FEDERATED STOCK & BOND FUND INC /MD/, 485BPOS, 1997-02-27

FEDERATED STOCK & BOND FUND INC /MD/
485BPOS, 1997-02-27

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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. 93 .......... X

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X

Amendment No. 33 ......................... X
--

FEDERATED STOCK AND BOND FUND, INC.
(formerly, 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)
--
X on February 28, 1997 pursuant to paragraph (b)
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 16, 1996; 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 & Oshinsky LLP
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 (3) 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; (2)
Financial Highlights-Class B 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.....The Financial Statements for the fiscal
year ended October 31, 1996 are hereby
incorporated by reference from the
Fund's Annual Report dated October 31,
1996.

FEDERATED 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 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 February 28, 1997, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

Prospectus dated February 28, 1997

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

TABLE OF CONTENTS

Summary of Fund Expenses.......................................................1

Financial Highlights...........................................................2

General Information............................................................3

Investment Information.........................................................3

Investment Objective.........................................................3

Investment Policies..........................................................3

Reducing Risks of Lower-Rated
Securities................................................................5

Non-Mortgage Related Asset-Backed
Securities................................................................7

Mortgage Related Asset-Backed
Securities................................................................7

Adjustable Rate Mortgage Securities..........................................7

Collateralized Mortgage Obligations..........................................7

Real Estate Mortgage Investment
Conduits..................................................................8

Resets of Interest...........................................................8

Caps and Floors..............................................................9

Investment Limitations......................................................13

Net Asset Value...............................................................13

How to Purchase Shares........................................................14

Investing in Shares.........................................................14
Reducing or Eliminating the
Sales Charge.............................................................15

Special Purchase Features...................................................17

Exchange Privilege............................................................17

How to Redeem Shares..........................................................19

Special Redemption Features.................................................20

Contingent Deferred Sales Charge............................................20

Elimination of Contingent Deferred
Sales Charge.............................................................21

Account and Share Information.................................................22

Certificates and Confirmations..............................................22

Dividends...................................................................22

Capital Gains...............................................................22

Accounts with Low Balances..................................................22

Fund Information..............................................................23

Management of the Fund......................................................23

Distribution of Shares......................................................24

Administration of the Fund..................................................25

Brokerage Transactions......................................................25

Expenses of the Fund and Shares.............................................26

Shareholder Information.......................................................27

Voting Rights...............................................................27

Tax Information...............................................................27

Federal Income Tax..........................................................27

State and Local Taxes.......................................................27

Performance Information.......................................................28

Other Classes of Shares.......................................................28

Appendix......................................................................29

Addresses.....................................................................32

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

SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.

CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES

<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)................................. 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)...................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................ 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................ None
Exchange Fee.................................................................................................. None
</TABLE>

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)

<TABLE>
<S> <C> <C>
Management Fee (after waiver) (2)............................................................................. 0.57%
12b-1 Fee (3)................................................................................................. 0.00%
Total Other Expenses.......................................................................................... 0.64%
Shareholder Services Fee.......................................................................... 0.25%
Total Operating Expenses (4)......................................................................... 1.21%
</TABLE>

(1) Shareholders who purchased shares with the proceeds of a redemption of
shares of an unaffiliated investment company purchased and redeemed with a
sales charge and not distributed by Federated Securities Corp. may be
charged a contingent deferred sales charge of 0.50% for redemptions made
within one year of purchase.

(2) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.55% of average daily net assets plus 4.50% of gross income, excluding
capital gains or losses.

(3) Class A Shares has no present intention of paying or accruing the 12b-1 fee
during the fiscal year ending October 31, 1997. If Class A Shares were
paying or accruing the 12b-1 fee, Class A Shares would be able to pay up to
0.25% of its average daily net assets for the 12b-1 fee. See "Fund
Information".

(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1997. The total operating
expenses were 1.10% for the fiscal year ended October 31, 1996, and would
have been 1.37% absent the voluntary waivers of a portion of the management
fee, administrative personnel and services fee and the shareholder services
fee.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE MAXIMUM
FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.

