND 16
TAX STATUS 16

THE FUND'S TAX STATUS 16
SHAREHOLDERS' TAX STATUS 17
TOTAL RETURN 17

YIELD 17

PERFORMANCE COMPARISONS 17

ECONOMIC AND MARKET INFORMATION 19
DURATION 19
ABOUT FEDERATED INVESTORS 19

MUTUAL FUND MARKET 19
INSTITUTIONAL CLIENTS 20
TRUST ORGANIZATIONS 20
BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES 20

GENERAL INFORMATION ABOUT THE FUND

The Fund was incorporated under the laws of the State of Maryland on
October 31, 1934. On April 16, 1993, the shareholders voted to permit the
Fund to offer separate series and classes of shares. During the fiscal
year ended October 31, 1994, the Fund offered Class A Shares and Class C
Shares. On August 31, 1994, a reorganization of the Fund was completed to
eliminate the separate classes of shares. At a meeting of the Board of
Directors (the "Directors") held on February 26, 1996, the Directors
approved an amendment to the Articles of Incorporation to change the name
of Stock and Bond Fund, Inc. and to reestablish the Fund's offering of
separate classes of Shares by approving Class B Shares and Class C
Shares.
Shares of the Fund are currently offered in three classes known as
Class A Shares, Class B Shares, and Class C Shares (individually and
collectively referred to as "Shares" as the context may require). This
Statement of Additional Information relates to all classes of Shares of the
Fund.
INVESTMENT OBJECTIVES AND POLICIES

The Fund's investment objectives are to provide relative safety of capital
with the possibility of long-term growth of capital and income.
Consideration is also given to current income. The investment objectives
cannot be changed without approval of shareholders.
As a matter of investment policy, under normal circumstances, the Fund
will invest at least 65% of its total assets in stocks and bonds. Unless
otherwise noted, investment policies and limitations may be changed by the
Directors without shareholder approval. Shareholders will be notified
before any material change occurs.

TYPES OF INVESTMENTS
The Fund invests ^in a diversified portfolio of domestic and foreign
common and preferred stocks and other equity securities, ^ domestically-
issued and foreign-issued corporate and government debt obligations,
mortgage-backed and asset-backed securities, obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
taxable municipal debt obligations and repurchase agreements.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by
buying and selling financial futures contracts, buying put options on
portfolio securities and listed put options on futures contracts, and
writing call options on futures contracts. The Fund may also write covered
call options on portfolio securities to attempt to increase its current
income. The Fund currently does not intend to invest more than 5% of its
total assets in options transactions.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of security called for in the
contract ("going short") and the buyer who agrees to take delivery of the
security ("going long") at a certain time in the future.
In the fixed income securities market, price generally moves inversely
to interest rates. Thus, a rise in rates generally means a drop in price.
Conversely, a drop in rates generally means a rise in price. In order to
hedge its holdings of fixed income securities against a rise in market
interest rates, the Fund could enter into contracts to deliver securities
at a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund 's anticipated holding period. The Fund would "go long"

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

increase in market interest rates. When the Fund writes a call option on a
futures contract, it is undertaking the obligation of assuming a short
futures position (selling a futures contract) at the fixed strike price at
any time during the life of the option if the option is exercised. As
market interest rates rise, causing the prices of futures to go down, the
Fund's obligation under a call option on a future (to sell a futures
contract) costs less to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which is
occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The net
premium income of the Fund will then offset the decrease in value of the
hedged securities.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS

Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather, the
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with its custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from that
of margin in securities transactions in that futures contract initial
margin does not involve the borrowing of funds by the Fund to finance the
transactions. Initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the
amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Fund will mark-to-market its open
futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during the
term of the option.
WRITING COVERED CALL OPTIONS ON PORTFOLIO SECURITIES

The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. The Fund may only sell call options either
on securities held in its portfolio or on securities which it has the right
to obtain without payment of further consideration (or has segregated cash
in the amount of any additional consideration).
OBLIGATIONS OF FOREIGN ISSUERS
Obligations of a foreign issuer may present greater risks than
investments in U.S. securities, including higher transaction costs as well
as the imposition of additional taxes by foreign governments. In addition,
investments in foreign issuers may include additional risks associated with
less complete financial information about the issuers, less market
liquidity, and political instability. Future political and economic
developments, the possible imposition of withholding taxes on interest
income, the possible seizure or nationalization of foreign holdings, the
possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect the payment of principal
and interest on obligations of foreign issuers. As a matter of investment
practice, the Fund will not invest in the obligations of a foreign issuer
if any such risk appears to the Fund's adviser to be substantial.
INVESTING IN FOREIGN CURRENCIES
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
order to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and a foreign currency
involved in an underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could result from a
positive change in such currency relationships. The Fund's investment

adviser, Federated Management (the "Adviser"), believes that it is
important to have the flexibility to enter into forward foreign currency
exchange contracts whenever it determines that it is in the Fund's best
interest to do so. The Fund will not speculate in foreign currency
exchange.
There is no limitation as to the percentage of the Fund's assets that
may be committed to such contracts.
The Fund does not enter into forward foreign currency exchange contracts
or maintain a net exposure in such contracts when the Fund would be
obligated to deliver an amount of foreign currency in excess of the value
of the Fund's portfolio securities or other assets denominated in that
currency or, in the case of a "cross-hedge" denominated in a currency or
currencies that the Adviser believes will tend to be closely correlated
with the currency with regard to price movements. Generally, the Fund does
not enter into a forward foreign currency exchange contract with a term
longer than one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to
buy or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option has
the right, but not the obligation, to buy the currency. Conversely, the
owner of a put option has the right, but not the obligation to sell the
currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position during
the option period at any time prior to expiration. A call option on foreign
currency generally rises in value if the underlying currency appreciates in
value, and a put option on foreign currency generally falls in value if the

underlying currency depreciates in value. Although purchasing a foreign
currency option can protect the Fund against an adverse movement in the
value of a foreign currency, the option will not limit the movement in the
value of such currency. For example, if the Fund were holding securities
denominated in a foreign currency that was appreciating and had purchased a
foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if
the Fund were to enter into a contract to purchase a security denominated
in foreign currency and, in conjunction with that purchase, were to
purchase a foreign currency call option to hedge against a rise in value of
the currency, and if the value of the currency instead depreciated between
the date of purchase and the settlement date, the Fund would not have to
exercise its call. Instead, the Fund could acquire, in the spot market, the
amount of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally.
In addition, there are certain additional risks associated with foreign
currency options. The markets in foreign currency options are relatively
new, and the Fund's ability to establish and close out positions on such
options is subject to the maintenance of a liquid secondary market.
Although the Fund will not purchase or write such options unless and until,
in the opinion of the Adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options are
not greater than the risks in connection with the underlying currency,
there can be no assurance that a liquid secondary market will exist for a
particular option at any specific time.

