FEDERATED STOCK & BOND FUND INC /MD/, 497, 1998-12-31

FEDERATED STOCK & BOND FUND INC /MD/
497, 1998-12-31

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Federated Stock and Bond Fund, Inc.

CLASS A SHARES
CLASS B SHARES

CLASS C SHARES

A mutual fund seeking to provide relative safety of capital with the possibility
of long-term growth of capital and income by allocating investments primarily
between equity and fixed income securities.

As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or passed upon the adequacy of this
prospectus, and any representation to the contrary is a criminal offense.

<TABLE>
<CAPTION>
CONTENTS

<S> <C>
Risk/Return Summary 1
What are the Fund's Fees and Expenses? 3
What are the Fund's Investment Strategies? 4
What are the Principal Securities in Which the Fund Invests? 5
What are the Specific Risks of Investing in the Fund? 6
What do Shares Cost? 7
How is the Fund Sold? 10
How to Purchase Shares 10
How to Redeem and Exchange Shares 12
Account and Share Information 14
Who Manages the Fund? 15
Financial Information 17
</TABLE>

DECEMBER 31, 1998

Risk/Return Summary

WHAT IS THE FUND'S INVESTMENT OBJECTIVE?

The Fund's investment objective is to provide relative safety of capital with
the possibility of long-term growth of capital and income. Consideration is also
given to current income. While there is no assurance that the Fund will achieve
its investment objective, it endeavors to do so by following the strategies and
policies described in this prospectus.

WHAT ARE THE FUND'S MAIN INVESTMENT STRATEGIES?

The Fund invests in a diversified portfolio that is allocated between equity and
fixed income securities.

WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?

All mutual funds take investment risks. Therefore, it is possible to lose money
by investing in the 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 or guaranteed by the U.S. government, the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.

Stock Market Risks

The value of the stocks in the Fund's portfolio will go up and down. These
fluctuations could be a sustained trend or a drastic movement. Fluctuations in
the Fund's portfolio may reflect changes in individual portfolio stocks or
general changes in stock valuations and will result in changes in the Fund's
share price. The Fund's investment adviser (Adviser) attempts to manage market
risk through diversification by limiting the amount the Fund invests in each
stock. Other risks of investing in the Fund include liquidity risks, risks
related to company size, sector risks, risks related to investing for value, and
leverage risks.

Fixed Income Securities Risks

The primary factors that may reduce the Fund's returns include:
. a general rise in interest rates, and
. defaults or an increase in the risk of defaults on portfolio securities.

Other risks of investing in the Fund include call risks and liquidity risks.

Risk/Return Bar Chart and Table

[GRAPH]

The bar chart shows the variability of the Fund's Class A Shares on a calendar
year-end basis.

The Fund's Class A Shares are sold subject to a sales charge (load). The impact
of the sales charges are not reflected in the total returns above, and if these
amounts were reflected, returns would be less than those shown.

The Fund's Class A Shares average annual total return as of the most recent
calendar quarter of September 30, 1998 was 3.08%.

Within the period shown in the Chart, the Fund's Class A Shares' highest
quarterly return was 10.50% (quarter ended June 30, 1997). Its lowest quarterly
return was (7.58%) (quarter ended September 30, 1990).

Average Annual Total Return

Average Annual Return for the Fund's Class A, Class B, and Class C Shares,
compared to the S&P 500 Index (S&P 500), the Lehman Brothers
Government/Corporate Bond Index (LBGCBI), and the Lipper Balanced Funds Average

(LBFA).

Class A Class B Class C

Calendar Period Shares Shares Shares S&P 500 LBGCBI LBFA
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year 23.92% 23.17% 22.99% 33.36% 9.66% 20.30%
- -----------------------------------------------------------------------------------------------------------
5 Years 13.81% -- -- 20.27% 7.48% 13.24%
- -----------------------------------------------------------------------------------------------------------
10 Years 11.58% -- -- 18.02% 8.96% 12.92%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

The table shows the Fund's Class A, Class B, and Class C Shares average annual
total returns compared to the S&P 500 and LBGCBI, which are broad-based market
indexes, and the LBFA, an average of funds with similar investment objectives.

While past performance does not necessarily predict future performance, this
information provides you with historical performance information so that you can
analyze whether the Fund's investment risks are balanced by its potential
rewards.

What are the Fund's Fees and Expenses?

FEDERATED STOCK AND BOND FUND, INC.

FEES AND EXPENSES

This table describes the fees and expenses that you may pay if you buy, hold and
redeem shares of the Fund's Class A, B, or C Shares.

Shareholder Fees

Fees Paid Directly From Your Investment Class A Class B Class C
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)............... 5.50% None None
Maximum Deferred Sales Charge (Load) (as a percentage of original purchase price or redemption
proceeds, as applicable)........................................................................... 0.00% 5.50% 1.00%
Maximum Sales Charge (Load) Imposed on Reinvested Dividends (and other Distributions) (as a
percentage of offering price)...................................................................... None None None
Redemption Fee (as a percentage of amount redeemed, if applicable)................................. None None None
Exchange Fee....................................................................................... None None None

Annual Fund Operating Expenses (Before Waivers)/1/

Expenses That are Deducted From Fund Assets (as a percentage of average net assets)

Management Fee/2/ /3/.............................................................................. 0.74% 0.74% 0.74%
Distribution (12b-1) Fee/4/........................................................................ 0.25% 0.75% 0.75%
Shareholder Services Fee........................................................................... 0.25% 0.25% 0.25%
Other Expenses..................................................................................... 0.08% 0.33% 0.33%
Total Annual Fund Operating Expenses............................................................... 1.32% 2.07%/4/ 2.07%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

1 Although not contractually obligated to do so, the adviser waived and
distributor reimbursed certain amounts. These are shown below along with the
net expenses the Fund actually paid for the fiscal year ended October 31,
1998.

<TABLE>

<S> <C> <C> <C>
Waiver of Fund Expenses.......................................................................... 0.07% 0.07% 0.07%
Total Actual Annual Fund Operating Expenses (after waivers)...................................... 1.25% 2.00% 2.00%
</TABLE>

2 The adviser has voluntarily waived a portion of the management fee. The
adviser can terminate this voluntary waiver at any time. The management fee
paid by the Fund (after the voluntary waiver) was 0.67% for the year ended
October 31, 1998.

3 Class A Shares did not pay or accrue the distribution (12b-1) fee during the
year ended October 31, 1998. Class A Shares has no present intention of paying
or accruing the distribution (12b-1) fee during the year ending October 31,
1999.

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

EXAMPLE:

The following Example is intended to help you compare the cost of investing in
the Fund's Class A, Class B, and Class C Shares with the cost of investing in
other mutual funds.

The Example assumes that you invest $10,000 in the Fund's Class A, Class B,
and Class C Shares for the time periods indicated and then redeem all of your
shares at the end of those periods. Expenses assuming no redemption are also
shown. The Example also assumes that your investment has a 5% return each year
and that the Fund's Class A, Class B, and Class C Shares operating expenses are
before waivers as shown above and remain the same. Although your actual costs
may be higher or lower, based on these assumptions your costs would be:

Share Class 1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>

Class A Shares

- ------------------------------------------------------------------
Expenses assuming

redemption $677 $ 945 $1,234 $2,053
- ------------------------------------------------------------------
Expenses assuming no

redemption $677 $ 945 $1,234 $2,053
- ------------------------------------------------------------------
Class B Shares

- ------------------------------------------------------------------
Expenses assuming

redemption $760 $1,049 $1,314 $2,208
- ------------------------------------------------------------------
Expenses assuming no

redemption $210 $ 649 $1,114 $2,208
- ------------------------------------------------------------------
Class C Shares

- ------------------------------------------------------------------
Expenses assuming

redemption $310 $ 649 $1,114 $2,400
- ------------------------------------------------------------------
Expenses assuming no

redemption $210 $ 649 $1,114 $2,400
- ------------------------------------------------------------------
</TABLE>

What are the Fund's Investment Strategies?

The Adviser's Strategy Committee determines the Fund portfolio's allocation
between equity securities and fixed income securities based upon an analysis of
general market and economic conditions. During normal market conditions, the
equity allocation ranges from 50% to 70% of the portfolio and the fixed income
allocation ranges from 30% to 50% of the portfolio.

With regard to the portion of the Fund allocated to equity securities, the
Fund pursues its investment objective by investing primarily in equity
securities of companies that are generally leaders in their industries,
characterized by sound management and have the ability to finance expected
growth. The Adviser attempts to identify good long-term values by its
disciplined investment process and careful fundamental research. The Fund's
holdings ordinarily will be in the top 25% of their industries with regard to
revenues.

The Adviser ranks the future performance potential of companies, based on
valuation models which attempt to identify companies trading at low valuation
relative to their history, to the market and to their expected future growth. To
determine the timing of purchases and sales of portfolio securities, the Adviser
looks at recent stock price performance and the direction of current fiscal year
earning estimates. In addition, the Adviser performs traditional fundamental
analysis to select the most promising companies for the Fund's portfolio.

Companies with similar characteristics may be grouped together in broad
categories called sectors. In determining the amount to invest in a security,
the Adviser limits the Fund's exposure to each business sector that comprises
the S&P 500 Index. Within the equity portion of the portfolio, the Fund's
allocation to a sector will not be less than 50% or more than 200% of the
Index's allocation to that sector.

With regard to the fixed income securities allocation, the Fund invests
primarily in investment grade fixed income securities. The Adviser allocates the
Fund's portfolio among business sectors and adjusts the credit quality of the
portfolio by analyzing current economic and securities market conditions,
particularly changes in interest rates and expected trends in corporate
earnings. These factors also guide the selection of maturity and duration of
portfolio securities. Duration measures the price sensitivity of a fixed income
security to changes in interest rates. In selecting a portfolio security, the
Adviser analyzes the business, competitive position, and financial condition of
the issuer to assess whether the security's risk is commensurate with its
potential return.

TEMPORARY DEFENSIVE INVESTMENTS

The Fund may temporarily depart from its principal investment strategies by
investing its assets in cash, cash items, and shorter-term, higher quality debt
securities and similar obligations. It may do this to minimize potential losses
and maintain liquidity to meet shareholder redemptions during adverse market
conditions. This may cause the Fund to give up greater investment returns to
maintain the safety of principal, that is, the original amount invested by
shareholders.