<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 year 3 years 5 years 10 years
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period, and (3) payment
of the maximum sales charge...................................................... $67 $91 $118 $194
</TABLE>

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

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

FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
CLASS A SHARES

- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated December 6, 1996 on the Fund's
financial statements for the year ended October 31, 1996, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

<TABLE>
<CAPTION>
YEAR
ENDED
YEAR ENDED OCTOBER 31, DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990(A) 1989
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.61 0.63 0.51 0.55 0.65 0.74 1.37 0.91
- --------------------------------------
Net realized and unrealized
gain (loss) on investments 1.81 2.21 (0.59) 1.58 0.39 2.17 (2.22) 0.91
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total from investment operations 2.42 2.84 (0.08) 2.13 1.04 2.91 (0.85) 1.82
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
LESS DISTRIBUTIONS
- --------------------------------------
Distributions from net investment
income (0.63) (0.62) (0.54) (0.56) (0.68) (0.77) (0.66) (0.94)
- --------------------------------------
Distributions from net realized
gain on investment transactions (1.21) (0.09) -- (0.61) (0.19) -- -- (0.71)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total distributions (1.84) (0.71) (0.54) (1.17) (0.87) (0.77) (0.66) (1.65)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
NET ASSET VALUE, END OF PERIOD $ 18.96 $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
TOTAL RETURN (B) 14.57% 17.99% (0.48)% 14.10% 7.94% 21.78% (5.90)% 12.46%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.10% 1.07% 1.06% 1.04% 1.04% 1.01% 1.01%* 1.01%
- --------------------------------------
Net investment income 3.44% 3.71% 3.23% 3.49% 4.15% 4.91% 5.77%* 5.82%
- --------------------------------------
Expense waiver/reimbursement (c) 0.27% 0.31% 0.07% 0.20% 0.21% 0.45% 0.54%* 0.51%
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $130,694 $134,669 $125,382 $124,583 $95,387 $88,534 $79,003 $88,367
- --------------------------------------
Average commission rate paid (d) $ .0307 -- -- -- -- -- -- --
- --------------------------------------
Portfolio turnover 74% 68% 45% 51% 43% 72% 49% 26%
- --------------------------------------

<CAPTION>
1988 1987
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.89 $ 15.34
<S> <C> <C>
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.85 0.81
- --------------------------------------
Net realized and unrealized
gain (loss) on investments 0.52 (0.24)
- -------------------------------------- --------- ---------
Total from investment operations 1.37 0.57
- -------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- --------------------------------------
Distributions from net investment
income (0.86) (0.79)
- --------------------------------------
Distributions from net realized
gain on investment transactions (0.46) (0.23)
- -------------------------------------- --------- ---------
Total distributions (1.32) (1.02)
- -------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 14.94 $ 14.89
- -------------------------------------- --------- ---------
TOTAL RETURN (B) 9.28% 3.58%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.00% 1.00%
- --------------------------------------
Net investment income 5.53% 5.07%
- --------------------------------------
Expense waiver/reimbursement (c) 0.39% 0.22%
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $90,504 $92,105
- --------------------------------------
Average commission rate paid (d) -- --
- --------------------------------------
Portfolio turnover 131% 110%
- --------------------------------------
</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.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
-
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE FUND'S
ANNUAL REPORT, DATED OCTOBER 31, 1996, WHICH CAN BE OBTAINED FREE OF CHARGE.

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

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.

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

The Fund invests in a diversified portfolio of domestic and foreign securities
as described below. 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 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 securities of larger, well-established companies
which have a history of lower volatility in earnings. Therefore, the corporate
bonds in which the Fund invests, including those purchased through and
collateralizing repurchase agreements, will generally be 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 Investors Service, Inc. ("Fitch") or unrated,
but determined by the Fund's investment adviser ("Adviser") to be of comparable
quality. The Fund may invest no more than 35% of its assets in corporate bonds
rated below the top four categories or which are unrated but determined to be of
comparable quality by the Adviser. Bonds rated "BBB" by S&P or Fitch, or "Baa"
by Moody's have speculative characteristics. A description of the ratings
categories is contained in the Appendix to this prospectus. Permitted
investments include:

common stocks;

preferred stocks;

corporate bonds;

convertible securities;

obligations of the United States;

notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;

taxable municipal debt obligations rated BBB or better by an NRSRO, or of
comparable quality in the judgment of the 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;

bankers' acceptances;

other securities;

repurchase agreements collateralized by acceptable investments.