In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of
the option position may vary with changes in the value of either or both
currencies and may have no relationship to the investment merits of a
foreign security. Because foreign currency transactions occurring in the
interbank market involve substantially larger amounts than those that may
be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting
of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very
large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e. less than $1 million) where rates may
be less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. option markets are
closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying
markets that cannot be reflected in the options markets until they re-
open.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an
advantageous price or yield for the Fund. No fees or other expenses, other
than normal transaction costs, are incurred. However, liquid assets of the

Fund sufficient to make payment for the securities to be purchased are
segregated on the Fund's records at the trade date. These assets are marked
to market daily and are maintained until the transaction has been settled.
The Fund does not intend to engage in when-issued and delayed delivery
transactions to an extent that would cause the segregation of more than 20%
of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund.
During the time portfolio securities are on loan, the borrower pays the
Fund any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Fund or the borrower. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker. The Fund does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to
the investment.
REPURCHASE AGREEMENTS
The Fund requires its custodian to take possession of the securities
subject to repurchase agreements, and these securities are marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase
price on any sale of such securities. In the event that a defaulting seller
files for bankruptcy or becomes insolvent, disposition of securities by the
Fund might be delayed pending court action. The Fund believes that under
the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent

jurisdiction would rule in favor of the Fund and allow retention or
disposition of such securities. The Fund will only enter into repurchase
agreements with banks and other recognized financial institutions, such as
broker/dealers, which are deemed by the Adviser to be creditworthy pursuant
to guidelines established by the Board of Directors.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase
agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in
return for a percentage of the instrument's market value in cash, and
agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest
at an agreed upon rate. The use of reverse repurchase agreements may enable
the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund,
in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. The securities are marked to
market daily and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Fund normally holds or disposes of portfolio securities in order to
achieve its investment objectives. Securities held by the Fund are selected
because they are considered to represent real value and will be held or
disposed of accordingly. The Adviser will not generally seek profits
through short-term trading. The Fund will not attempt to set or meet a
portfolio turnover rate since any turnover would be incidental to

transactions undertaken in an attempt to achieve the Fund's investment
objectives. For the fiscal years ended October 31, 1995 and 1994, the
portfolio turnover rates were 68% and 45%, respectively.
INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities
on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except as permitted by its
investment objectives and policies, and except that the Fund may enter
into reverse repurchase agreements and otherwise borrow up to one-
third of the value of its net assets including the amount borrowed, as
a temporary, extraordinary or emergency measure or to facilitate
management of the portfolio by enabling the Fund to meet redemption
requests when the liquidation of portfolio instruments would be
inconvenient or disadvantageous. This practice is not for investment
leverage. The Fund will not purchase any portfolio instruments while
any borrowings (including reverse repurchase agreements) are
outstanding.
DIVERSIFICATION OF INVESTMENTS
The Fund will not invest more than 5% of the value of its total assets
in the securities of any one issuer, except U.S. government
securities; invest in more than 10% of the voting securities of one
issuer; or invest in more than 10% of any class of securities of one
issuer. ^
SELLING SECURITIES
The Fund may not sell any security or evidence of interest therein
unless it is owned by the Fund and available for delivery.

INVESTING IN COMMODITIES, COMMODITY CONTRACTS, OR REAL ESTATE
The Fund will not invest in commodities, commodity contracts, or real
estate.
UNDERWRITING
The Fund will not engage in underwriting or agency distribution of
securities issued by others.
LENDING CASH OR SECURITIES
The Fund will not lend any assets except portfolio securities. The
purchase of corporate or government bonds, debentures, notes or other
evidences of indebtedness shall not be considered a loan for purposes
of this limitation.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of the value of its total
assets in securities of companies in any one industry. However, with
respect to foreign governmental securities, the Fund reserves the
right to invest up to 25% of its total assets in fixed income
securities of foreign governmental units located within an individual
foreign nation and to purchase or sell various currencies on either a
spot or forward basis in connection with these investments.
The above limitations cannot be changed without shareholder approval. The
following limitations, however, may be changed by the Directors without
shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND
DIRECTORS OF THE FUND
The Fund will not purchase or retain the securities of any issuer in
which the officers and Directors of the Fund or its investment adviser
own a substantial financial interest.
INVESTING IN RESTRICTED SECURITIES

The Fund will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the Securities Act
of 1933, except for commercial paper issued under Section 4(2) of the
Securities Act of 1933 and certain other restricted securities which
meet the criteria for liquidity as established by the Directors. To
comply with certain state restrictions, the Fund will limit these
transactions to 5% of its total assets. (If state restrictions change,
this latter restriction may be revised without shareholder approval or
notification.)
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement
more than seven days after notice and certain restricted securities
not determined by the Directors to be liquid. To comply with certain
state restrictions, the Fund will limit these transactions to 10% of
its net assets. (If state restrictions change, this latter restriction
may be revised without shareholder approval or notification.)
ACQUIRING SECURITIES
The Fund will not invest in securities issued by any other
investment company or investment trust except in regular open-market
transactions or as part of a plan of merger or consolidation. It will
not invest in securities of a company for the purpose of exercising
control or management.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total
assets in securities of issuers which have records of less than three
years of continuous operations.
INVESTING IN WARRANTS

The Fund will not invest more than 5% of its assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on recognized stock exchanges
to 2% of its total assets. (If state restrictions change, this latter
restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund
in units or attached to securities may be deemed to be without
value.
If a percentage limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in value or
net assets will not result in a violation of such restriction.
The Fund did not borrow money or lend portfolio securities in excess of 5%
of the value of its net assets during the last fiscal year and has no
present intent to do so in the coming fiscal year.
In addition, to comply with certain state restrictions, the Fund will not
invest in oil, gas, or other mineral leases, nor will it invest in real
estate limited partnerships. If state restrictions change, these
limitations may be revised without notice to shareholders.

FEDERATED STOCK AND BOND FUND, INC. MANAGEMENT

OFFICERS AND DIRECTORS ARE LISTED WITH THEIR ADDRESSES, BIRTHDATES,
PRESENT POSITIONS WITH FEDERATED STOCK AND BOND FUND, INC., AND PRINCIPAL
OCCUPATIONS.

John F. Donahue@*
Federated Investors Tower

Pittsburgh, PA
Birthdate: July 28, 1924
Director and President
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, Executive Vice
President of the Company .

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

John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Director
President, Investment Properties Corporation; Senior Vice-President, John
R. Wood and Associates, Inc., Realtors; Partner or Trustee in private real

estate ventures in Southwest Florida; formerly, President, Northgate
Village Development Corporation and Naples Property Management, Inc.;
Director or Trustee of the Funds.

William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Director
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.

James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Director
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

Director
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
Director
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
Director
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street
Boston Corporation; Director or Trustee of the Funds;.

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

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

Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Director
Professor, International Politics and Management Consultant; Trustee,
Carnegie Endowment for International Peace, RAND Corporation, Online

Computer Library Center, Inc., National Defense University, U.S. Space
Foundation, and Czech Management Center; President Emeritus, University of
Pittsburgh; Founding Chairman, National Advisory Council for Environmental
Policy and Technology, Federal Emergency Management Advisory Board, and
Czech Management Center; Director or Trustee of the Funds.

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

J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
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; 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, Director and President of the Company.

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; President and Trustee, Federated Shareholder Services;
Director, Federated Securities Corp.; Executive Vice President and
Secretary of the Funds.

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

Vice President

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 Director is deemed to be an "interested person" as defined in the
Investment Company Act of 1940, as amended.
@ Member of the Executive Committee. The Executive Committee of the Board
of Directors handles the responsibilities of the Board of Directors between
meetings of the Board.

As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; Blanchard Funds; Blanchard
Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust Series, Inc. ;
DG Investor Series; Edward D. Jones & Co. Daily Passport Cash Trust;
Federated Adjustable Rate U.S. Government Fund, Inc.; Federated American
Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds; Federated
Equity Income Fund, Inc.; Federated Fund for U.S. Government Securities,
Inc.; Federated GNMA Trust; Federated Government Income Securities, Inc.;

Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Insurance Series; Federated Master Trust; Federated Municipal
Opportunities Fund, Inc.; Federated Municipal Securities Fund, Inc.;
Federated Municipal Trust; Federated Short-Term Municipal Trust; Federated
Short-Term U.S. Government Trust; Federated Stock and Bond Fund, Inc.;
Federated Stock Trust; Federated Tax-Free Trust; Federated Total Return
Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Intermediate Municipal Trust; International Series, Inc.; Investment Series
Funds, Inc.; Investment Series Trust; Liberty Term Trust, Inc. - 1999;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Money Market Management, Inc.; Money Market Obligations
Trust; Money Market Trust; Municipal Securities Income Trust; Newpoint
Funds; Peachtree Funds; RIMCO Monument Funds; Targeted Duration Trust; Tax-
Free Instruments Trust; The Planters Funds; The Starburst Funds; The
Starburst Funds II; The Virtus Funds; Trust for Financial Institutions;
Trust for Government Cash Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; and World Investment
Series, Inc.
FUND OWNERSHIP
As of June 5, 1996, Officers and Directors as a group owned
approximately 98,160,271 shares (4.02%) of the Fund's outstanding Class A
Shares.