What are the Principal Securities in Which the Fund Invests?

COMMON STOCKS

Common stocks are the most prevalent type of equity security. Common
stockholders receive the residual value of the issuer's earnings and assets
after the issuer pays its creditors and any preferred stockholders. As a result,
changes in an issuer's earnings directly influence the value of its common
stock.

CORPORATE DEBT SECURITIES

Corporate debt securities are fixed income securities issued by businesses.
Fixed income securities pay interest, dividends or distributions at a specified
rate. The rate may be fixed or adjusted periodically. The issuer must also repay
the principal amount of the security, normally within a specified time. Notes,
bonds, debentures and commercial paper are the most prevalent types of corporate
debt securities.

INVESTMENT RATINGS FOR INVESTMENT GRADE SECURITIES

The Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more nationally recognized rating services. For
example, Standard and Poor's, a rating service, assigns ratings to investment
grade securities (AAA, AA, A, and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal (default) when
due on each security. Lower credit ratings correspond to higher credit risk. If
a security has not received a rating, the Fund must rely entirely upon the
Adviser's credit assessment that the security is comparable to investment
grade.

What are the Specific Risks of Investing in the Fund?

The specific risks associated with equity securities are as follows:

STOCK MARKET RISKS

The value of equity securities in the Fund's portfolio will go up and down.
These fluctuations could be a sustained trend or a drastic movement. The Fund's
portfolio will reflect changes in prices of individual portfolio stocks or
general changes in stock valuations. Consequently, the Fund's share price may
decline and you could lose money.

The Fund's Adviser attempts to manage market risk of investing in individual
securities by limiting the amount the Fund invests in each stock.

LIQUIDITY RISKS

Equity securities that are not widely held may trade less frequently than more
widely held securities. This limits trading opportunity making it more difficult
to sell or buy the securities at a favorable price or time. In response, the
Fund may have to lower the price, sell other securities, or give up an
investment opportunity, any of which could have a negative effect on its
performance. Infrequent trading may also lead to greater price volatility.

RISKS RELATED TO COMPANY SIZE

Generally, the smaller the market capitalization of a company, the fewer the
number of shares traded daily, the less liquid its stock and the more volatile
its price. Market capitalization is determined by multiplying the number of
outstanding shares by the current market price per share.

In addition, investing in small capitalization companies entails greater risk
because these companies may have unproven track records, limited product or
service base, limited access to capital and may be more likely to fail than
larger, more established companies.

SECTOR RISK

Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain sector
may perform differently than other sectors or as the market as a whole. As the
Adviser allocates more of the Fund's portfolio holdings to a particular sector,
the Fund's performance will be more susceptible to any economic, business or
other developments which generally affect that sector.

RISKS RELATED TO INVESTING FOR VALUE

Due to their relatively low valuations, Value stocks are typically less volatile
than Growth stocks. For instance, the price of a Value stock may experience a
smaller increase on an analyst's upward earnings estimate revision, a positive
fundamental development, or other positive market development. Further, Value
stocks tend to have higher dividend yields than Growth stocks. This means they
depend less on price changes for returns. Accordingly, they might not
participate in upward market movements, but may be less adversely affected in a
down market compared to lower yielding stocks.

LEVERAGE RISK

Leverage risk is created when an investment exposes the Fund to a level of risk
that exceeds the amount invested. Changes in the value of such an investment
magnify the Fund's risk of loss and potential for gain. Investments can have
these same results if their returns are based on a multiple of a specified
index, security, or other benchmark.

The specific risks associated with fixed income securities are as follows:

MARKET RISK

Prices of fixed income securities rise and fall in response to interest rate
changes for similar securities. Generally, when interest rates rise, prices of
fixed income securities fall.

Interest rate changes have a greater effect on fixed income securities with
longer durations. Duration measures the price sensitivity of a fixed income
security to changes in interest rates.

CREDIT RISK

Credit risk is the possibility that an issuer will default (the issuer fails to
repay interest and principal when due). If an issuer defaults, the Fund will
lose money.

Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Service. Fixed income securities receive
different credit ratings depending on the rating service's assessment of the
likelihood of default by the issuer. The lower the rating of the fixed income
security, the greater the credit risk.

Fixed income securities generally compensate for greater credit risk by paying
interest at a higher rate. The difference between the yield of the security and
the yield of a U.S. Treasury security with a comparable maturity (the "spread")
measures the additional interest received for taking risk. Spreads may increase
generally in response to adverse economic or market conditions. A security's
spread may also increase if the security's rating is lowered, or the security is
perceived to have an increased credit risk. An increase in the spread will cause
the price of the security to decline.

CALL RISK

Call risk is the possibility that an issuer may redeem a fixed income security
before maturity ("call") at a price below its current market price. An increase
in the likelihood of a call may reduce the security's price.

If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

LIQUIDITY RISKS

Fixed income securities that have noninvestment grade credit ratings, have not
been rated or that are not widely held may trade less frequently than other
securities. This limits trading opportunity making it more difficult to sell or
buy the securities at a favorable price or time. This may increase the price
volatility of these securities.

What do Shares Cost?

You can purchase, redeem, or exchange Shares any day the New York Stock Exchange
(NYSE) is open. When the Fund receives your transaction request in proper form,
it is processed at the next determined net asset value (NAV) plus any applicable
sales charge (public offering price).

NAV is determined at the end of regular trading (normally 4:00 p.m. Eastern
time) each day the NYSE is open. The Fund's current NAV and public offering
price may be found in the mutual funds section of local newspapers under
"Federated" and the appropriate class designation listing.

The following table summarizes the minimum required investment amount and the
maximum sales charge, if any, that you will pay on an investment in the Fund.
Keep in mind that investment professionals may charge you fees for their
services in connection with your Share transactions.

Maximum Sales Charge
Minimum -----------------------------
Initial/ Contingent
Subsequent Front-End Deferred
Investment Sales Sales

Shares Offered Amounts/1/ Charge/2/ Charge/3/

- -----------------------------------------------------------------
<S> <C> <C> <C>
Class A $1500/$100 5.50% 0.00%

- -----------------------------------------------------------------
Class B $1500/$100 None 5.50%
- -----------------------------------------------------------------
Class C $1500/$100 None 1.00%
- -----------------------------------------------------------------
</TABLE>

1 The minimum initial and subsequent investment amounts for retirement plans
are $250 and $100, respectively. The minimum subsequent investment amounts
for Systematic Investment Programs is $50. Investment professionals may
impose higher or lower minimum investment requirements on their customers
than those imposed by the Fund. Orders for $250,000 or more will be invested
in Class A Shares instead of Class B Shares to maximize your return and
minimize the sales charges and marketing fees. Accounts held in the name of
an investment professional may be treated differently. Class B Shares will
automatically convert into Class A Shares after eight full years from the
purchase date. This conversion is a non-taxable event.

2 Front-End Sales Charge is expressed as a percentage of public offering
price. See "Sales Charge When You Purchase" below.

3 See "Sales Charge When You Redeem" below.

SALES CHARGE WHEN YOU PURCHASE

Class A Shares

- ----------------------------------------------------------------
Sales Charge

as a Percentage Sales Charge
of Public as a Percentage

Purchase Amount Offering Price of NAV

- ----------------------------------------------------------------
<S> <C> <C>
Less than $50,000 5.50% 5.82%

- ----------------------------------------------------------------
$50,000 but less than

$100,000 4.50% 4.71%
- ----------------------------------------------------------------
$100,000 but less than

$250,000 3.75% 3.90%
- ----------------------------------------------------------------
$250,000 but less than

$500,000 2.50% 2.56%
- ----------------------------------------------------------------
$500,000 but less than

$1 million 2.00% 2.04%
- ----------------------------------------------------------------
$1 million or greater/1/ 0.00% 0.00%
</TABLE>

1 A contingent deferred sales charge of 0.75% of the redemption amount applies
to Class A Shares redeemed up to 24 months after purchase under certain
investment programs where an investment professional received an advance
payment on the transaction.

The sales charge at purchase may be reduced or eliminated by:

. purchasing Shares in greater quantities to reduce the applicable sales charge;
. combining concurrent purchases of Shares:

-by you, your spouse, and your children under age 21; or
-of the same share class of two or more Federated Funds (other than money

market funds);

. accumulating purchases (in calculating the sales charge on an additional
purchase, include the current value of previous Share purchases still invested
in the Fund); or

. signing a letter of intent to purchase a specific dollar amount of Shares
within 13 months (call your investment professional or the Fund for more
information).

The sales charge will be eliminated when you purchase Shares:

. within 120 days of redeeming Shares of an equal or lesser amount;
. by exchanging shares from the same share class of another Federated Fund

(other than a money market fund);

. through wrap accounts or other investment programs where you pay the
investment professional directly for services;

. through investment professionals that receive no portion of the sales charge
. as a Federated Life Member (Class A Shares only) and their immediate family

members; or

. Director/Trustee or employee of the fund, the Adviser, the Distributor and
their affiliates, and the immediate family members of these individuals.

If your investment qualifies for a reduction or elimination of the sales charge,
you or your investment professional should notify the Fund's Distributor,
Federated Securities Corp., at the time of purchase. If the Distributor is not
notified, you will receive the reduced sales charge only on additional
purchases, and not retroactively on previous purchases.

SALES CHARGE WHEN YOU REDEEM

Your redemption proceeds may be reduced by a sales charge, commonly referred to
as a contingent deferred sales charge (CDSC).

<TABLE>

<S> <C>

Class A Shares

- -----------------------------------------------------------------------
A contingent deferred sales charge of 0.75% of the redemption
amount applies to Class A Shares redeemed up to 24 months after
purchase under certain investment programs where an investment
professional received an advance payment on the transaction.