COMMON STOCKS

The domestic and foreign common stocks in which the Fund invests are selected by
the 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
Adviser.

CORPORATE BONDS

Although the corporate bonds in which the Fund will invest primarily are rated
as investment grade by an NRSRO, or of comparable quality in the judgment of the
Adviser, the Fund may, under normal circumstances, invest as much as 35% of its
net assets in such bonds that are rated below investment grade or are of
comparable quality ("junk bonds"). Although there is a percentage limitation,
there is no minimum rating applicable to corporate bonds purchased or held by
the Fund, and the Fund may, from time to time, purchase or hold such bonds in
the lowest category, including bonds in default.

Bonds 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. 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 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 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 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
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 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.

CONVERTIBLE SECURITIES

Convertible securities include a spectrum of securities which can be exchanged
for or converted into common stock of the issuer or a related financial entity
(for example, a merged or acquired company or partner). Convertible securities
may include, but are not limited to: convertible bonds or debentures;
convertible preferred stock; units consisting of usable bonds and warrants; or,
securities which cap or otherwise limit returns to the convertible security
holder, such as DECS--(Dividend Enhanced Convertible Stock, or Debt Exchangeable
for Common Stock when issued as a debt security), LYONS--(Liquid Yield Option
Notes, which are corporate bonds that are purchased at prices below par with no
coupons and are convertible into stock), PERCS--(Preferred Equity Redemption
Cumulative Stock, which is an equity issue that pays a high cash dividend, has a
cap price and mandatory conversion to common stock at maturity), and
PRIDES--(Preferred Redeemable Increased Dividend Securities, which are
essentially the same as DECS; the difference is little more than who initially
underwrites the issue).

Convertible securities are often rated below investment grade or not rated
because they fall below debt obligations and just above common equity in order
of preference or priority on the issuer's balance sheet. Hence, an issuer with
investment grade senior debt may issue convertible securities with ratings less
than investment grade or not rated. The Fund does not limit convertible
securities by rating, and there is no minimal acceptance rating for a
convertible security to be purchased or held in the Fund. Therefore, the Fund
invests in convertible securities irrespective of their ratings. This could
result in the Fund purchasing and holding, without limit, convertible securities
rated below investment grade by an NRSRO or in the Fund holding such securities
where they have acquired a rating below investment grade after the Fund has
purchased it.

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:

direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;

notes, bonds, and discount notes issued or guaranteed by U.S. government
- ---
agencies and instrumentalities supported by the full faith and credit of the

United States; and

notes, bonds, and discount notes of other U.S. government agencies or
- ---
instrumentalities which receive or have access to federal funding.

Some obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government 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:

the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;

discretionary authority of the U.S. government to purchase certain
obligations of an agency or instrumentality; or

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:
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;

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

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

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.

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
objectives 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 American Depository Receipts, and may invest more than
10% of its total assets in foreign securities.

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. The Adviser will allocate investments among securities of
particular issuers on the basis of its views as to the best values then
currently available in the marketplace. Such values are a function of yield,
maturity, issue classification and quality characteristics, coupled with
expectations regarding the economy, movements in the general level and term of
interest rates, currency values, political developments and variations in the
supply of funds available for investment in the world bond market relative to
the demands placed upon it.

This policy would enable the Fund to concentrate its investments in the
securities of foreign governmental and non-governmental issuers 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

For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in cash and cash items including: short-term money market instruments;
securities issued and/or guaranteed as to payment of principal and interest by
the U.S. government, its agencies or instrumentalities; and repurchase
agreements.

The Fund may also hold the instruments described above in such amounts as
necessary: to provide funds for the settlement of portfolio transactions;
pending investment of cash receipts in the ordinary course of business; and to
meet requests for redemption of Fund shares.

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.

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:

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 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:

<TABLE>
<CAPTION>
SALES SALES DEALER
CHARGE CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
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%*
</TABLE>

*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 of 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 Shares through:

quantity discounts and accumulated purchases;

concurrent purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

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 0.50% 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.