As of June 5, 1996, the following shareholders of record owned 5% or
more of the outstanding Class A Shares of the Fund: Alltel Corp Thrift
Plan, Nations Bank, Trustee, San Francisco, California, owned approximately
997,921 Shares (17.63%); and Central Dupage Health System Retirement Plan,
Winfield, Illinois, owned approximately 311,437 Shares (5.50%).

DIRECTORS COMPENSATION

AGGREGATE
NAME, COMPENSATION
POSITION WITH FROM TOTAL COMPENSATION PAID
CORPORATION CORPORATION *# FROM FUND COMPLEX +

John F. Donahue $ 0 $ 0 for the Fund
Director and President 68 other investment companies in
the Fund Complex

Thomas G. Bigley++ $ 956 $ 20,688 for the Fund
Director 49 other investment companies in
the Fund Complex

John T. Conroy, Jr. $ 1,236 $ 117,202 for the Fund
Director 64 other investment companies in
the Fund Complex

William J. Copeland $ 1,236 $ 117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex

James E. Dowd $ 1,236 $ 117,202 for the Fund and
Director 64 other investment companies in
the Fund Complex

Lawrence D. Ellis, M.D. $ 1,125 $ 106,460 for the Fund
and
Director 64 other investment companies in
the Fund Complex

Edward L. Flaherty, Jr. $ 1,236 $ 117,202 for the Fund
and
Director 64 other investment companies in
the Fund Complex

Peter E. Madden $ 956 $ 90,563 for the Fund and
Director 64 other investment companies in
the Fund Complex

Gregor F. Meyer $ 1,125 $ 106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex

John E. Murray, Jr. $ 674 $ 0 for the Fund and
Director 69 other investment companies in
the Fund Complex

Wesley W. Posvar $ 1,125 $ 106,460 for the Fund and

Director 64 other investment companies in
the Fund Complex

Marjorie P. Smuts $ 1,125 $ 106,460 for the Fund and
Director 64 other investment companies in
the Fund Complex

* Information is furnished for the fiscal year ended October 31, 1995.
# The aggregate compensation is provided for the Corporation which is
comprised of one portfolio.
+ The information is provided for the last calendar year.

++ Mr. Bigley served on 39 investment companies in the Federated Funds
Complex from January 1 through September 30, 1995. On October 1, 1995, he
was appointed a Trustee on 15 additional Federated Funds.

DIRECTOR LIABILITY
The Corporation's Articles of Incorporation provide that the Directors 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.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE FUND
The Fund's investment adviser is Federated Management. It is a subsidiary
of Federated Investors. All 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.
The Adviser shall not be liable to the Fund or any shareholder for any
losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
ADVISORY FEES
For its advisory services, Federated Management receives an annual
investment advisory fee as described in the prospectus. During the fiscal
years ended October 31, 1995, 1994, and 1993, the Adviser earned $979,379,
$945,715, and $834,842, respectively, of which $215,192, $98,828, and
$222,090, respectively, was voluntarily waived because of undertakings to
limit the Fund's expenses. All advisory fees were computed on the same
basis as described in the prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares
are registered for sale in those states. If the Fund's normal
operating expenses (including the investment advisory fee, but not
including brokerage commissions, interest, taxes and extraordinary
expenses) exceed 2 1/2% per year of the first $30 million of average

net assets, 2% per year of the next $70 million of average net assets,
and 1 1/2% per year of the remaining average net assets, the Adviser
will reimburse the Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser
will be limited, in any single fiscal year, by the amount of the
investment advisory fee. This arrangement is not part of the advisory
contract and may be amended or rescinded in the future.
BROKERAGE TRANSACTIONS

The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the
Adviser and may include: advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry
studies; receipt of quotations for portfolio evaluations; and similar
services. Research services provided by brokers and dealers may be used by
the Adviser or its affiliates in advising the Fund and other accounts. To
the extent that receipt of these services may supplant services for which
the Adviser or its affiliates might otherwise have paid, it would tend to
reduce their expenses. The Adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer brokerage and research
services to execute securities transactions. They determine in good faith
that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.
During the fiscal years ended October 31, 1995, 1994, and 1993, the Fund
paid total brokerage commissions of $84,056, $41,256, and $69,262,
respectively.

As of October 31, 1995, the Fund owned $952,733 of securities of Travelers
Inc. (Smith Barney) and $931,021 of securities of Dean Witter, two of its
regular brokers that derive more than 15% of gross revenues from
securities- related activities.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type
the Fund may make may also be made by those other accounts. When the Fund
and one or more other accounts managed by the Adviser are prepared to
invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund. In other
cases, however, it is believed that coordination and the ability to
participate in volume transactions will be to the benefit of the Fund.
OTHER RELATED SERVICES
Affiliates of the Adviser may, from time to time, provide certain
electronic equipment and software to institutional customers in order to
facilitate the purchase of shares of funds offered by Federated Securities
Corp.
OTHER SERVICES

FUND ADMINISTRATION
Federated Services Company, a subsidiary of Federated Investors,
provides administrative personnel and services to the Fund for a fee as
described in the prospectus. Prior to March 1, 1994, Federated
Administrative Services Inc., also a subsidiary of Federated Investors,
served as the Fund's administrator. (For purposes of this Statement of
Additional Information, Federated Services Company and Federated

Administrative Services, Inc., may hereinafter collectively be referred to
as the "Administrators"). For the fiscal year ended October 31, 1995,
Federated Administrative Services earned $125,000. For the fiscal year
ended October 31, 1994, the Administrators collectively earned $207,503.
For the fiscal year ended October 31, 1993, Federated Administrative
Services, Inc. earned $291,137. Dr. Henry J. Gailliot, an officer of
Federated Management, the adviser to the Fund, holds approximately 20%,
of the outstanding common stock and serves as a director of Commercial Data
Services, Inc., a company which provides computer processing services to
Federated Services Company.
CUSTODIAN AND PORTFOLIO ACCOUNTANT
State Street Bank and Trust Company, ("State Street Bank") Boston, MA,
is custodian for the securities and cash of the Fund. Federated Services
Company, Pittsburgh, PA, provides certain accounting and recordkeeping
services with respect to the Fund's portfolio investments. 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
Federated Services Company, through its registered transfer agent,
Federated Shareholder Services Company, maintains all necessary shareholder
records. For its services, the transfer agent receives a fee based on the
size, type and number of transactions made by shareholders.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Deloitte & Touche LLP,
Pittsburgh, PA.
PURCHASING SHARES