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

Class B Shares

- -----------------------------------------------------------------------
Shares Held Up To: CDSC

- -----------------------------------------------------------------------
1 year 5.50%
- -----------------------------------------------------------------------
2 years 4.75%
- -----------------------------------------------------------------------
3 years 4.00%
- -----------------------------------------------------------------------
4 years 3.00%
- -----------------------------------------------------------------------
5 years 2.00%
- -----------------------------------------------------------------------
6 years 1.00%
- -----------------------------------------------------------------------
7 years or more 0.00%
- -----------------------------------------------------------------------

Class C Shares

- -----------------------------------------------------------------------
You will pay a 1% CDSC if you redeem Shares within one year of
the purchase date.

</TABLE>

You Will Not be Charged a CDSC When Redeeming Shares:
. purchased with reinvested dividends or capital gains;

. purchased within 120 days of redeeming Shares of an equal or lesser amount;
. that you exchanged into the same share class of another Federated Fund where

the shares were held for the applicable CDSC holding period (other than a
money market fund);

. purchased through investment professionals that did not receive advanced
sales payments; or

. if after you purchase shares you become disabled as defined by the IRS.

In addition, you will not be charged a CDSC:

. if the Fund redeems your Shares and closes your account for not meeting the
minimum balance requirement;

. if your redemption is a required retirement plan distribution;
. upon the death of the last surviving shareholder(s) of the account.

If your redemption qualifies, you or your investment professional
should notify the Distributor at the time of redemption to eliminate the CDSC.
If the Distributor is not notified, the CDSC will apply.

To keep the sales charge as low as possible, the Fund redeems your Shares in
this order:

. Shares that are not subject to a CDSC;

. Shares held the longest (to determine the number of years your Shares have
been held, include the time you held shares of other Federated Funds that have
been exchanged for Shares of this Fund); and

. then, the CDSC is calculated using the share price at the time of purchase or
redemption, whichever is lower.

How is the Fund Sold?

The Fund offers three share classes: Class A Shares, Class B Shares, and Class C
Shares, each representing interests in a single portfolio of securities.

The Fund's Distributor markets the Shares described in this prospectus to
institutions or individuals, directly or through investment professionals.

When the Distributor receives sales charges and marketing fees, it may pay
some or all of them to investment professionals. The Distributor and its
affiliates may pay out of their assets other amounts (including items of
material value) to investment professionals for marketing and servicing Shares.
The Distributor is a subsidiary of Federated Investors, Inc. (Federated).

RULE 12B-1 PLAN

The Fund has adopted a Rule 12b-1 Plan, which allows it to pay marketing fees to
the Distributor and investment professionals for the sale, distribution and
customer servicing of the Fund's Class A Shares, Class B Shares, and Class C
Shares. Because these Shares pay marketing fees on an ongoing basis, your
investment cost may be higher over time than other shares with different sales
charges and marketing fees.

How to Purchase Shares

You may purchase Shares through an investment professional, directly from the
Fund, or through an exchange from another Federated Fund. The Fund reserves the
right to reject any request to purchase or exchange Shares.

Where the Fund offers more than one Share Class and you do not specify the
Class choice on your New Account Form or form of payment (Federal Reserve wire
or check), you automatically will receive Class A Shares.

THROUGH AN INVESTMENT PROFESSIONAL

. Establish an account with the investment professional; and
. Submit your purchase order to the investment professional before the end of

regular trading on the NYSE (normally 4:00 p.m. Eastern time). You will
receive the next calculated NAV if the investment professional forwards the
order to the Fund on the same day and the Fund receives payment within three
business days. You will become the owner of Shares and receive dividends when
the Fund receives your payment.

Investment professionals should send payments according to the instructions in
the sections "By Wire" or "By Check."

DIRECTLY FROM THE FUND

. Establish your account with the Fund by submitting a completed New Account

Form; and

. Send your payment to the Fund by Federal Reserve wire or check.

You will become the owner of Shares and your Shares will be priced at the next
calculated NAV after the Fund receives your wire or your check. If your check
does not clear, your purchase will be canceled and you could be liable for any
losses or fees the Fund or its transfer agent incurs.

An institution may establish an account and place an order by calling the Fund
and the Shares will be priced at the next calculated NAV after the Fund receives
the order.

By Wire

Send your wire to:

State Street Bank and Trust Company
Boston, MA
Dollar Amount of Wire

ABA Number 011000028
Attention: EDGEWIRE

Wire Order Number, Dealer Number, or Group Number
Nominee/Institution Name
Fund Name and Number and Account Number

You cannot purchase Shares by wire on holidays when wire transfers are
restricted.

By Check

Make your check payable to The Federated Funds, note your account number on the
check, and mail it to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

If you send your check by a private courier or overnight delivery service that
requires a street address, mail it to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

Payment should be made in U.S. dollars and drawn on a U.S. bank. The Fund will
not accept third-party checks (checks originally payable to someone other than
you or The Federated Funds).

THROUGH AN EXCHANGE

You may purchase Shares through an exchange from the same Share class of another
Federated Fund. You must meet the minimum initial investment requirement for
purchasing Shares and both accounts must have identical registrations.

BY SYSTEMATIC INVESTMENT PROGRAM

Once you have opened an account, you may automatically purchase additional
Shares on a regular basis by completing the Systematic Investment Program
section of the New Account Form or by contacting the Fund or your investment
professional.

BY AUTOMATED CLEARINGHOUSE (ACH)

Once you have opened an account, you may purchase additional Shares through a
depository institution that is an ACH member. This purchase option can be
established by completing the appropriate sections of the New Account Form.

RETIREMENT INVESTMENTS

You may purchase Shares as retirement investments (such as qualified plans and
IRAs or transfer or rollover of assets). Call your investment professional or
the Fund for information on retirement investments. We suggest that you discuss
retirement investments with your tax adviser. You may be subject to an annual
IRA account fee.

How to Redeem and Exchange Shares

You should redeem or exchange Shares:

. through an investment professional if you purchased Shares through an
investment professional; or

. directly from the Fund if you purchased Shares directly from the Fund.

THROUGH AN INVESTMENT PROFESSIONAL

Submit your redemption or exchange request to your investment professional by
the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time). The
redemption amount you will receive is based upon the next calculated NAV after
the Fund receives the order from your investment professional.

DIRECTLY FROM THE FUND

By Telephone

You may redeem or exchange Shares by calling the Fund once you have completed
the appropriate authorization form for telephone transactions. If you call
before the end of regular trading on the NYSE (normally 4:00 p.m. Eastern time)
you will receive a redemption amount based on that day's NAV.

By Mail

You may redeem or exchange Shares by mailing a written request to the Fund. You
will receive a redemption amount based on the next calculated NAV after the day
the Fund receives your written request in proper form.

Send requests by mail to:

Federated Shareholder Services Company
P.O. Box 8600

Boston, MA 02266-8600

Send requests by private courier or overnight delivery service to:

Federated Shareholder Services Company
1099 Hingham Street
Rockland, MA 02370-3317

All requests must include:

. Fund Name and Share Class, account number and account registration;
. amount to be redeemed or exchanged;
. signatures of all Shareholders exactly as registered; and
. if exchanging, the Fund Name and Share Class, account number and account

registration into which you are exchanging.

Call your investment professional or the Fund if you need special instructions.

Signature Guarantees

Signatures must be guaranteed if:

. your redemption will be sent to an address other than the address of record;
. your redemption will be sent to an address of record that was changed within

the last thirty days;

. a redemption is payable to someone other than the shareholder(s) of record; or
. if exchanging (transferring) into another fund with a different shareholder

registration.

A signature guarantee is designed to protect your account from fraud. Obtain a
signature guarantee from a bank or trust company, savings association, credit
union, or broker, dealer, or securities exchange member. A notary public cannot
provide a signature guarantee.

PAYMENT METHODS FOR REDEMPTIONS

Your redemption proceeds will be mailed by check to your address of record. The
following payment options are available if you complete the appropriate section
of the New Account Form or an Account Service Options Form. These payment
options require a signature guarantee if they were not established when the
account was opened:
. an electronic transfer to your account at a financial institution that is an

ACH member; or

. wire payment to your account at a domestic commercial bank that is a Federal
Reserve System member.

Redemption in Kind

Although the Fund intends to pay Share redemptions in cash, it reserves the
right to pay the redemption price in whole or in part by a distribution of the
Fund's portfolio securities.

LIMITATIONS ON REDEMPTION PROCEEDS

Redemption proceeds normally are wired or mailed within one business day after
receiving a request in proper form. Payment may be delayed up to seven days:

. to allow your purchase to clear;
. during periods of market volatility; or

. when a shareholder's trade activity or amount adversely impacts the Fund's
ability to manage its assets.

You will not accrue interest or dividends on uncashed checks from the Fund if
those checks are undeliverable and returned to the Fund.

REDEMPTIONS FROM RETIREMENT ACCOUNTS

In the absence of your specific instructions, 10% of the value of your
redemption from a retirement account in the Fund may be withheld for taxes. This
withholding only applies to certain types of retirement accounts.

EXCHANGE PRIVILEGES

You may exchange Shares of the Fund into Shares of the same class of another
Federated Fund. To do this, you must:
. ensure that the account registrations are identical;
. meet any minimum initial investment requirements; and
. receive a prospectus for the fund into which you wish to exchange.

An exchange is treated as a redemption and a subsequent purchase, and is a
taxable transaction.The Fund may modify or terminate the exchange privilege at
any time. The Fund's management or investment adviser may determine from the
amount, frequency and pattern of exchanges that a shareholder is engaged in
excessive trading that is detrimental to the Fund and other shareholders. If
this occurs, the Fund may terminate the availability of exchanges to that
shareholder and may bar that shareholder from purchasing other Federated Funds.

SYSTEMATIC WITHDRAWAL/EXCHANGE PROGRAM

You may automatically redeem or exchange Shares in a minimum amount of $100.00
on a regular basis. Complete the appropriate section of the New Account Form or
an Account Service Options Form or contact your investment professional or the
Fund. Your account value must meet the minimum initial investment amount at the
time the program is established. This program may reduce, and eventually
deplete, your account. Payments should not be considered yield or income.
Generally, it is not advisable to continue to purchase Shares subject to a sales
charge while redeeming Shares using this program.