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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, other than retirement accounts subject to required minimum
distributions. 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 0.50% 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.

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 0.55% 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.

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 $110 billion invested across over 300 funds
under management and/or administration by its subsidiaries, as of December 31,
1996, Federated Investors is one of the largest mutual fund investment managers
in the United States. With more than 2,000 employees, Federated continues to be
led by the management who founded the company in 1955. Federated funds are
presently at work in and through 4,500 financial institutions nationwide.

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

Scott B. Schermerhorn has been the Fund's portfolio manager since July 1996 and
is responsible for managing the equity portion of the Fund. Mr. Schermerhorn
joined Federated Investors in 1996 as a Vice President of the Fund's investment
adviser. From 1990 through 1996, Mr. Schermerhorn was a Senior Vice President
and Senior Investment Officer at J W Seligman & Co., Inc. Mr. Schermerhorn
received his M.B.A. in Finance and International Business from Seton Hall
University.

Joseph M. Balestrino has been the Fund's portfolio manager since May 1994 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 portfolio manager since September 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.

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 0.25% 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 0.50% 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:
<TABLE>
<CAPTION>
MAXIMUM
ADMINISTRATIVE FEE AVERAGE AGGREGATE DAILY NET ASSETS
<C> <S>
.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>

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 and distribution fees. However, the
Directors reserve the right to allocate certain other expenses to holders of
Class A Shares as they deem appropriate ("Class Expenses"). In any case, Class
Expenses would be limited to: transfer agent fees as identified by the transfer
agent as attributable to holders of 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.

As of February 5, 1997, Merrill Lynch Pierce Fenner & Smith, Jacksonville,
Florida (as record owner holding Class C Shares for its clients), owned 34.33%
of voting securities of the Fund's Class C Shares and Eva R. Spencer and Judy B.
Crumley, Virginia Beach, Virginia, owned 56.13% of voting securities of the
Fund's Class C Shares and, therefore, may for certain purposes, be deemed to
control the Fund and be able to affect the outcome of certain matters presented
for a vote of shareholders.

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

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 A Shares, Class B
Shares, and Class C Shares, investors may call 1-800-341-7400 or contact their
financial institution.

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

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.

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

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.
CLASS A SHARES

PROSPECTUS
An Open-End, Diversified Management
Investment Company
February 28, 1997

[LOGO OF FEDERATED INVESTORS]

Federated Investors Tower
Pittsburgh, PA 15222-3779

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

Cusip 313911109
8012905A-A (2/97)

FEDERATED 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.

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.

Prospectus dated February 28, 1997

TABLE OF CONTENTS

Summary of Fund Expenses--
Class A Shares...............................................................1

Summary of Fund Expenses--
Class B Shares...............................................................2

Summary of Fund Expenses--
Class C Shares...............................................................3

Financial Highlights--Class A Shares...........................................4
Financial Highlights--Class B Shares...........................................5
Financial Highlights--Class C Shares...........................................6

General Information............................................................7

Investment Information.........................................................7
Investment Objective.........................................................7
Investment Policies..........................................................7

Reducing Risks of Lower-Rated
Securities................................................................9
Non-Mortgage Related Asset-Backed
Securities...............................................................11
Mortgage Related Asset-Backed
Securities...............................................................11
Adjustable Rate Mortgage Securities.........................................11
Collateralized Mortgage Obligations.........................................11
Real Estate Mortgage Investment
Conduits.................................................................12
Resets of Interest..........................................................12
Caps and Floors.............................................................13

Investment Limitations......................................................17

Net Asset Value...............................................................17

Investing in the Fund.........................................................18
Class A Shares..............................................................18
Class B Shares..............................................................18
Class C Shares..............................................................18

How to Purchase Shares........................................................19
Investing in Class A Shares.................................................19
Reducing or Eliminating the
Sales Charge.............................................................20
Investing in Class B Shares.................................................21
Investing in Class C Shares.................................................22
Purchasing Shares through a
Financial Institution....................................................22
Purchasing Shares By Wire...................................................23
Purchasing Shares By Check..................................................23
Special Purchase Features...................................................23