Shares are sold at their net asset value (plus a sales charge on Class A
Shares only) on days the New York Stock Exchange is open for business. The

procedure for purchasing Shares is explained in the respective prospectuses
under "How to Purchase Shares" and "Investing in Class A Shares."
DISTRIBUTION PLAN AND SHAREHOLDER SERVICES
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.
By adopting the Distribution Plan, the Directors expect that the Fund
will be able to achieve a more predictable flow of cash for investment
purposes and to meet redemptions. This will facilitate more efficient
portfolio management and assist the Fund in pursuing its investment
objectives. By identifying potential investors whose needs are served by
the Fund's objectives, and properly servicing these accounts, it may be
possible to curb sharp fluctuations in rates of redemptions and sales.
Other benefits, which may be realized under either arrangement, may
include: (1) providing personal services to shareholders; (2) investing
shareholder assets with a minimum of delay and administrative detail; (3)
enhancing shareholder recordkeeping systems; and (4) responding promptly to
shareholders' requests and inquiries concerning their accounts.
For the fiscal year ended October 31, 1995, the Fund paid shareholder
services fees in the amount of $320,244 of which $178,558 was waived, all

of which where paid to financial institutions. Class B Shares and Class C
Shares did not exist prior to , 1996.
-----
PURCHASES BY SALES REPRESENTATIVES, FUND DIRECTORS, AND
EMPLOYEES
Directors, employees, and sales representatives of the Fund, Federated
Management, and Federated Securities Corp. or their affiliates and their
immediate family members, or any investment dealer who has a sales
agreement with Federated Securities Corp., and their spouses and children
under 21, may buy shares at net asset value without a sales charge and are
not subject to a redemption fee to the extent the financial institution
through which the shares are sold agrees to waive any initial payment to
which it might otherwise be entitled. Shares may also be sold without a
sales charge to trusts or pension or profit-sharing plans for these
persons.
These sales are made with the purchaser's written assurance that the
purchase is for investment purposes and that the securities will not be
resold except through redemption by the Fund.
EXCHANGING SECURITIES FOR FUND SHARES
Investors may exchange qualifying securities they already own for
Shares, or they may exchange a combination of qualifying securities and
cash for Shares. Any qualifying securities to be exchanged must meet the
investment objective and policies of the Fund, must have readily
ascertainable market value, must be liquid, and must not be subject to
restrictions on resale.
The Fund will prepare a list of securities which are eligible for
acceptance and furnish this list to brokers upon request. The Fund reserves
the right to reject any security, even though it appears on the list, and
the right to amend the list of acceptable securities at any time without
notice to brokers or investors.

An investment broker acting for an investor should forward the
securities in negotiable form with an authorized letter of transmittal to
Federated Securities Corp. Federated Securities Corp. will determine that
transmittal papers are in good order and forward to the Fund's custodian,
State Street Bank and Trust Company. The Fund will notify the broker of its
acceptance and valuation of the securities within five business days of
their receipt by State Street Bank.
The Fund values such securities in the same manner as the Fund values
its portfolio securities. The basis of the exchange will depend upon the
net asset value of Shares on the day the securities are valued. One Share
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be
considered in valuing the securities. All interest, dividends,
subscription, conversion, or other rights attached to the securities become
the property of the Fund, along with the securities.
TAX CONSEQUENCES
Exercise of this exchange privilege is treated as a sale for federal
income tax purposes. Depending upon the cost basis of the securities
exchanged for Shares, a gain or loss may be realized by the investor.

DETERMINING NET ASSET VALUE

Net asset value generally changes each day. The days on which net asset
value is calculated by the Fund are described in the respective
prospectuses.
DETERMINING MARKET VALUE OF SECURITIES
Market values of the Fund's portfolio securities are determined as follows:

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

The Fund redeems Shares at the next computed net asset value after the
Fund receives the redemption request. Shareholder redemptions may be
subject to a contingent deferred sales charge. Redemption procedures are
explained in the respective prospectuses under "How to Redeem Shares" or
"Redeeming Class A Shares." Although the transfer agent 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
Although the Fund intends to redeem Shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or
in part by a distribution of securities from the Fund's portfolio.

Redemption in kind will be made in conformity with applicable Securities
and Exchange Commission rules, taking such securities at the same value
employed in determining net asset value and selecting the securities in a
manner the Directors determine to be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the Investment
Company Act of 1940 under which the Fund is obligated to redeem Shares for
any shareholder in cash up to the lesser of $250,000 or 1% of the Fund's
net asset value during any 90-day period.
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.
TAX STATUS

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

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

The Class A Shares' average annual total returns for the one-year, five-
year, and ten-year periods ended October 31, 1995, were 17.99%, 11.99% and
9.90%, respectively. Class B Shares and Class C Shares did not exist prior
to August , 1996.
---
Average annual total return for each class 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 quarterly
reinvestment of all dividends and distributions. Any applicable contingent

deferred sales charge is deducted from the ending value of the investment
based on the lesser of the original purchase price or the offering price of
Shares redeemed. Occasionally, total return which does not reflect the
effect of the sales charge, may be quoted in advertising.
YIELD

The Class A Shares' yield for the thirty-day period ended October 31,
1995, was 3.64%. Class B Shares and Class C Shares did not exist prior to
August , 1996.
The yield for each class of Shares is determined by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by each class of Shares over a thirty-day period by the
maximum offering price per share of the respective class on the last day of
the period. This value is then annualized using semi-annual compounding.
This means that the amount of income generated during the thirty-day period
is assumed to be generated each month over a twelve-month period and is
reinvested every six months. The yield does not necessarily reflect income
actually earned by the Fund because of certain adjustments required by the
Securities and Exchange Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees
in connection with services provided in conjunction with an investment in a
class of Shares, performance will be reduced for those shareholders paying
those fees.
PERFORMANCE COMPARISONS

The Fund's performance of each class of Shares depends upon such
variables as:
o portfolio quality;
o average portfolio maturity;

o type of instruments in which the portfolio is invested;
o changes in interest rates and market value of portfolio
securities;
o changes in the Fund's or a class of Shares' expenses;
and
o various other factors.
The Fund's performance fluctuates on a daily basis largely because net
earnings and offering price per Share fluctuate daily. Both net earnings
and offering price per Share are factors in the computation of yield and
total return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance,
investors should consider all relevant factors such as the composition of
any index used, prevailing market conditions, portfolio compositions of
other funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
. STANDARD & POOR'S RATING GROUP DAILY STOCK PRICE INDEX OF 500 COMMON
STOCKS is a composite index of common stocks in industry,
transportation, and financial and public utility companies, and
compares total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the index assumes
reinvestment of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included nor are
brokerage or other fees calculated in these figures.
. SALOMON BROTHERS AAA-AA CORPORATES calculates total returns of
approximately 775 issues, which include long-term, high-grade
domestic corporate taxable bonds, rated AAA-AA, with maturities of

twelve years or more. It also includes companies in industry, public
utilities, and finance.
. LIPPER ANALYTICAL SERVICES, INC., ranks funds in various categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and
income dividends and takes into account any change in net asset
value over a specific period of time. From time to time, the Fund
will quote its Lipper ranking in advertising and sales literature.
. LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) is comprised of
approximately 5,000 issues which include non-convertible bonds
publicly issued by the U.S. government or its agencies; corporate
bonds guaranteed by the U.S. government and quasi-federal
corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine
years. Tracked by Lehman Brothers, Inc., the index calculates total
returns for one-month, three-month, twelve-month, and ten-year
periods and year-to-date.
. S&P 500/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED INDEX) AND
THE S&P 500/ LEHMAN BROTHERS GOVERNMENT (WEIGHTED INDEX) combine the
components of a stock-oriented index and a bond-oriented index to
obtain results which can be compared to the performance of a managed
fund. The indices' total returns will be assigned various weights
depending upon the Fund's current asset allocation.
. MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.