Systematic Withdrawal Program (SWP) on Class B Shares

You will not be charged a CDSC on SWP redemptions if:
. you redeem 12% or less of your account value in a single year;
. your account is at least one year old;
. you reinvest all dividends and capital gains distributions; and
. your account has at least a $10,000 balance when you establish the SWP. (You

cannot aggregate multiple Class B Share accounts to meet this minimum
balance).

You will be subject to a CDSC on redemption amounts that exceed the 12% annual
limit. In measuring the redemption percentage, your account is valued when you
establish the SWP and then annually at calendar year-end. You can redeem only at
a rate of 1% monthly, 3% quarterly, or 6% semi-annually.

ADDITIONAL CONDITIONS

Telephone Transactions

The Fund will record your telephone instructions. If the Fund does not follow
reasonable procedures, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

Share Certificates

The Fund no longer issues share certificates. If you are redeeming or exchanging
Shares represented by certificates previously issued by the Fund, you must
return the certificates with your written redemption or exchange request. For
your protection, send your certificates by registered or certified mail, but do
not endorse them.

Account and Share Information

CONFIRMATIONS AND ACCOUNT STATEMENTS

You will receive confirmation of purchases, redemptions and exchanges (except
for systematic transactions). In addition, you will receive periodic statements
reporting all account activity, including systematic transactions, dividends and
capital gains paid.

DIVIDENDS AND CAPITAL GAINS

The Fund declares and pays any dividends quarterly to shareholders. Dividends
are paid to all shareholders invested in the Fund on the record date. The record
date is the date on which a shareholder must officially own shares in order to
earn a dividend.

In addition, the Fund pays any capital gains at least annually. Your dividends
and capital gains distributions will be automatically reinvested in additional
Shares without a sales charge, unless you elect cash payments.

If you purchase Shares just before a Fund declares a dividend or capital gain
distribution, you will pay the full price for the Shares and then receive a
portion of the price back in the form of a distribution, whether or not you
reinvest the distribution in Shares. Therefore, you should consider the tax
implications of purchasing Shares shortly before the Fund declares a dividend or
capital gain. Contact your investment professional or the Fund for information
concerning when dividends and capital gains will be paid.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, non-retirement
accounts may be closed if redemptions or exchanges cause the account balance to
fall below the minimum initial investment amount. Before an account is closed
you will be notified and allowed 30 days to purchase additional Shares to meet
the minimum.

TAX INFORMATION

The Fund sends an annual statement of your account activity to assist you in
completing your federal, state and local tax returns. Fund distributions of
dividends and capital gains are taxable to you whether paid in cash or
reinvested in the Fund. Dividends are taxable as ordinary income; capital gains
are taxable at different rates depending upon the length of time the Fund holds
its assets.

Fund distributions are expected to be both dividends and capital gains.
Redemptions and exchanges are taxable sales. Please consult your tax adviser
regarding your federal, state, and local tax liability.

Who Manages the Fund?

The Board of Directors governs the Fund. The Board selects and oversees the
Adviser, Federated Management. The Adviser manages the Fund's assets, including
buying and selling portfolio securities. The Adviser's address is Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.

THE FUND'S PORTFOLIO MANAGERS ARE:

Michael P. Donnelly

Michael P. Donnelly has been a portfolio manager of the Fund since December 1997
and is responsible for managing the equity portion of the Fund. Mr. Donnelly has
been a Portfolio Manager for various Federated Funds for the past five years.
Mr. Donnelly joined Federated Investors, Inc. or its predecessor in 1989 as an
Investment Analyst and has been a Vice President of the Fund's Adviser and
Federated Research Corp. since 1994. He served as an Assistant Vice President of
the Fund's Adviser and Federated Research Corp. from 1992 to 1994. Mr. Donnelly
is a Chartered Financial Analyst and received his M.B.A. from the University of
Virginia.

Joseph M. Balestrino

Joseph M. Balestrino has been a portfolio manager of the Fund since May 1994 and
is responsible for managing the overall allocation of the Fund's assets within
the corporate sector. Mr. Balestrino has been a Portfolio Manager for various
Federated Funds for the past five years. Mr. Balestrino also manages the
investment grade portion of the Fund. Mr. Balestrino joined Federated Investors,
Inc. or its predecessor in 1986 and has been a Vice President of the Fund's
investment Adviser and Federated Research Corp. since 1995. Mr. Balestrino
served as an Assistant Vice President of the investment Adviser and Federated
Research Corp. 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

Mark E. Durbiano has been a portfolio manager of the Fund since September 1996
and is responsible for managing the high yield portion of the Fund. Mr. Durbiano
has been a Portfolio Manager for various Federated Funds for the past five
years. Mr. Durbiano joined Federated Investors, Inc. or its predecessor in 1982
and has been a Senior Vice President of the Fund's investment Adviser and
Federated Research Corp. since January 1996. From 1988 through 1995, Mr.
Durbiano was a Vice President of the Fund's investment Adviser and Federated
Research Corp. Mr. Durbiano is a Chartered Financial Analyst and received his
M.B.A. in Finance from the University of Pittsburgh.

The Adviser and other subsidiaries of Federated advise and/or provide
administrative services to more than 300 mutual funds and private accounts,
which total over $120 billion in assets as of December 31, 1997. Federated was
established in 1955 and is one of the largest mutual fund investment managers in
the United States with more than 2,000 employees. Over 4,000 investment
professionals make Federated Funds available to their customers.

ADVISORY FEES

The Adviser receives an annual investment advisory fee equal to 0.55% of the
Fund's average daily net assets plus 4.50% of the Fund's gross income. The
Adviser may voluntarily waive a portion of its fee or reimburse the Fund for
certain operating expenses.

Gross income includes, in general, discount earned on U.S. Treasury bills and
agency discount notes, interest earned on all interest-bearing obligations, and
dividend income recorded on the ex-dividend date but does not include capital
gains or losses or reduction for expenses.

YEAR 2000 READINESS

The "Year 2000" problem is the potential for computer errors or failures because
certain computer systems may be unable to interpret dates after December 31,
1999. The Year 2000 problem may cause systems to process information incorrectly
and could disrupt businesses that rely on computers, like the Fund.

While it is impossible to determine in advance all of the risks to the Fund,
the Fund could experience interruptions in basic financial and operational
functions. Fund shareholders could experience errors or disruptions in Fund
share transactions or Fund communications.

The Fund's service providers are making changes to their computer systems to
fix any Year 2000 problems. In addition, they are working to gather information
from third-party providers to determine their Year 2000 readiness.

Year 2000 problems would also increase the risks of the Fund's investments. To
assess the potential effect of the Year 2000 problem, the Adviser is reviewing
information regarding the Year 2000 readiness of issuers of securities the Fund
may purchase.

However, this may be difficult with certain issuers. For example, funds
dealing with foreign service providers or investing in foreign securities will
have difficulty determining the Year 2000 readiness of those entities. This is
especially true of entities or issuers in emerging markets.

The financial impact of these issues for the Fund is still being determined.
There can be no assurance that potential Year 2000 problems would not have a
material adverse effect on the Fund.

Financial Information

FINANCIAL HIGHLIGHTS

The Financial Highlights will help you understand the Fund's financial
performance for its past five fiscal years, or since inception, if the life of
the Fund is shorter. Some of the information is presented on a per share basis.
Total returns represent the rate an investor would have earned (or lost) on an
investment in the Fund, assuming reinvestment of all dividends and capital
gains.

This information has been audited by Deloitte & Touche LLP, whose report,
along with the Fund's audited financial statements, is included in the Annual
Report.

Financial Highlights--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 16, 1998, on the Fund's
financial statements for the year ended October 31, 1998, 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.

Year Ended October 31 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.46 $ 18.96 $ 18.38 $ 16.25 $ 16.87
- -----------------------------------------
Income From Investment Operations:

- -----------------------------------------
Net investment income 0.65 0.63 0.61 0.63 0.51
- -----------------------------------------
Net realized and unrealized gain (loss)

on investments 1.37 3.34 1.81 2.21 (0.59)
- ----------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 2.02 3.97 2.42 2.84 (0.08)
- ----------------------------------------------------------------------------------------------------
Less Distributions:

- -----------------------------------------
Distributions from net investment income (0.69) (0.56) (0.63) (0.62) (0.54)
- -----------------------------------------
Distributions from net realized gain on

investments (2.65) (1.91) (1.21) (0.09) --
- -----------------------------------------
TOTAL DISTRIBUTIONS (3.34) (2.47) (1.84) (0.71) (0.54)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.14 $ 20.46 $ 18.96 $ 18.38 $ 16.25
- ----------------------------------------------------------------------------------------------------
Total Return/1/ 11.09% 23.02% 14.57% 17.99% (0.48%)
- ----------------------------------------------------------------------------------------------------

Ratios to Average Net Assets:

- ----------------------------------------------------------------------------------------------------
Expenses 1.25% 1.21% 1.10% 1.07% 1.06%
- ----------------------------------------------------------------------------------------------------
Net investment income 3.30% 3.06% 3.44% 3.71% 3.23%
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/2/ 0.07% 0.16% 0.27% 0.31% 0.07%
- ----------------------------------------------------------------------------------------------------
Supplemental Data:

- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $196,149 $162,780 $130,694 $134,669 $125,382
- ----------------------------------------------------------------------------------------------------
Portfolio turnover 53% 87% 74% 68% 45%
- ----------------------------------------------------------------------------------------------------
</TABLE>

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

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

See Notes which are an integral part of the Financial Statements

Financial Highlights--Class B Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Year Ended October 31 1998 1997 1996/1/
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.45 $18.96 $ 17.89

- -------------------------------------------------------------------------------
Income From Investment Operations:

- -------------------------------------------------------------------------------
Net investment income 0.50 0.51 0.02
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.37 3.34 1.05
- ------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.87 3.85 1.07
- ------------------------------------------------------------------------------------------------------------------
Less Distributions:

- -------------------------------------------------------------------------------
Distributions from net investment income (0.57) (0.45) --
- -------------------------------------------------------------------------------
Distributions from net realized gain on investments (2.65) (1.91) --
- ------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.22) (2.36) --
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.10 $20.45 $ 18.96
- ------------------------------------------------------------------------------------------------------------------
Total Return/2/ 10.26% 22.20% 5.98%
- ------------------------------------------------------------------------------------------------------------------