Exchange Privilege............................................................24
How to Redeem Shares..........................................................26
Special Redemption Features.................................................27
Contingent Deferred Sales Charge............................................27
Class A Shares..............................................................27
Class B Shares..............................................................27
Class C Shares..............................................................28
Class A Shares, Class B Shares,
and Class C Shares.......................................................28
Elimination of Contingent Deferred
Sales Charge.............................................................28

Account and Share Information.................................................30
Certificates and Confirmations..............................................30
Dividends...................................................................30
Capital Gains...............................................................30
Accounts with Low Balances..................................................30

Fund Information..............................................................31
Management of the Fund......................................................31
Distribution of Shares......................................................32
Administration of the Fund..................................................34
Brokerage Transactions......................................................34
Expenses of the Fund and Shares.............................................34

Shareholder Information.......................................................35
Voting Rights...............................................................35

Tax Information...............................................................36
Federal Income Tax..........................................................36
State and Local Taxes.......................................................36

Performance Information.......................................................36
Appendix......................................................................37

Addresses.....................................................................40

SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.

<TABLE>
<S> <C> <C>
CLASS A SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................. 5.50%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)....................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................. 0.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................. None
Exchange Fee................................................................................................... None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................................. 0.57%
12b-1 Fee (3).................................................................................................. 0.00%
Total Other Expenses........................................................................................... 0.64%
Shareholder Services Fee........................................................................ 0.25%
Total Operating Expenses (4).......................................................................... 1.21%

</TABLE>

(4) The total operating expenses in the table above are based on expenses
expected during the fiscal year ending October 31, 1997. The total operating
expenses were 1.10% for the fiscal year ended October 31, 1996 and would
have been 1.37% absent the voluntary waivers of a portion of the management
fee, administrative personnel and services fee and the shareholder services
fee.

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

<TABLE>
<S> <C> <C> <C> <C>
EXAMPLE 1 year 3 years 5 years 10 years
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period, and (3) payment of the maximum sales charge............. $67 $91 $118 $194
</TABLE>

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

SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.

<TABLE>
<S> <C> <C>
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................. None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of offering price)....................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................. 5.50%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................. None
Exchange Fee................................................................................................... None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................................. 0.60%
12b-1 Fee...................................................................................................... 0.75%
Total Other Expenses........................................................................................... 0.61%
Shareholder Services Fee........................................................................ 0.25%
Total Operating Expenses (3)(4)....................................................................... 1.96%

</TABLE>

(1) The contingent deferred sales charge is 5.50% in the first year declining to
1.00% in the sixth year and 0.00% thereafter. (See "Contingent Deferred
Sales Charge").

(3) Class B Shares convert to Class A Shares (which pay lower ongoing expenses)
approximately eight years after purchase.

(4) The total operating expenses would have been 2.11% absent the voluntary
waivers of a portion of the management fee, and administrative personnel and
services fee.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

<TABLE>
<S> <C> <C>
EXAMPLE 1 year 3 years
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period.......................................................... $77 $105
You would pay the following expenses on the same investment, assuming no redemption................ $20 $ 62
</TABLE>

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

SUMMARY OF FUND EXPENSES
FEDERATED STOCK AND BOND FUND, INC.

<TABLE>
<S> <C> <C>
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price).................................. None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price).......................................................................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) (1)............................................................. 1.00%
Redemption Fee (as a percentage of amount redeemed, if applicable)............................................. None
Exchange Fee................................................................................................... None

ANNUAL OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee (after waiver) (2).............................................................................. 0.60%
12b-1 Fee...................................................................................................... 0.75%
Total Other Expenses........................................................................................... 0.68%
Shareholder Services Fee........................................................................ 0.25%
Total Operating Expenses (3).......................................................................... 2.03%
</TABLE>

(1) The contingent deferred sales charge assessed is 1.00% of the lesser of the
original purchase price or the net asset value of Shares redeemed within one
year of their purchase date. For a more complete description, (See
"Contingent Deferred Sales Charge.")

(3) The total operating expenses would have been 2.18% absent the voluntary
waivers of a portion of the management fee and administrative personnel and
services fee.