Investors may also consult the fund evaluation consulting universe listed
below. Consulting universes may be composed of pension, profit-sharing,
commingled, endowment/foundation and mutual funds.
. SEI BALANCED UNIVERSE is composed of 916 portfolios managed by 390
managers representing $86 billion in assets. To be included in the
universe, a portfolio must contain a 5% minimum commitment in both
equity and fixed income securities.
Advertisements and other sales literature for all three classes of
Shares may quote total returns which are calculated on non-standardized
base periods. These total returns also represent the historic change in the
value of an investment in each class of Shares based on quarterly
reinvestment of dividends over a specified period of time.
From time to time , as it deems appropriate, the Fund may advertise the
performance of a class of Shares, using charts, graphs, and descriptions,
compared to federally insured bank products, including certificates of
deposits and time deposits, and to money market funds using the Lipper
Analytical Services money market instruments average.
Advertisements may quote performance information which does not reflect
the effect of various sales charges on Class A Shares, Class B Shares, and
Class C Shares.
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 Fund portfolio managers and their views and analysis
on how such developments could affect the Funds. In addition, advertising
and sales literature may quote statistics and give general information
about the mutual fund industry, including the growth of the industry, from
sources such as the Investment Company Institute.
DURATION
Duration is a commonly used measure of the potential volatility in the
price of a bond, other fixed income security, or in a portfolio of fixed
income securities, prior to maturity. Volatility is the magnitude of the
change in the price of a bond relative to a given change in the market rate
of interest. A bond's price volatility depends on three primary variables:
the bond's coupon rate; maturity date; and the level of market yields of
similar fixed-income securities. Generally, bonds with lower coupons or
longer maturities will be more volatile than bonds with higher coupons or
shorter maturities. Duration combines these variables into a single
measure.
Duration is calculated by dividing the sum of the time-weighted values of
the cash flows of a bond or bonds, including interest and principal
payments, by the sum of the present values of the cash flows.
When the Fund invests in mortgage pass-through securities, its duration
will be calculated in a manner which requires assumptions to be made
regarding future capital prepayments. A more complete description of this
calculation is available upon request from the Fund.

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 equity sector, Federated Investors has more than 25 years'
experience. As of December 31, 1995, Federated managed 22 equity funds
totaling approximately $5.4 billion in assets across growth, value, equity
income, international, index and sector (i.e. utility) styles. Federated's
value-oriented management style combines quantitative and qualitative
analysis and features a structured, computer-assisted composite modeling
system that was developed in the 1970's.
In the corporate bond sector, as of December 31, 1995, Federated
Investors managed 10 money market funds, and 14 bond funds with assets
approximating $11.5 billion, and $2.7 billion, respectively. Federated's
corporate bond decision making--based on intensive, diligent credit
analysis--is backed by over 20 years of experience in the corporate bond
sector. In 1972, Federated introduced one of the first high-yield bond
funds in the industry. In 17 years ending December 1995, Federated's high
yield portfolios experienced a default rate of just 1.86%, versus 3.10% for
the market as a whole. In 1983, Federated was one of the first fund

managers to participate in the asset-backed securities market, a market
totaling more than $200 billion.
J. Thomas Madden, Executive Vice President, oversees Federated's equity and
high yield corporate bond management while William D. Dawson, Executive
Vice President, oversees Federated's domestic fixed income management.
Henry A. Frantzen, Executive Vice President, oversees the management of
Federated's international portfolios.
MUTUAL FUND MARKET
Twenty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $3 trillion to the more than 5,500 funds
available.*
Federated Investors, through its subsidiaries, distributes mutual funds for
a variety of investment applications. Specific markets include:
INSTITUTIONAL CLIENTS
Federated Investors meets the needs of more than 4,000 institutional
clients nationwide by managing and servicing separate accounts and mutual
funds for a variety of applications, including defined benefit and defined
contribution programs, cash management, and asset/liability management.
Institutional clients include corporations, pension funds, tax-exempt
entities, foundations/endowments, insurance companies, and investment and
financial advisors. The marketing effort to these institutional clients is
headed by John B. Fisher, President, Institutional Sales Division.
TRUST ORGANIZATIONS
Other institutional clients include close relationships with more than
1,500 banks and trust organizations. Virtually all of the trust divisions
of the top 100 bank holding companies use Federated funds in their clients'
portfolios. The marketing effort to trust clients is headed by Mark R.
Gensheimer, Executive Vice President, Bank Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES
Federated funds are available to consumers through major brokerage firms
nationwide--including 200 New York Stock Exchange firms--supported by more
wholesalers than any other mutual fund distributor. Federated's service to
financial professionals and institutions has earned it high rankings in
several DALBAR Surveys. The marketing effort to these firms is headed by
James F. Getz, President, Broker/Dealer Division.
*source: Investment Company Institute

PART C. OTHER INFORMATION

Item 24. Financial Statements and Exhibits:
(a) Financial Statements (Filed in Part A);
(b) Exhibits:
(1) Conformed copy of the Charter of the Registrant as
amended (14);
(2) Copies of the By-Laws of the Registrant as amended
(14);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial
Interest of the Registrant; +
(5) Conformed copy of the Investment Advisory Contract of
the Registrant (13);
(6) (i) Conformed copy of Distributors Contract (12);

(ii) Conformed copy of Exhibit B to the Distributor's
Contract; +
(iii) The Registrant hereby incorporates the conformed
copy of the specimen Mutual Funds Sales and Service
Agreement; Mutual Funds Service Agreement; and Plan
Trustee/Mutual Funds Service Agreement from Item 24 (b)
(6) of the Cash Trust Series II Registration Statement
on Form N-1A, filed with the Commission on July 24,
1995. (File Numbers 33-38550 and 811-6269).
(7) Not applicable;
(8) (i) Conformed copy of the Custodian Contract (13);
(9) (i) Conformed copy of Administrative Services Agreement
(13);
(ii) Conformed copy of Shareholder Services Agreement
(13);
(iii) Conformed copy of Transfer Agency and Service
Agreement (13);
(iv) The responses described in Item 24 (b) (6)
are hereby incorporated by reference.
+ All exhibits have been filed electronically.

6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 69 filed on Form N-1A February 22, 1988. (File Nos. 2-
10415 and 811-1)
12. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 83 filed on Form N-1A December 28, 1993.(File Nos. 2-
10415 and 811-1)

13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 85 filed on Form N-1A December 29, 1994.(File Nos. 2-
10415 and 811-1)
14. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 88 filed on Form N-1A December 27, 1995. (File Nos. 2-
10415 and 811-1)

(v) The Registrant hereby incorporates the conformed copy of
the Shareholder Services Sub- Contract between
National Pensions Alliance, Ltd. and Federated
Shareholder Servivces from Item 24(b)(9)(ii) of the
Federated GNMA Trust Registration Statement on Form
N-1A, filed with the Commission on March 25, 1996. (File
Nos. 2- 75670 and 811-3375)
(vi) The Registrant hereby incorporates the
conformed copy of the Shareholder Services Sub-
Contract between Fidelity and Federated
Shareholder Services from Item 24(b)(9)(iii) of the
Federated GNMA Trust Registration Statement on Form N-
1A, filed with the Commission on March 25, 1996. (File
Nos. 2-75670 and 811-3375)
(10) Not applicable;
(11) Copy of the Consent of Independent Auditors; +
(12) Not applicable;
(13) Not applicable;
(14) Not applicable;
(15) Conformed copy of Distribution Plan including Exhibit
A; +

(16) Copy of Schedule for Computation of Fund Performance
Data (7);
(17) Copy of Financial Data Schedule; +
(18) The Registrant hereby incorporates by reference the
conformed copy of the specimen Multiple Class Plan from
Item 24(b)(18) of the World Investment Series, Inc.
Registration Statement on Form N-1A, filed with the
Commission on January 26, 1996. (File Nos. 33-52149 and
811-07141);
(19) Conformed copy of Power of Attorney; +
+ All exhibits have been filed electronically.