Ratios to Average Net Assets:

- ------------------------------------------------------------------------------------------------------------------
Expenses 2.00% 1.96% 1.96%/3/
- ------------------------------------------------------------------------------------------------------------------
Net investment income 2.55% 2.31% 3.52%/3/
- ------------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/4/ 0.07% 0.16% 0.15%
- ------------------------------------------------------------------------------------------------------------------
Supplemental Data:

- ------------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $26,487 $4,622 $ 94
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover 53% 87% 74%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

3 Computed on an annualized basis.

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

See Notes which are an integral part of the Financial Statements

Financial Highlights--Class C Shares

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

Year Ended October 31 1998 1997 1996/1/
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 20.42 $18.96 $ 17.89

- ---------------------------------------------------------------------------
Income From Investment Operations:

- ---------------------------------------------------------------------------
Net investment income 0.50 0.47 0.04
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.37 3.35 1.03
- ---------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 1.87 3.82 1.07
- ---------------------------------------------------------------------------------------------------------------
Less Distributions:

- ---------------------------------------------------------------------------
Distributions from net investment income (0.57) (0.45) --
- ---------------------------------------------------------------------------
Total distributions from net realized gain on investments (2.65) (1.91) --
- ---------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (3.22) (2.36) --
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.07 $20.42 $ 18.96
- ---------------------------------------------------------------------------------------------------------------
Total Return/2/ 10.21% 22.08% 5.98%
- ---------------------------------------------------------------------------------------------------------------

Ratios to Average Net Assets:

- ---------------------------------------------------------------------------------------------------------------
Expenses 2.00% 1.96% 2.03%/3/
- ---------------------------------------------------------------------------------------------------------------
Net investment income 2.55% 2.31% 1.94%/3/
- ---------------------------------------------------------------------------------------------------------------
Expense waiver/reimbursement/4/ 0.07% 0.16% 0.15%/3/
- ---------------------------------------------------------------------------------------------------------------
Supplemental Data:

- ---------------------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $10,312 $1,114 $ 2
- ---------------------------------------------------------------------------------------------------------------
Portfolio turnover 53% 87% 74%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

3 Computed on an annualized basis.

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

See Notes which are an integral part of the Financial Statements

A Statement of Additional Information (SAI) dated December 31, 1998, is
incorporated by reference into this prospectus. Additional information about the
Fund's investments is available in the Fund's annual report to shareholders. The
annual report discusses market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. To
obtain the SAI, the annual report and other information without charge, call
your investment professional or the Fund at 1-800-341-7400.

You can obtain information about the Fund (including the SAI) by visiting or
writing the Public Reference Room of the Securities and Exchange Commission in
Washington, DC 20549-6009 or from the Commission's Internet site at http://
www.sec.gov. You can call 1-800-SEC-0330 for information on the Public Reference
Room's operations and copying charges.

Federated

WORLD-CLASS INVESTMENT MANGER(SM)

Federated
Stock and

Bond Fund, Inc.

CLASS A SHARES
CLASS B SHARES
CLASS C SHARES

P R O S P E C T U S

Federated(SM)

Federated Stock and Bond Fund, Inc.
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

1-800-341-7400

www.federatedinvestors.com

Federated Securities Corp., Distributor

Investment Company Act File No. 811-1
Cusip 313911109

Cusip 313911208
Cusip 313911307

8012905 (12/98)

Federated is a registered mark [RECYCLED

of Federated Investors, Inc. PAPER

1998 (C) Federated Investors, Inc. LOGO] DECEMBER 31, 1998

STATEMENT OF ADDITIONAL INFORMATION

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

This Statement of Additional Information (SAI) is not a prospectus. Read
this SAI in conjunction with the prospectus for Federated Stock and Bond Fund,
Inc. (Fund), dated December 31, 1998.

This SAI incorporates by reference the Fund's Annual Report. Obtain the
prospectus or the Annual Report without charge by calling 1-800-341-7400.

DECEMBER 31, 1998

TABLE OF CONTENTS

HOW IS THE FUND ORGANIZED?
SECURITIES IN WHICH THE FUND INVESTS

WHAT DO SHARES COST?
HOW IS THE FUND SOLD?
SUBACCOUNTING SERVICES
REDEMPTION IN KIND

ACCOUNT AND SHARE INFORMATION
TAX INFORMATION
WHO MANAGES AND PROVIDES

SERVICES TO THE FUND?
HOW DOES THE FUND MEASURE PERFORMANCE?
WHO IS FEDERATED INVESTORS, INC.?
FINANCIAL INFORMATION
INVESTMENT RATINGS
ADDRESSES

[Federated Investors Logo]
Federated Securities Corp., Distributor,
subsidiary of Federated Investors, Inc.

CUSIP 313911109
CUSIP 313911208
CUSIP 313911307
8012905 (12/98)

<PAGE>

HOW IS THE FUND ORGANIZED?

The Fund is a diversified open-end, management investment company that was
established under the laws of the State of Maryland on October 31, 1934. The
Corporation may offer separate series of shares representing interests in
separate portfolios of securities. The Corporation changed its name from Stock
and Bond Fund, Inc. to Federated Stock and Bond Fund, Inc. on February 26, 1996.

The Board of Directors (the Board) has established three classes of shares
of the Fund, known as Class A Shares, Class B Shares and Class C Shares
(Shares). This SAI
relates to all of the above-mentioned Shares.

SECURITIES IN WHICH THE FUND INVESTS

In pursuing its investment strategy, the Fund may invest in the following
securities for any purpose that is consistent with its investment objective.

SECURITIES DESCRIPTIONS AND TECHNIQUES

EQUITY SECURITIES

Equity securities represent a share of an issuer's earnings and assets,
after the issuer pays its liabilities. The Fund cannot predict the income it
will receive from equity securities because issuers generally have discretion as
to the payment of any dividends or distributions. However, equity securities
offer greater potential for appreciation than many other types of securities,
because their value increases directly with the value of the issuer's business.
The following describes the types of equity securities in which the Fund
invests.

COMMON STOCKS

Common stocks are the most prevalent type of equity security. Common stocks
receive the issuer's earnings after the issuer pays its creditors and any
preferred stockholders. As a result, changes in an issuer's earnings directly
influence the value of its common stock.

PREFERRED STOCKS

Preferred stocks have the right to receive specified dividends or
distributions before the issuer makes payments on its common stock. Some
preferred stocks also participate in dividends and distributions paid on common
stock. Preferred stocks may also permit the issuer to redeem the stock. The Fund
may also treat such redeemable preferred stock as a fixed income security.

INTERESTS IN OTHER LIMITED LIABILITY COMPANIES

Entities such as limited partnerships, limited liability companies,
business trusts and companies organized outside the United States may issue
securities comparable to common or preferred stock.

REAL ESTATE INVESTMENT TRUSTS (REITS)

REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income tax if
they limit their operations and distribute most of their income. Such tax
requirements limit a REIT's ability to respond to changes in the commercial real
estate market.

WARRANTS

Warrants give the Fund the option to buy the issuer's equity securities at
a specified price (the exercise price) at a specified future date (the
expiration date). The Fund may buy the designated securities by paying the
exercise price before the expiration date. Warrants may become worthless if the
price of the stock does not rise above the exercise price by the expiration
date. This increases the market risks of warrants as compared to the underlying
security. Rights are the same as warrants, except companies typically issue
rights to existing stockholders.

FIXED INCOME SECURITIES

Fixed income securities pay interest, dividends or distributions at a
specified rate. The rate may be a fixed percentage of the principal or adjusted
periodically. In addition, the issuer of a fixed income security must repay the
principal amount of the security, normally within a specified time. Fixed income
securities provide more regular income than equity securities. However, the
returns on fixed income securities are limited and normally do not increase with
the issuer's earnings. This limits the potential appreciation of fixed income
securities as compared to equity securities.

A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease depending
upon whether it costs less (a discount) or more (a premium) than the principal
amount. If the issuer may redeem the security before its scheduled maturity, the
price and yield on a discount or premium security may change based upon the
probability of an early redemption. Securities with higher risks generally have
higher yields.

The following describes the types of fixed income securities in which the
Fund invests.

TREASURY SECURITIES

Treasury securities are direct obligations of the federal government of the
United States. Treasury securities are generally regarded as having the lowest
credit risks.

AGENCY SECURITIES

Agency securities are issued or guaranteed by a federal agency or other
government sponsored entity acting under federal authority (a GSE). The United
States supports some GSEs with its full, faith and credit. Other GSEs receive
support through federal subsidies, loans or other benefits. A few GSEs have no
explicit financial support, but are regarded as having implied support because
the federal government sponsors their activities. Agency securities are
generally regarded as having low credit risks, but not as low as treasury
securities.

The Fund treats mortgage backed securities guaranteed by GSEs as agency
securities. Although a GSE guarantee protects against credit risks, it does not
reduce the
market and prepayment risks of these mortgage backed securities.

CORPORATE DEBT SECURITIES

Corporate debt securities are fixed income securities issued by businesses.
Notes, bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities. The Fund may also purchase interests in bank loans to
companies. The credit risks of corporate debt securities vary widely among
issuers.

In addition, the credit risk of an issuer's debt security may vary based on
its priority for repayment. For example, higher ranking (senior) debt securities
have a higher priority than lower ranking (subordinated) securities. This means
that the issuer might not make payments on subordinated securities while
continuing to make payments on senior securities. In addition, in the event of
bankruptcy, holders of senior securities may receive amounts otherwise payable
to the holders of subordinated securities. Some subordinated securities, such as
trust preferred and capital securities notes, also permit the issuer to defer
payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer any
payment that would reduce its capital below regulatory requirements.

COMMERCIAL PAPER

Commercial paper is an issuer's obligation with a maturity of less than
nine months. Companies typically issue commercial paper to pay for current
expenditures. Most issuers constantly reissue their commercial paper and use the
proceeds (or bank loans) to repay maturing paper. If the issuer cannot continue
to obtain liquidity in this fashion, its commercial paper may default. The short
maturity of commercial paper reduces both the market and credit risks as
compared to other debt securities of the same issuer.