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

LONG-TERM SHAREHOLDERS MAY PAY MORE THAN THE ECONOMIC EQUIVALENT OF THE
MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

<TABLE>
<S> <C> <C>
EXAMPLE 1 year 3 years
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return and (2)
redemption at the end of each time period.......................................................... $31 $64
You would pay the following expenses on the same investment, assuming no redemption................ $21 $64
</TABLE>

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

FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
CLASS A SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated December 6, 1996, on the Fund's
financial statements for the year ended October 31, 1996, is included in the
Annual Report, which is incorporated by reference. This table should be read in
conjunction with the Fund's financial statements and notes thereto, which may be
obtained from the Fund.

<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
YEAR ENDED OCTOBER 31, 31,
1996 1995 1994 1993 1992 1991 1990(A) 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11 $ 14.94
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.61 0.63 0.51 0.55 0.65 0.74 1.37 0.91
- --------------------------------------
Net realized and unrealized
gain (loss) on investments 1.81 2.21 (0.59) 1.58 0.39 2.17 (2.22) 0.91
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total from investment operations 2.42 2.84 (0.08) 2.13 1.04 2.91 (0.85) 1.82
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
LESS DISTRIBUTIONS
- --------------------------------------
Distributions from net investment
income (0.63) (0.62) (0.54) (0.56) (0.68) (0.77) (0.66) (0.94)
- --------------------------------------
Distributions from net realized gain
on investment transactions (1.21) (0.09) -- (0.61) (0.19) -- -- (0.71)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total distributions (1.84) (0.71) (0.54) (1.17) (0.87) (0.77) (0.66) (1.65)
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
NET ASSET VALUE, END OF PERIOD $ 18.96 $ 18.38 $ 16.25 $ 16.87 $ 15.91 $ 15.74 $ 13.60 $ 15.11
- -------------------------------------- --------- --------- --------- --------- --------- --------- ----------- ---------
TOTAL RETURN (B) 14.57% 17.99% (0.48)% 14.10% 7.94% 21.78% (5.90)% 12.46%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.10% 1.07% 1.06% 1.04% 1.04% 1.01% 1.01%* 1.01%
- --------------------------------------
Net investment income 3.44% 3.71% 3.23% 3.49% 4.15% 4.91% 5.77%* 5.82%
- --------------------------------------
Expense waiver/
reimbursement (c) 0.27% 0.31% 0.07% 0.20% 0.21% 0.45% 0.54%* 0.51%
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $130,694 $134,669 $125,382 $124,583 $95,387 $88,534 $79,003 $88,367
- --------------------------------------
Average commission rate paid (d) $ .0307 -- -- -- -- -- -- --
- --------------------------------------
Portfolio turnover 74% 68% 45% 51% 43% 72% 49% 26%
- --------------------------------------

<CAPTION>
1988 1987
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.89 $ 15.34
- --------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------
Net investment income 0.85 0.81
- --------------------------------------
Net realized and unrealized
gain (loss) on investments 0.52 (0.24)
- -------------------------------------- --------- ---------
Total from investment operations 1.37 0.57
- -------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- --------------------------------------
Distributions from net investment
income (0.86) (0.79)
- --------------------------------------
Distributions from net realized gain
on investment transactions (0.46) (0.23)
- -------------------------------------- --------- ---------
Total distributions (1.32) (1.02)
- -------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 14.94 $ 14.89
- -------------------------------------- --------- ---------
TOTAL RETURN (B) 9.28% 3.58%
- --------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------
Expenses 1.00% 1.00%
- --------------------------------------
Net investment income 5.53% 5.07%
- --------------------------------------
Expense waiver/
reimbursement (c) 0.39% 0.22%
- --------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------
Net assets, end of period (000
omitted) $90,504 $92,105
- --------------------------------------
Average commission rate paid (d) -- --
- --------------------------------------
Portfolio turnover 131% 110%
- --------------------------------------
</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.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

Further information about the Fund's performance is contained in the Fund's
annual report, dated October 31, 1996, which can be obtained free of charge.

FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
CLASS B SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.89
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.02
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.05
- ---------------------------------------------------------------------------------------------- -------
Total from investment operations 1.07
- ---------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 18.96
- ---------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 5.98%
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 1.96%*
- ----------------------------------------------------------------------------------------------
Net investment income 3.52%*
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.15%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $94
- ----------------------------------------------------------------------------------------------
Average commission rate paid (d) $ .0307
- ----------------------------------------------------------------------------------------------
Portfolio turnover 74%
- ----------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.
(a) Reflects operations for the period from August 30, 1996 (date of initial
public offering) to October 31, 1996.

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

(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

Further information about the Fund's performance is contained in the Fund's
annual report, dated October 31, 1996, which can be obtained free of charge.

FINANCIAL HIGHLIGHTS
FEDERATED STOCK AND BOND FUND, INC.
CLASS C SHARES
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

<TABLE>
<CAPTION>
PERIOD ENDED
OCTOBER 31, 1996(A)
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.89
- ----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------
Net investment income 0.04
- ----------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 1.03
- ---------------------------------------------------------------------------------------------- -------
Total from investment operations 1.07
- ---------------------------------------------------------------------------------------------- -------
NET ASSET VALUE, END OF PERIOD $ 18.96
- ---------------------------------------------------------------------------------------------- -------
TOTAL RETURN (B) 5.98%
- ----------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------------------------------
Expenses 2.03%*
- ----------------------------------------------------------------------------------------------
Net investment income 1.94%*
- ----------------------------------------------------------------------------------------------
Expense waiver/reimbursement (c) 0.15%*
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $2
- ----------------------------------------------------------------------------------------------
Average commission rate paid (d) $ .0307
- ----------------------------------------------------------------------------------------------
Portfolio turnover 74%
- ----------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from August 30, 1996 (date of initial
public offering) to October 31, 1996.

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

Further information about the Fund's performance is contained in the Fund's
annual report, dated October 31, 1996, which can be obtained free of charge.

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

INVESTMENT POLICIES

ACCEPTABLE INVESTMENTS

Poor's Ratings Group ("S&P"), or Fitch Investors Service, Inc. ("Fitch") or
unrated, but determined by the Fund's investment adviser ("Adviser") to be of
comparable quality. The Fund may invest no more than 35% of its assets in
corporate bonds rated below the top four categories or which are unrated but
determined to be of comparable quality by the Adviser. Bonds rated "BBB" by S&P
or Fitch, or "Baa" by Moody's have speculative characteristics. A description of
the ratings categories is contained in the Appendix to this prospectus.
Permitted investments include:

common stocks;

preferred stocks;

corporate bonds;
convertible securities;

obligations of the United States;

notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;

taxable municipal debt obligations rated BBB or better by an NRSRO, or which
are of comparable quality in the judgment of the 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;

bankers' acceptances;

other securities;

repurchase agreements collateralized by acceptable investments.

COMMON STOCKS

CORPORATE BONDS

The prices of fixed income securities generally fluctuate inversely to the
direction of interest rates.

REDUCING RISKS OF
LOWER-RATED SECURITIES

The 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:

DIVERSIFICATION. The Fund invests in securities of many different issuers,
industries, and economic sectors to reduce portfolio risk.

CONVERTIBLE SECURITIES

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:

direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes,
and bonds;

notes, bonds, and discount notes issued or guaranteed by U.S. government
agencies and instrumentalities supported by the full faith and credit of the
United States; and
notes, bonds, and discount notes of other U.S. government agencies or
instrumentalities which receive or have access to federal funding.

the issuer's right to borrow an amount limited to a specific line of credit
from the U.S. Treasury;

discretionary authority of the U.S. government to purchase certain obligations
of an agency or instrumentality; or

the credit of the agency or instrumentality.

MUNICIPAL SECURITIES

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.

NON-MORTGAGE RELATED
ASSET-BACKED SECURITIES

MORTGAGE RELATED
ASSET-BACKED SECURITIES

COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOS")

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;

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

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")

RESETS OF INTEREST

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.

BANK INSTRUMENTS

RESTRICTED AND
ILLIQUID SECURITIES

investment limitations applicable to illiquid securities.

FOREIGN SECURITIES
AND INVESTMENT RISKS

The Fund may invest in American Depository Receipts, and may invest more than
10% of its total assets in 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.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

TEMPORARY INVESTMENTS

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

LENDING OF PORTFOLIO SECURITIES

PUT AND CALL OPTIONS

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 attempt to hedge the portfolio by entering into financial futures
contracts and to write calls on financial futures contracts.