7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 49 filed on Form N-1A December 21, 1979. (File Nos.
2-10415 and 811-1)

Item 25. Persons Controlled by or Under Common Control with Registrant:

None

Item 26. Number of Holders of Securities:

Number of Record Holders
Title of Class as of June 5, 1996

Shares of Capital Stock 2,903
($0.001 per share par value)

Item 27. Indemnification (13)

Item 28. Business and Other Connections of Investment Adviser:

For a description of the other business of Federated Management,
the investment adviser, see the section entitled "Fund
Information - Management of the Fund" in Part A. The
affiliations with the Registrant of three of the Trustees and
three of the Officers of the investment adviser and their
business addresses are included in Part B of this Registration
Statement under "Federated Stock and Bond Fund, Inc., Fund
Management." The remaining Trustee of the investment adviser, his
position with the investment adviser, and, in parentheses, his
principal occupation is: Mark D. Olson (Partner, Wilson,
Halbrook & Bayard), 107 W. Market Street, Georgetown, Delaware
19947.

The remaining Officers of the investment adviser are: William D.
Dawson, III, Henry A. Frantzen, J. Thomas Madden, and Mark L.
Mallon, Executive Vice Presidents; Henry J. Gailliot, Senior Vice
President-Economist; Peter R. Anderson, Drew J. Collins, Jonathan
C. Conley, Mark Durbiano, J. Alan Minteer, and Mary Jo Ochson,
Senior Vice Presidents; J. Scott Albrecht, Joseph M. Balestrino,
Randall S. Bauer, David F. Belton, David A. Briggs, Kenneth J.

Cody, Deborah A. Cunningham, Michael P. Donnelly, Linda A.
Duessel, Kathleen M. Foody-Malus, Thomas M. Franks, Edward C.
Gonzales, Timothy E. Keefe, Stephen A. Keen, Mark S. Kopinski,
Jeff A. Kozemchak, Marian R. Marinack, Susan M. Nason, Robert J.
Ostrowski, Frederick L. Plautz, Jr., Charles A. Ritter, James D.
Roberge, Frank Semack, William F. Stotz, Sandra L. Weber, and
Christopher H. Wiles, Vice Presidents; Thomas R. Donahue,
Treasurer; and Stephen A. Keen, Secretary. The business address
of each of the Officers of the investment adviser is Federated
Investors Tower, Pittsburgh, PA 15222-3779. These individuals
are also officers of a majority of the investment advisers to the
Funds listed in Part B of this Registration Statement.
+ All exhibits have been filed electronically.

13. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 85 filed on Form N-1A December 29, 1994.(File Nos. 2-
10415 and 811-1)

Item 29. Principal Underwriters:

(a) Federated Securities Corp., the Distributor for shares of the
Registrant, also acts as principal underwriter for the following open-end
investment companies: 111 Corcoran Funds; Annuity Management Series; Arrow
Funds; Automated Government Money Trust; BayFunds; Blanchard Funds;
Blanchard Precious Metals Fund, Inc.; Cash Trust Series II; Cash Trust
Series, Inc.; DG Investor Series; Edward D. Jones & Co. Daily Passport Cash

Trust; Federated Adjustable Rate U.S. Government Fund, Inc.; Federated
American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity Funds;
Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income
Securities, Inc.; Federated Government Trust; Federated High Income Bond
Fund, Inc.; Federated High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust; Federated Institutional
Trust; Federated Insurance Series;Federated Master Trust; Federated
Municipal Opportunities Fund, Inc.; Federated Municipal Securities Fund,
Inc.; Federated Municipal Trust; Federated Short-Term Municipal Trust;
Federated Short-Term U.S. Government Trust; Federated Stock and Bond Fund,
Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income
Securities, Inc.; Fortress Utility Fund, Inc.; High Yield Cash Trust;
Independence One Mutual Funds; Intermediate Municipal Trust; International
Series, Inc.; Investment Series Funds, Inc.; Investment Series Trust;
Liberty U.S. Government Money Market Trust; Liquid Cash Trust; Managed
Series Trust; Marshall Funds, Inc.; Money Market Management, Inc.; Money
Market Obligations Trust; Money Market Trust; Municipal Securities Income
Trust; Newpoint Funds; Peachtree Funds; RIMCO Monument Funds; SouthTrust
Vulcan Funds; Star Funds; Targeted Duration Trust; Tax-Free Instruments
Trust; The Biltmore Funds; The Biltmore Municipal Funds; The Monitor Funds;
The Planters Funds; The Starburst Funds; The Starburst Funds II; The Virtus
Funds; Tower Mutual Funds; Trust for Financial Institutions; Trust for
Government Cash Reserves; Trust for Short-Term U.S. Government Securities;

Trust for U.S. Treasury Obligations; Vision Group of Funds, Inc.; andWorld
Investment Series, Inc.

Federated Securities Corp. also acts as principal underwriter for the
following closed-end investment company: Liberty Term Trust, Inc.- 1999.

(b)

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Richard B. Fisher Director, Chairman, Chief Vice President
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, Asst.
Secretary, and Asst.
Treasurer, Federated
Securities Corp.

Edward C. Gonzales Director, Executive ViceExecutive Vice
Federated Investors Tower President, Federated, President
Pittsburgh, PA 15222-3779 Securities Corp.

John W. McGonigle Director, Federated Executive Vice
Federated Investors Tower Securities Corp. President,
Pittsburgh, PA 15222-3779 Secretary, and
Treasurer

John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust, Federated
Pittsburgh, PA 15222-3779 Securities Corp.

Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard W. Boyd Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Solon A. Person, IV Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas E. Territ Senior Vice President, --
Federated Investors Tower Federated Securities Corp
Pittsburgh, PA 15222-3779

John B. Bohnet Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Byron F. Bowman Vice President, Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Kevin J. Crenny Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Daniel T. Culbertson Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

G. Michael Cullen Vice President, --
Federated Investors Tower Federated Securites Corp.
Pittsburgh, PA 15222-3779

Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Michael D. Fitzgerald Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Craig S. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

H. Joeseph Kenedy Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Steven A. La Versa Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard C. Mihm Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert D. Oehlschlager Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant

Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

John C. Shelar, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Jamie M. Teschner Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Paul A. Uhlman Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Michael P. Wolff Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Charlene H. Jennings Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

J. Timothy Radcliff Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Denis McAuley Treasurer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Thomas R. Donahue Asstistant Secretary, --
Federated Investors Tower Assistant Treasurer,
Pittsburgh, PA 15222-3779 Federated Securities Corp.

Joseph M. Huber Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

David M. Taylor Assistant Secretary, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779

Item 30. Location of Accounts and Records:

All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:

Registrant Federated Investors Tower
Pittsburgh, PA 15222-3779

Federated Shareholder Services
Company P.O. Box 8600
("Transfer Agent, and Dividend Boston, MA 02266-8600
Disbursing Agent ")

Federated Services Company Federated Investors Tower
("Administrator") Pittsburgh, PA 15222-3779

Federated Management Federated Investors Tower
("Adviser") Pittsburgh, PA 15222-3779

State Street Bank and Trust Company P.O. Box 8600
("Custodian") Boston, MA 02266-8600

Item 31. Management Services: Not applicable

Item 32. Undertakings:

Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Directors and the calling of special shareholder meetings by
shareholders.

Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders, upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED STOCK AND BOND
FUND, INC., certifies that it meets all of the requirements for
effectiveness of this Amendment to its Registration Statement pursuant to
Rule 485(a) under the Securities Act of 1933 and has duly caused this

Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and
Commonwealth of Pennsylvania, on the 1st day of July 1996.

FEDERATED STOCK AND BOND FUND, INC.