DEMAND INSTRUMENTS

Demand instruments are corporate debt securities that the issuer must repay
upon demand. Other demand instruments require a third party, such as a dealer or
bank, to repurchase the security for its face value upon demand. The Fund treats
demand instruments as short-term securities, even though their stated maturity
may extend beyond one year.

MUNICIPAL SECURITIES

Municipal securities are issued by states, counties, cities and other
political subdivisions and authorities. Although many municipal securities are
exempt from federal income tax, the Fund may invest in taxable municipal
securities.

MORTGAGE BACKED SECURITIES

Mortgage backed securities represent interests in pools of mortgages. The
mortgages that comprise a pool normally have similar interest rates, maturities
and other terms. Mortgages may have fixed or adjustable interest rates.
Interests in pools of adjustable rate mortgages are known as ARMs.

Mortgage backed securities come in a variety of forms. Many have extremely
complicated terms. The simplest form of mortgage backed securities are
pass-through certificates. An issuer of pass-through certificates gathers
monthly payments from an underlying pool of mortgages. Then, the issuer deducts
its fees and expenses and passes the balance of the payments onto the
certificate holders once a month. Holders of pass-through certificates receive a
pro rata share of all payments and pre-payments from the underlying mortgages.
As a result, the holders assume all the prepayment risks of the underlying
mortgages.

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)

CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying pass-through
certificate among holders of different classes of mortgage backed securities.
This creates different prepayment and market risks for each CMO class.

SEQUENTIAL CMOS

In a sequential pay CMO, one class of CMOs receives all principal payments
and prepayments. The next class of CMOs receives all principal payments after
the first class is paid off. This process repeats for each sequential class of
CMO. As a result, each class of sequential pay CMOs reduces the prepayment risks
of subsequent classes.

PACS, TACS AND COMPANION CLASSES

More sophisticated CMOs include planned amortization classes (PACs) and
targeted amortization classes (TACs). PACs and TACs are issued with companion
classes. PACs and TACs receive principal payments and prepayments at a specified
rate. The companion classes receive principal payments and prepayments in excess
of the specified rate. In addition, PACs will receive the companion classes'
share of principal payments, if necessary, to cover a shortfall in the
prepayment rate. This helps PACs and TACs to control prepayment risks by
increasing the risks to their companion classes.

IOS AND POS

CMOs may allocate interest payments to one class (Interest Only or IOs) and
principal payments to another class (Principal Only or POs). POs increase in
value when prepayment rates increase. In contrast, IOs decrease in value when
prepayments increase, because the underlying mortgages generate less interest
payments. However, IOs tend to increase in value when interest rates rise (and
prepayments decrease), making IOs a useful hedge against market risks.

FLOATERS AND INVERSE FLOATERS

Another variant allocates interest payments between two classes of CMOs.
One class (Floaters) receives a share of interest payments based upon a market
index such as LIBOR. The other class (Inverse Floaters) receives any remaining
interest payments from the underlying mortgages. Floater classes receive more
interest (and Inverse Floater classes receive correspondingly less interest) as
interest rates rise. This shifts prepayment and market risks from the Floater to
the Inverse Floater class, reducing the price volatility of the Floater class
and increasing the price volatility of the Inverse Floater class.

Z CLASSES AND RESIDUAL CLASSES

CMOs must allocate all payments received from the underlying mortgages to
some class. To capture any unallocated payments, CMOs generally have an accrual
(Z) class. Z classes do not receive any payments from the underlying mortgages
until all other CMO classes have been paid off. Once this happens, holders of Z
class CMOs receive all payments and prepayments. Similarly, REMICs have residual
interests that receive any mortgage payments not allocated to another REMIC
class.

The degree of increased or decreased prepayment risks depends upon the
structure of the CMOs. However, the actual returns on any type of mortgage
backed security depend upon the performance of the underlying pool of mortgages,
which no one can predict and will vary among pools.

ASSET BACKED SECURITIES

Asset backed securities are payable from pools of obligations other than
mortgages. Most asset backed securities involve consumer or commercial debts
with maturities of less than ten years. However, almost any type of fixed income
assets (including other fixed income securities) may be used to create an asset
backed security. Asset backed securities may take the form of commercial paper,
notes, or pass through certificates. Asset backed securities have prepayment
risks. Like CMOs, asset backed securities may be structured like Floaters,
Inverse Floaters, IOs and POs.

BANK INSTRUMENTS

Bank instruments are unsecured interest bearing deposits with banks. Bank
instruments include bank accounts, time deposits, certificates of deposit and
banker's acceptances. Yankee instruments are denominated in U.S. dollars and
issued by U.S. branches of foreign banks. Eurodollar instruments are denominated
in U.S. dollars and issued by non-U.S. branches of U.S. or foreign banks.

INSURANCE CONTRACTS

Insurance contracts include guaranteed investment contracts, funding
agreements and annuities. The Fund treats these contracts as fixed income
securities.

ZERO COUPON SECURITIES

Zero coupon securities do not pay interest or principal until final
maturity unlike debt securities that provide periodic payments of interest
(referred to as a coupon payment). Investors buy zero coupon securities at a
price below the amount payable at maturity. The difference between the purchase
price and the amount paid at maturity represents interest on the zero coupon
security. Investors must wait until maturity to receive interest and principal,
which increases the market and credit risks of a zero coupon security.

There are many forms of zero coupon securities. Some are issued at a
discount and are referred to as zero coupon or capital appreciation bonds.
Others are created from interest bearing bonds by separating the right to
receive the bond's coupon payments from the right to receive the bond's
principal due at maturity, a process known as coupon stripping. Treasury STRIPs,
IOs and POs are the most common forms of stripped zero coupon securities. In
addition, some securities give the issuer the option to deliver additional
securities in place of cash interest payments, thereby increasing the amount
payable at maturity. These are referred to as pay-in-kind or PIK securities.

CREDIT ENHANCEMENT

Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some cases
the company providing credit enhancement makes all payments directly to the
security holders and receives reimbursement from the issuer. Normally, the
credit enhancer has greater financial resources and liquidity than the issuer.
For this reason, the Adviser usually evaluates the credit risk of a fixed income
security based solely upon its credit enhancement.

Common types of credit enhancement include guarantees, letters of credit,
bond insurance and surety bonds. Credit enhancement also includes arrangements
where securities or other liquid assets secure payment of a fixed income
security. If a default occurs, these assets may be sold and the proceeds paid to
security's holders. Either form of credit enhancement reduces credit risks by
providing another source of payment for a fixed income security.

CONVERTIBLE SECURITIES

Convertible securities are fixed income securities that the Fund has the
option to exchange for equity securities at a specified conversion price. The
option allows the Fund to realize additional returns if the market price of the
equity securities exceeds the conversion price. For example, the Fund may hold
fixed income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed income securities.

Convertible securities have lower yields than comparable fixed income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.

The Fund treats convertible securities as both fixed income and equity
securities for purposes of its investment policies and limitations, because of
their unique characteristics.

FOREIGN SECURITIES

Foreign securities are securities of issuers based outside the United
States. The Fund considers an issuer to be based outside the United States if:

o it is organized under the laws of, or has a principal office located in,
another country;

o the principal trading market for its securities is in another country; or

o it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from goods
produced, services performed, or sales made in another country.

Foreign securities are primarily denominated in foreign currencies. Along
with the risks normally associated with domestic securities of the same type,
foreign securities are subject to currency risks and risks of foreign investing.
Trading in certain foreign markets is also subject to liquidity risks.

DEPOSITARY RECEIPTS

Depositary receipts represent interests in underlying securities issued by
a foreign company. Depositary receipts are not traded in the same market as the
underlying security. The foreign securities underlying American Depositary
Receipts (ADRs) are traded in the United States. ADRs provide a way to buy
shares of foreign-based companies in the United States rather than in overseas
markets. ADRs are also traded in U.S. dollars, eliminating the need for foreign
exchange transactions. The foreign securities underlying European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs), and International Depositary
Receipts (IDRs), are traded globally or outside the United States. Depositary
receipts involve many of the same risks of investing directly in foreign
securities, including currency risks and risks of foreign investing.

FOREIGN EXCHANGE CONTRACTS

In order to convert U.S. dollars into the currency needed to buy a foreign
security, or to convert foreign currency received from the sale of a foreign
security into U.S. dollars, the Fund may enter into spot currency trades. In a
spot trade, the Fund agrees to exchange one currency for another at the current
exchange rate. The Fund may also enter into derivative contracts in which a
foreign currency is an underlying asset. The exchange rate for currency
derivative contracts may be higher or lower than the spot exchange rate. Use of
these derivative contracts may increase or decrease the Fund's exposure to
currency risks.

FOREIGN GOVERNMENT SECURITIES

Foreign government securities generally consist of fixed income securities
supported by national, state or provincial governments or similar political
subdivisions. Foreign government securities also include debt obligations of
supranational entities, such as international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples of these include, but are not limited to, the International Bank for
Reconstruction and Development (the World Bank), the Asian Development Bank, the
European Investment Bank and the Inter-American Development Bank.

Foreign government securities also include fixed income securities of
quasi-governmental agencies that are either issued by entities owned by a
national, state or equivalent government or are obligations of a political unit
that are not backed by the national government's full faith and credit. Further,
foreign government securities include mortgage-related securities issued or
guaranteed by national, state or provincial governmental instrumentalities,
including quasi-governmental agencies.

DERIVATIVE CONTRACTS

Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities, currencies,
commodities, financial indices or other assets. Some derivative contracts (such
as futures, forwards and options) require payments relating to a future trade
involving the underlying asset. Other derivative contracts (such as swaps)
require payments relating to the income or returns from the underlying asset.
The other party to a derivative contract is referred to as a counterparty.

Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract except
for the price. Investors make payments due under their contracts through the
exchange. Most exchanges require investors to maintain margin accounts through
their brokers to cover their potential obligations to the exchange. Parties to
the contract make (or collect) daily payments to the margin accounts to reflect
losses (or gains) in the value of their contracts. This protects investors
against potential defaults by the counterparty. Trading contracts on an exchange
also allows investors to close out their contracts by entering into offsetting
contracts.