RISKS

DERIVATIVE CONTRACTS
AND SECURITIES

underlying securities, mortgages or other obligations.

INVESTMENT LIMITATIONS

The following investment limitations cannot be changed without shareholder
approval. The Fund will not:

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;

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 0.75% 12b-1 fee. Class B
Shares will automatically convert into Class A Shares, based on relative net
asset value, on or around the fifteenth of the month eight full years after the
purchase date. Class B Shares provide an investor the benefit of putting all of
the investor's dollars to work from the time the investment is made, but (until
conversion) will have a higher expense ratio and pay lower dividends than Class
A Shares due to the 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 also bear a 0.75% 12b-1 fee. 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 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:
<TABLE>
<CAPTION>
SALES SALES DEALER
CHARGE CHARGE CONCESSION
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
OF PUBLIC OF NET OF PUBLIC
OFFERING AMOUNT OFFERING
AMOUNT OF TRANSACTION PRICE INVESTED PRICE
<S> <C> <C> <C>
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%*
</TABLE>

*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.

REDUCING OR ELIMINATING THE
SALES CHARGE

The sales charge can be reduced or eliminated on the purchase of Class A Shares
through:

quantity discounts and accumulated purchases;

concurrent purchases;

signing a 13-month letter of intent;

using the reinvestment privilege; or

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

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 0.50% 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

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

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 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."

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

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.

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 Class A Shares through a financial
intermediary may be charged a service fee by that financial intermediary.
Redemption requests must be received in proper form and can be made as described
below.

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

REDEEMING SHARES BY MAIL

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

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, other
than retirement accounts subject to required minimum distributions. 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:

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 0.50% 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.

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:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
<S> <C>
First 5.50%
Second 4.75%
Third 4.00%
Fourth 3.00%
Fifth 2.00%
Sixth 1.00%
Seventh and thereafter 0.00%
</TABLE>

CLASS 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.

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 the last
surviving 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; (3) involuntary redemptions by
the Fund of Shares in shareholder accounts that do not comply with the minimum
balance requirements; and (4) qualifying redemptions for Class B Shares under a
Systematic Withdrawal Program. To qualify for elimination of the contingent
deferred sales charge through a Systematic Withdrawal Program, the redemptions
of Class B Shares must be from an account: that is at least 12 months old, has
all Fund distributions reinvested in Fund Shares, and has a value of at least
$10,000 when the Systematic Withdrawal Program is established. Qualifying
redemptions may not exceed 1.00% monthly of the account value as periodically
determined by the Fund. For more information regarding the elimination of the
contingent deferred sales charge through a Systematic Withdrawal Program contact
your financial intermediary or the Fund. 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 Fund reserves the right to discontinue
or modify the elimination of the contingent deferred sales charge. Shareholders
will be notified of a discontinuation. 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 the shareholder is
entitled to such elimination.

ACCOUNT AND SHARE
INFORMATION

CERTIFICATES AND CONFIRMATIONS

Detailed confirmations of each purchase and redemption are sent to each
shareholder. Quarterly confirmations are sent to report dividends paid during
that quarter.

DIVIDENDS

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 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

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 0.55% 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.

ADVISER'S BACKGROUND

PORTFOLIO MANAGERS' BACKGROUND

Scott B. Schermerhorn has been the Fund's portfolio manager since July 1996. Mr.
Schermerhorn joined Federated Investors in 1996 as a Vice President of the
Fund's investment adviser. From 1990 through 1996, Mr. Schermerhorn was a Senior
Vice President and Senior Investment Officer at J W Seligman & Co., Inc. Mr.
Schermerhorn received his M.B.A. in Finance and International Business from
Seton Hall University.

Joseph M. Balestrino has been the Fund's portfolio manager since May 1994 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 portfolio manager since September 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

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 0.25%, 0.75%, and 0.75%, 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.

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

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

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

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 they deem appropriate
("Class Expenses"). In any case, Class Expenses would be limited to: transfer
agent fees as identified by the transfer agent as attributable to holders of
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.

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.