BY: /s/ J. Crilley Kelly
J. Crilley Kelly, Assistant Secretary
Attorney in Fact for John F. Donahue
July 1, 1996

Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the
following person in the capacity and on the date indicated:

NAME TITLE DATE

By:/s/ J. Crilley Kelly
J. Crilley Kelly Attorney In Fact July 1, 1996
ASSISTANT SECRETARY For the Persons
Listed Below

NAME TITLE

John F. Donahue* President and Director
(Chief Executive Officer)

John W. McGonigle* Treasurer and Executive
Vice President
(Principal Financial and
Accounting Officer)

Thomas G. Bigley* Director

John T. Conroy, Jr.* Director

William J. Copeland* Director

James E. Dowd* Director

Lawrence D. Ellis, M.D.* Director

Edward L. Flaherty, Jr.* Director

Peter E. Madden* Director

Gregor F. Meyer* Director

John E. Murray, Jr.* Director

Wesley W. Posvar* Director

Marjorie P. Smuts* Director

* By Power of Attorney

Exhibit 11 under Form N-1A
Exhibit 23 under Item 601/Reg S-K

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors and Shareholders of
FEDERATED STOCK AND BOND FUND, INC.:

We consent to the use in Post-Effective Amendment No. 88 to
Registration Statement (No. 2-10415) of Federated Stock and Bond Fund, Inc.
(formerly, Stock and Bond Fund, Inc.) of our report dated December 15, 1995
appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading `Financial
Highlights''in such Prospectus.

By:DELOITTE & TOUCHE
Deloitte & Touche

Pittsburgh, Pennsylvania
June 27, 1996

Exhibit 4 under Form N-1A
Exhibit 4 under Item 601/Reg. S-K

(FEDERATED STOCK AND BOND FUND, INC.)

Number Class A Shares

Account No. Alpha Code See Reverse Side For
Certain Definitions

THIS IS TO CERTIFY THAT is the owner of

CUSIP 313911109

Fully Paid and Non-Assessable Shares of Beneficial Interest of FEDERATED
STOCK AND BOND FUND, INC. (Class A Shares) hereafter called the Fund,
transferable on the books of the Fund by the owner in person or by duly
authorized attorney upon surrender of this certificate properly endorsed.
The shares represented hereby are issued and shall be held subject to the
provisions of the Declaration of Trust and By-Laws of the Fund and all
amendments thereto, all of which the holder by acceptance hereof assents.

This Certificate is not valid unless countersigned by the Transfer Agent.

IN WITNESS WHEREOF, the Fund has caused this Certificate to be signed in its
proper officers and to be sealed with its seal.

Dated: FEDERATED STOCK AND BOND FUND, INC.
Corporate Seal
(1996)
Massachusetts

/s/John W. McGonigle /s/ John F. Donahue
Treasurer Chairman

Countersigned: Federated Shareholder Services
Transfer Agent
By:
Authorized Signature

The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in
full according to applicable laws or regulations;
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties (Cust) (Minors)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act
in common (State)

Additional abbreviations may also be used though not in the above list.

For value received _____________ hereby sell, assign, and transfer unto

Please insert social security or other
identifying number of assignee

===========================================================================
(Please print or typewrite name and address, including zip code, of
assignee)

of beneficial interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint

===========================================================================
to transfer the said shares on the books of the within named Fund with full
power of substitution in the premises.

Dated
----------------------
NOTICE:
------------------------------
The signature to this assignment must
correspond with the name as written upon the
face of the certificate in every particular,
without alteration or enlargement or any
change whatever.

All persons dealing with FEDERATED STOCK AND BOND FUND, INC., a Maryland
corporation, must look solely to the Fund property for the enforcement of
any claim against the Fund, as the Directors, officers, agents or
shareholders of the Fund assume no personal liability whatsoever for
obligations entered into on behalf of the Fund.
THIS SPACE MUST NOT BE COVERED IN ANY WAY

DOCUMENT DESCRIPTION - SPECIMEN STOCK CERTIFICATE

Page One

A. The Certificate is outlined by an (color) one-half inch border.

B. The number in the upper left-hand corner and the number of shares in
the upper right-hand corner are outlined by octagonal boxes.
C. The cusip number in the middle right-hand area of the page is boxed.

D. The Massachusetts corporate seal appears in the bottom middle of the
page.

Page Two

The social security or other identifying number of the assignee
appears in a box in the top-third upper-left area of the page.

Exhibit 6(ii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K

Exhibit B
to the
Distributor's Contract

STOCK AND BOND FUND, INC.
CLASS B SHARES
CLASS C SHARES

The following provisions are hereby incorporated and made part of the
Distributor's Contract dated March 1, 1993, between Stock and Bond Fund,
Inc. and Federated Securities Corp. with respect to the Classes of shares
set forth above (`Classes'').
1. The Corporation hereby appoints FSC to engage in activities
principally intended to result in the sale of shares of the above-
listed Classes (``Shares'). Pursuant to this appointment, FSC is
authorized to select a group of financial institutions (``Financial
Institutions'') to sell Shares at the current offering price thereof
as described and set forth in the respective prospectuses of the
Corporation.
2. During the term of this Agreement, the Corporation will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the
annual rate of of the average aggregate net asset value of the
Shares held during the month. For the month in which this Agreement
becomes effective or terminates, there shall be an appropriate
proration of any fee payable on the basis of the number of days that
the Agreement is in effect during the month.
3. FSC may from time-to-time and for such periods as it deems
appropriate reduce its compensation to the extent any Class expenses
exceed such lower expense limitation as FSC may, by notice to the
Corporation, voluntarily declare to be effective.
4. FSC will enter into separate written agreements with various firms
to provide certain of the services set forth in Paragraph 1 herein.
FSC, in its sole discretion, may pay Financial Institutions a
periodic fee in respect of Shares owned from time to time by their
clients or customers. The schedules of such fees and the basis upon
which such fees will be paid shall be determined from time to time
by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Directors of the
Corporation on a quarterly basis showing amounts expended hereunder
including amounts paid to Financial Institutions and the purpose for
such expenditures.

In consideration of the mutual covenants set forth in the
Distributor's Contract dated March 1, 1993 between Stock and Bond Fund,
Inc. and Federated Securities Corp., Stock and Bond Fund, Inc. executes and
delivers this Exhibit on behalf of the Corporation, and with respect to the
separate Classes of Shares thereof, first set forth in this Exhibit.

Witness the due execution hereof this 1st day of March, 1996.

ATTEST: STOCK AND BOND FUND, INC.

/s/ John W. McGonigle By:/s/ John F. Donahue
John W. McGonigle John F. Donahue
Secretary President
(SEAL)

ATTEST: FEDERATED SECURITIES CORP.

/s/ Byron F. Bowman By:/s/ Edward C. Gonzales
Byron F. Bowman Edward C. Gonzales
Secretary Executive Vice President

(SEAL)