For example, the Fund could close out an open contract to buy an asset at a
future date by entering into an offsetting contract to sell the same asset on
the same date. If the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss.
Exchanges may limit the amount of open contracts permitted at any one time. Such
limits may prevent the Fund from closing out a position. If this happens, the
Fund will be required to keep the contract open (even if it is losing money on
the contract), and to make any payments required under the contract (even if it
has to sell portfolio securities at unfavorable prices to do so). Inability to
close out a contract could also harm the Fund by preventing it from disposing of
or trading any assets it has been using to secure its obligations under the
contract.

The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty. OTC
contracts do not necessarily have standard terms, so they cannot be directly
offset with other OTC contracts. In addition, OTC contracts with more
specialized terms may be more difficult to price than exchange traded contracts.

Depending upon how the Fund uses derivative contracts and the relationships
between the market value of a derivative contract and the underlying asset,
derivative contracts may increase or decrease the Fund's exposure to market and
currency risks, and may also expose the Fund to liquidity and leverage risks.
OTC contracts also expose the Fund to credit risks in the event that a
counterparty defaults on the contract.

The Fund may trade in the following types of derivative contracts.

FUTURES CONTRACTS

Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of an underlying asset at a specified price,
date, and time. Entering into a contract to buy an underlying asset is commonly
referred to as buying a contract or holding a long position in the asset.
Entering into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures contracts
are considered to be commodity contracts. Futures contracts traded OTC are
frequently referred to as forward contracts. The Fund can buy or sell futures
contracts on portfolio securities or indexes and engage in foreign currency
forward contracts.

OPTIONS

Options are rights to buy or sell an underlying asset for a specified price
(the exercise price) during, or at the end of, a specified period. A call option
gives the holder (buyer) the right to buy the underlying asset from the seller
(writer) of the option. A put option gives the holder the right to sell the
underlying asset to the writer of the option. The writer of the option receives
a payment, or premium, from the buyer, which the writer keeps regardless of
whether the buyer uses (or exercises) the option.

The Fund may:

Buy put options on portfolio securities and financial futures contracts
including index futures (in anticipation of a decrease in the value of the
underlying asset).

Write call options on portfolio securities, financial futures contracts,
and securities which the Fund has the right to obtain without payment of further
consideration or for which it has segregated cash in the amount of any
additional consideration (to generate income from premiums, and in anticipation
of a decrease or only limited increase in the value of the underlying asset). If
a call written by a Fund is exercised, the Fund foregoes any possible profit
from an increase in the market price of the underlying asset over the exercise
price plus the premium received.

When the Fund writes options on futures contracts, it will be subject to
margin requirements similar to those applied to futures contracts.

HYBRID INSTRUMENTS

Hybrid instruments combine elements of derivative contracts with those of
another security (typically a fixed income security). All or a portion of the
interest or principal payable on a hybrid security is determined by reference to
changes in the price of an underlying asset or by reference to another benchmark
(such as interest rates, currency exchange rates or indices). Hybrid instruments
also include convertible securities with conversion terms related to an
underlying asset or benchmark.

The risks of investing in hybrid instruments reflect a combination of the
risks of investing in securities, options, futures and currencies, and depend
upon the terms of the instrument. Thus, an investment in a hybrid instrument may
entail significant risks in addition to those associated with traditional fixed
income or convertible securities. Hybrid instruments are also potentially more
volatile and carry greater market risks than traditional instruments. Moreover,
depending on the structure of the particular hybrid, it may expose the Fund to
leverage risks or carry liquidity risks.

SPECIAL TRANSACTIONS

REPURCHASE AGREEMENTS

Repurchase agreements are transactions in which the Fund buys a security
from a dealer or bank and agrees to sell the security back at a mutually agreed
upon time and price. The repurchase price exceeds the sale price, reflecting the
Fund's return on the transaction. This return is unrelated to the interest rate
on the underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.

The Fund's custodian or subcustodian will take possession of the securities
subject to repurchase agreements. The Adviser or subcustodian will monitor the
value of the underlying security each day to ensure that the value of the
security always equals or exceeds the repurchase price.

Repurchase agreements are subject to credit risks.

REVERSE REPURCHASE AGREEMENTS

Reverse repurchase agreements are repurchase agreements in which the Fund
is the seller (rather than the buyer) of the securities, and agrees to
repurchase them at an agreed upon time and price. A reverse repurchase agreement
may be viewed as a type of borrowing by the Fund. Reverse repurchase agreements
are subject to credit risks. In addition, reverse repurchase agreements create
leverage risks because the Fund must repurchase the underlying security at a
higher price, regardless of the market value of the security at the time of
repurchase.

DELAYED DELIVERY TRANSACTIONS

Delayed delivery transactions, including when issued transactions, are
arrangements in which the Fund buys securities for a set price, with payment and
delivery of the securities scheduled for a future time. During the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. The Fund records the transaction when it
agrees to buy the securities and reflects their value in determining the price
of its shares. Settlement dates may be a month or more after entering into these
transactions so that the market values of the securities bought may vary from
the purchase prices. Therefore, delayed delivery transactions create market
risks for the Fund. Delayed delivery transactions also involve credit risks in
the event of a counterparty default.

TO BE ANNOUNCED SECURITIES (TBAS)

As with other delayed delivery transactions, a seller agrees to issue a TBA
security at a future date. However, the seller does not specify the particular
securities to be delivered. Instead, the Fund agrees to accept any security that
meets specified terms. For example, in a TBA mortgage backed transaction, the
Fund and the seller would agree upon the issuer, interest rate and terms of the
underlying mortgages. The seller would not identify the specific underlying
mortgages until it issues the security. TBA mortgage backed securities increase
market risks because the underlying mortgages may be less favorable than
anticipated by the Fund.

DOLLAR ROLLS

Dollar rolls are transactions where the Fund sells mortgage-backed
securities with a commitment to buy similar, but not identical, mortgage-backed
securities on a future date at a lower price. Normally, one or both securities
involved are TBA mortgage backed securities. Dollar rolls are subject to market
risks and credit risks.

SECURITIES LENDING

The Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or liquid securities from the
borrower as collateral. The borrower must furnish additional collateral if the
market value of the loaned securities increases. Also, the borrower must pay the
Fund the equivalent of any dividends or interest received on the loaned
securities.

The Fund will reinvest cash collateral in securities that qualify as an
acceptable investment for the Fund. However, the Fund must pay interest to the
borrower for the use of cash collateral.

Loans are subject to termination at the option of the Fund or the borrower.
The Fund will not have the right to vote on securities while they are on loan,
but it will terminate a loan in anticipation of any important vote. The Fund may
pay administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash collateral to a securities
lending agent or broker.

Securities lending activities are subject to market risks and credit risks.

<PAGE>

ASSET COVERAGE

In order to secure its obligations in connection with derivatives contracts
or special transactions, the Fund will either own the underlying assets, enter
into an offsetting transaction or set aside readily marketable securities with a
value that equals or exceeds the Fund's obligations. Unless the Fund has other
readily marketable assets to set aside, it cannot trade assets used to secure
such obligations entering into an offsetting derivative contract or terminating
a special transaction. This may cause the Fund to miss favorable trading
opportunities or to realize losses on derivative contracts or special
transactions.

INVESTMENT RISKS

There are many factors which may effect an investment in the Fund. The
Fund's principal risks are described in its prospectus. Additional risk factors
are outlined below and the specific risks associated with equity securities are
as follows:

STOCK MARKET RISKS

o The value of equity securities in the Fund's portfolio will rise and fall.
These fluctuations could be a sustained trend or a drastic movement. The
Fund's portfolio will reflect changes in prices of individual portfolio
stocks or general changes in stock valuations. Consequently, the Fund's
share price may decline and you could lose money.

o The Adviser attempts to manage market by limiting the amount the Fund
invests in each company's equity securities. However, diversification will
not protect the Fund against widespread or prolonged declines in the stock
market.

LIQUIDITY RISKS

o Trading opportunities are limited for equity securities that are not widely
held. This may make it more difficult to sell or buy a security at a
favorable price or time. Consequently, the Fund may have to accept a lower
price to sell a security, sell other securities to raise cash or give up an
investment opportunity, any of which could have a negative effect on the
Fund's performance. Infrequent trading of securities may also lead to an
increase in their price volatility

o Liquidity risk also refers to the possibility that the Fund may not be able
to sell a security or close out a derivative contract when it wants to. If
this happens, the Fund will be required to continue to hold the security or
keep the position open,

o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

RISKS RELATED TO COMPANY SIZE

o Generally, the smaller the market capitalization of a company, the fewer
the number of shares traded daily, the less liquid its stock and the more
volatile its price. Market capitalization is determined by multiplying the
number of outstanding shares by the current market price per share.

o Companies with smaller market capitalizations also tend to have unproven
track records, limited product or service base and limited access to
capital. These factors also increase risks and make these companies more
likely to fail than larger, well capitalized companies.

SECTOR RISK

O Companies with similar characteristics may be grouped together in broad
categories called sectors. Sector risk is the possibility that a certain
sector may perform differently than other sectors or as the market as a
whole. As the adviser allocates more of the Fund's portfolio holdings to a
particular sector, the Fund's performance will be more susceptible to any
economic, business or other developments which generally affect that
sector.

LEVERAGE RISK

o Leverage risk is created when an investment exposes the Fund to a level of
risk that exceeds the amount invested. Changes in the value of such an
investment magnify the fund's risk of loss and potential for gain.
Investments can have these same results if their returns are based on a
multiple of a specified index, security, or other benchmark.

The specific risks associated with fixed income securities are as follows:

BOND MARKET RISK

o Prices of fixed income securities rise and fall in response to interest
rate changes for similar securities. Generally, when interest rates rise,
prices of fixed income securities fall.

o Interest rate changes have a greater effect on fixed income securities with
longer durations. Duration measures the price sensitivity of a fixed income
security to changes in interest rates.