Exhibit 15 under Form N-1A
Exhibit 1 under Item 601/Reg. S-K

STOCK AND BOND FUND, INC.
DISTRIBUTION PLAN
This Distribution Plan (`Plan'') is adopted as of March 1, 1996March
1, 1993, by the Board of Directors of Stock and Bond Fund, Inc. (the
`Corporation''), a Maryland Corporation with respect to certain classes of
shares (`Classes'') of the Corporation (the ``Funds'') set forth in
exhibits hereto.
1. This Plan is adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (``Act'), so as to allow the
Corporation to make payments as contemplated herein, in conjunction
with the distribution of Classes of the Funds (``Shares').
2. This Plan is designed to finance activities of Federated Securities
Corp. (``FSC') principally intended to result in the sale of Shares
to include: (a) providing incentives to financial institutions
(``Financial Institutions') to sell Shares; (b) advertising and
marketing of Shares to include preparing, printing and distributing
prospectuses and sales literature to prospective shareholders and
with Financial Institutions; and (c) implementing and operating the
Plan. In compensation for services provided pursuant to this Plan,
FSC will be paid a fee in respect of the following Classes set forth
on the applicable exhibit.
3. Any payment to FSC in accordance with this Plan will be made
pursuant to the ``Distributor's Contract''entered into by the
Corporation and FSC. Any payments made by FSC to Financial
Institutions with funds received as compensation under this Plan
will be made pursuant to the ``Financial Institution Agreement''
entered into by FSC and the Institution.
4. FSC has the right (i) to select, in its sole discretion, the
Financial Institutions to participate in the Plan and (ii) to
terminate without cause and in its sole discretion any Financial
Institution Agreement.
5. Quarterly in each year that this Plan remains in effect, FSC shall
prepare and furnish to the Board of Directors of the Corporation,
and the Board of Directors shall review, a written report of the
amounts expended under the Plan and the purpose for which such
expenditures were made.
6. This Plan shall become effective with respect to each Class
(i) after approval by majority votes of: (a) the Corporation's Board
of Directors; (b) the members of the Board of the Corporation who
are not interested persons of the Corporation and have no direct or
indirect financial interest in the operation of the Corporation's
Plan or in any related documents to the Plan (``Disinterested
Directors''), cast in person at a meeting called for the purpose of
voting on the Plan; and (c) the outstanding voting securities of the
particular Class, as defined in Section 2(a)(42) of the Act; and
(ii) upon execution of an exhibit adopting this Plan with respect to
such Class.
7. This Plan shall remain in effect with respect to each Class
presently set forth on an exhibit and any subsequent Classes added
pursuant to an exhibit during the initial year of this Plan for the
period of one year from the date set forth above and may be
continued thereafter if this Plan is approved with respect to each
Class at least annually by a majority of the Corporation's Board of
Directors and a majority of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on such Plan.
If this Plan is adopted with respect to a Class after the first
annual approval by the Directors as described above, this Plan will
be effective as to that Class upon execution of the applicable
exhibit pursuant to the provisions of paragraph 6(ii) above and will
continue in effect until the next annual approval of this Plan by
the Directors and thereafter for successive periods of one year
subject to approval as described above.
8. All material amendments to this Plan must be approved by a vote of
the Board of Directors of the Corporation and of the Disinterested
Directors, cast in person at a meeting called for the purpose of
voting on it.
9. This Plan may not be amended in order to increase materially the
costs which the Classes may bear for distribution pursuant to the
Plan without being approved by a majority vote of the outstanding
voting securities of the Classes as defined in Section 2(a)(42) of
the Act.
10. This Plan may be terminated with respect to a particular Class at
any time by: (a) a majority vote of the Disinterested Directors; or
(b) a vote of a majority of the outstanding voting securities of the
particular Class as defined in Section 2(a)(42) of the Act; or (c)
by FSC on 60 days' notice to the Corporation.
11. While this Plan shall be in effect, the selection and nomination of
Disinterested Directors of the Corporation shall be committed to the
discretion of the Disinterested Directors then in office.

12. All agreements with any person relating to the implementation of
this Plan shall be in writing and any agreement related to this Plan
shall be subject to termination, without penalty, pursuant to the
provisions of Paragraph 10 herein.
13. This Plan shall be construed in accordance with and governed by the
laws of the Commonwealth of Pennsylvania.

EXHIBIT A
to the
Distribution Plan
STOCK AND BOND FUND, INC.
CLASS B SHARES
CLASS C SHARES

This Distribution Plan is adopted by Stock and Bond Fund, Inc. with
respect to the Classes of Shares of the Corporation set forth above.
In compensation for the services provided pursuant to this Plan,
FSC will be paid a monthly fee computed at the annual rate of .75 of
1% of the average aggregate net asset value of the Class B Shares and
Class C Shares of Stock and Bond Fund, Inc. held during the month.
Witness the due execution hereof this 1st day of March 1, 1996.

STOCK AND BOND FUND, INC.

By:/s/ John F. Donahue
John F. Donahue
President

Exhibit 19 under Form N-1A
Exhibit 24 under Item 601/Reg. S-K

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints the Secretary and Assistant Secretary of FEDERATED STOCK AND BOND
FUND, INC. and
the Deputy General Counsel of Federated Investors, and each of them, their
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for them and in their names, place and
stead, in any and all capacities, to sign any and all documents to be filed
with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, by means of the Securities and Exchange Commission's electronic
disclosure system known as EDGAR; and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to sign and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

SIGNATURES TITLE DATE

/c/JOHN F. DONAHUE President and DirectorJune 20, 1996
John F. Donahue (Chief Executive Officer)

/c/JOHN W. MCGONIGLE Treasurer and ExecutiveJune 20, 1996
John W. McGonigle Vice President
(Principal Financial and
Accounting Officer)

/c/THOMAS G. BIGLEY Director June 20, 1996
Thomas G. Bigley

/c/JOHN T. CONROY, JR. Director June 20, 1996
John T. Conroy, Jr.

/c/WILLIAM J. COPELAND Director June 20, 1996
William J. Copeland

SIGNATURES TITLE DATE

/c/JAMES E. DOWD Director June 20, 1996
James E. Dowd

/c/LAWRENCE D. ELLIS, M.D. Director June 20, 1996
Lawrence D. Ellis, M.D.

/c/EDWARD L. FLAHERTY, JR. Director June 20, 1996
Edward L. Flaherty, Jr.

/c/PETER E. MADDEN Director June 20, 1996
Peter E. Madden

/c/GREGOR F. MEYER Director June 20, 1996
Gregor F. Meyer

/c/JOHN E. MURRAY, JR. Director June 20, 1996
John E. Murray, Jr.

/c/WESLEY W. POSVAR Director June 20, 1996
Wesley W. Posvar

/c/MARJORIE P. SMUTS Director June 20, 1996
Marjorie P. Smuts

Sworn to and subscribed before me this 20th day of June, 1996

/c/MARIE M. HAMM
Marie M. Hamm
Notarial Seal
Marie M. Hamm, Notary Public
Plum Boro, Allegheny County
My Commission Expires Sept. 16, 1996
Member, Pennsylvania Association of Notaries

<S> <C>

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Federated Stock And Bond Fund, Inc.

<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Oct-31-1996
<PERIOD-END> Apr-30-1996
<INVESTMENTS-AT-COST> 118,128,346
<INVESTMENTS-AT-VALUE> 136,192,462
<RECEIVABLES> 2,447,982
<ASSETS-OTHER> 7,392
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,647,836
<PAYABLE-FOR-SECURITIES> 957,641
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,602
<TOTAL-LIABILITIES> 1,050,243
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 111,174,732
<SHARES-COMMON-STOCK> 7,628,183
<SHARES-COMMON-PRIOR> 7,327,906
<ACCUMULATED-NII-CURRENT> 2,622,024
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,736,720
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 18,064,117
<NET-ASSETS> 137,597,593
<DIVIDEND-INCOME> 882,730
<INTEREST-INCOME> 2,325,228
<OTHER-INCOME> 0
<EXPENSES-NET> 737,834
<NET-INVESTMENT-INCOME> 2,470,124
<REALIZED-GAINS-CURRENT> 5,663,685
<APPREC-INCREASE-CURRENT> 1,461,411
<NET-CHANGE-FROM-OPS> 9,595,220
<EQUALIZATION> 61,865
<DISTRIBUTIONS-OF-INCOME> 2,443,968
<DISTRIBUTIONS-OF-GAINS> 9,454,029
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 973,035
<NUMBER-OF-SHARES-REDEEMED> 1,216,390
<SHARES-REINVESTED> 543,632
<NET-CHANGE-IN-ASSETS> 2,928,797
<ACCUMULATED-NII-PRIOR> 2,534,003
<ACCUMULATED-GAINS-PRIOR> 9,527,064
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 518,434
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 916,805
<AVERAGE-NET-ASSETS> 137,010,243
<PER-SHARE-NAV-BEGIN> 18.380
<PER-SHARE-NII> 0.330
<PER-SHARE-GAIN-APPREC> 0.940
<PER-SHARE-DIVIDEND> 0.330
<PER-SHARE-DISTRIBUTIONS> 1.280
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 18.040
<EXPENSE-RATIO> 1.07
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.000

</TABLE>