CREDIT RISK

o Credit risk is the possibility that an issuer will default by failing to
pay interest and principal when due. If an issuer defaults, the Fund will
lose money.

o Many fixed income securities receive credit ratings from companies such as
Standard & Poor's and Moody's Investor Services. These services assign
ratings to securities by assessing the likelihood of issuer default. Lower
credit ratings correspond to higher credit risk. If a security has not
received a rating, the Fund must rely on the Adviser's credit assessment.

o Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of the
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's rating
is lowered, or the security is perceived to have an increased credit risk.
An increase in the spread will cause the price of the security to decline.

CALL RISK

o Call risk is the possibility that an issuer may redeem a fixed income
security before maturity (a call) at a price below its current market
price. An increase in the likelihood of a call may reduce the security's
price.

o If a fixed income security is called, the Fund may have to reinvest the
proceeds in other fixed income securities with lower interest rates, higher
credit risks, or other less favorable characteristics.

LIQUIDITY RISKS

o Trading opportunities are more limited for fixed income securities that
have not received any credit ratings, have received ratings below
investment grade or are not widely held. These features may make it more
difficult to sell or buy a security at a favorable price or time.
Consequently, the Fund may have to accept a lower price to sell a security,
sell other securities to raise cash or give up an investment opportunity,
any of which could have a negative effect on the Fund's performance.

Infrequent trading of securities may also lead to an increase in their
price volatility.

o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

RISK OF FOREIGN INVESTING

o Foreign securities pose additional risks over domestic securities because
foreign economic or political conditions may be less favorable than those
of the United States. Foreign financial markets may also have fewer
investor protections. Securities in foreign markets may also suffer from
taxation policies that reduce returns for U.S. investors. Due to these risk
factors, foreign securities may be more volatile and less liquid than
similar securities traded in the U.S.

RISKS ASSOCIATED WITH NONINVESTMENT GRADE SECURITIES

o Securities rated below investment grade, also known as junk bonds,
generally entail greater risks than investment grade securities. For
example, their prices are more volatile, their values are more negatively
impacted by economic downturns, and their trading market may be more
limited.

The specific risks of investing in derivative contracts include the following:

o Liquidity risk refers to the possibility that the Fund may not be able to
sell a security or close out a position when it wants to. If this happens,
the Fund will be required to continue to hold the security or keep the
position open, and the Fund could incur losses.

o OTC derivative contracts generally carry greater liquidity risk than
exchange-traded contracts.

INVESTMENT LIMITATIONS

SELLING SHORT AND BUYING ON MARGIN

The Fund will not sell any securities short or purchase any securities on
margin.

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Fund will not issue senior securities, except as permitted by its
investment objective and policies, and except that the Fund may enter into
reverse repurchase agreements and otherwise borrow up to one-third of the value
of its net assets including the amount borrowed, as a temporary, extraordinary
or emergency measure or to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. This practice is not for
investment leverage. The Fund will not purchase any portfolio instruments while
any borrowings (including reverse repurchase agreements) are outstanding.

DIVERSIFICATION OF INVESTMENTS

The Fund will not invest more than 5% of the value of its total assets in
the securities of any one issuer, except U.S. government securities; invest in
more than 10% of the voting securities of one issuer; or invest in more than 10%
of any class of securities of one issuer.

SELLING SECURITIES

The Fund may not sell any security or evidence of interest therein unless
it is owned by the Fund and available for delivery.

INVESTING IN COMMODITIES, COMMODITY CONTRACTS, OR REAL ESTATE

The Fund will not invest in commodities, commodity contracts, or real
estate.

UNDERWRITING

The Fund will not engage in underwriting or agency distribution of
securities issued by others.

LENDING CASH OR SECURITIES

The Fund will not lend any assets except portfolio securities. The purchase
of corporate or government bonds, debentures, notes or other evidences of
indebtedness shall not be considered a loan for purposes of this limitation.

CONCENTRATION OF INVESTMENTS

The Fund will not invest more than 25% of the value of its total assets in
securities of companies in any one industry. However, with respect to foreign
governmental securities, the Fund reserves the right to invest up to 25% of its
total assets in fixed income securities of foreign governmental units located
within an individual foreign nation and to purchase or sell various currencies
on either a spot or forward basis in connection with these investments.

The above limitations cannot be changed unless authorized by the "vote of a
majority of its outstanding voting securities," as defined by the Investment
Company Act. The following limitations, however, may be changed by the Directors
without shareholder approval. Shareholders will be notified before any material
change in these limitations becomes effective.

INVESTING IN ILLIQUID SECURITIES

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.

ACQUIRING SECURITIES

The Fund will not invest in securities issued by any other investment
company or investment trust except in regular open-market transactions or as
part of a plan of merger or consolidation. It will not invest in securities of a
company for the purpose of exercising control or management.

If a percentage limitation is adhered to at the time of investment, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction.

The Fund did not borrow money or lend portfolio securities in excess of 5%
of the value of its net assets during the last fiscal year and has no present
intent to do so in the coming fiscal year.

For purposes of its policies and limitations, the Fund considers
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items."

Cash items may include short-term obligations such as:

o obligations of the U.S. government or its agencies or
instrumentalities; and

o repurchase agreements.

DETERMINING MARKET VALUE OF SECURITIES

Market values of the Fund's portfolio securities are determined as follows:

o for equity securities, according to the last sale price in the market in
which they are primarily traded (either a national securities exchange or
the over-the-counter market), if available;

o in the absence of recorded sales for equity securities, according to the
mean between the last closing bid and asked prices;

o for bonds and other fixed income securities, at the last sale price on a
national securities exchange, if available, otherwise, as determined by an
independent pricing service;

o for short-term obligations, according to the mean between bid and asked
prices as furnished by an independent pricing service, except that
short-term obligations with remaining maturities of less than 60 days at
the time of purchase may be valued at amortized cost or at fair market
value as determined in good faith by the Board; and

o for all other securities, at fair value as determined in good faith by the
Board.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider: institutional trading in
similar groups of securities, yield, quality, stability, risk, coupon rate,
maturity, type of issue, trading characteristics, and other market data or
factors. From time to time, when prices cannot be obtained from an independent
pricing service, securities may be valued based on quotes from broker-dealers or
other financial institutions that trade the securities.

The Fund values futures contracts and options at their market values
established by the exchanges on which they are traded at the close of trading on
such exchanges. Options traded in the over-the-counter market are valued
according to the mean between the last bid and the last asked price for the
option as provided by an investment dealer or other financial institution that
deals in the option. The Board may determine in good faith that another method
of valuing such investments is necessary to appraise their fair market value.
TRADING IN FOREIGN SECURITIES. Trading in foreign securities may be completed at
times which vary from the closing of the New York Stock Exchange (NYSE). In
computing its NAV, the Fund values foreign securities at the latest closing
price on the exchange on which they are traded immediately prior to the closing
of the NYSE. Certain foreign currency exchange rates may also be determined at
the latest rate prior to the closing of the NYSE. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at current rates.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE. If
such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by the
Fund's Board, although the actual calculation may be done by others.

WHAT DO SHARES COST?

The Fund's net asset value (NAV) per Share fluctuates and is based on the
market value of all securities and other assets of the Fund. The NAV 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.

REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE

You can reduce or eliminate the applicable front-end sales charge, as follows.

QUANTITY DISCOUNTS. Larger purchases of the same Share class can reduce or
eliminate the sales charge you pay. You can combine purchases of Shares made on
the same day by you, your spouse, and your children under age 21. In addition,
purchases made at one time by a trustee or fiduciary for a single trust estate
or a single fiduciary account can be combined.

ACCUMULATED PURCHASES. If you make an additional purchase of Shares, you
can count previous Share purchases still invested in the Fund in calculating the
applicable sales charge on the additional purchase.

CONCURRENT PURCHASES. You can combine concurrent purchases of the same
Share class of two or Federated Funds in calculating the applicable sales
charge.

LETTER OF INTENT - CLASS A SHARES. You can sign a Letter of Intent
committing to purchase a certain amount of the same class of Shares within a 13
month period to combine such purchases in calculating the sales charge. The
Fund's custodian will hold Shares in escrow equal to the maximum applicable
sales charge. If you complete the Letter of Intent, the Custodian will release
the Shares in escrow to your account. If you do not fulfill the Letter of
Intent, the Custodian will redeem the appropriate amount from the Shares held in
escrow to pay the sales charges that were not applied to your purchase.

REINVESTMENT PRIVILEGE. You may reinvest, within 120 days, your redemption
proceeds at the next determined NAV, without any sales charge.

PURCHASES BY AFFILIATES OF THE FUND. The following individuals and their
immediate family members may buy Shares at NAV without any sales charge because
there are nominal sales efforts associated with their purchases:

o the Directors, employees, and sales representatives of the Fund, the
Adviser, the Distributor and their affiliates;

o Employees of State Street Bank Pittsburgh who started their employment on
January 1, 1998, and were employees of Federated Investors, Inc.
(Federated) on December 31, 1997;

o any associated person of an investment dealer who has a sales agreement
with the Distributor; and

o trusts, pension or profit-sharing plans for these individuals.

FEDERATED LIFE MEMBERS

Shareholders of the Fund known as "Federated Life Members" are exempt from
paying any front-end sales charge. These shareholders joined the Fund
originally:

o through the "Liberty Account," an account for Liberty Family of Funds
shareholders on February 28, 1998 (the Liberty Account and Liberty Family
of Funds are no longer marketed); or

o as Liberty Account shareholders by investing through an affinity group
prior to August 1, 1987.

REDUCING OR ELIMINATING THE CONTINGENT DEFERRED SALES CHARGE

These reductions or eliminations are offered because no sales commissions
have been advanced to the selling investment professional, the shareholder has
already paid a Contingent Deferred Sales Charge (CDSC), or nominal sales efforts
are associated with the original purchase of Shares.

Upon notification to the Distributor or the Fund's transfer agent, no CDSC
will be imposed on redemptions:

o following the death or post-purchase disability, as defined in Section
72(m)(7) of the Internal Revenue Code of 1986, of the last surviving
shareholder;

o representing minimum required distributions from an Individual Retirement
Account or other retirement plan in Federated Funds to a shareholder who
has attained the age of 70-1/2;

o which are involuntary redemptions processed by the Fund because the
accounts do not meet the minimum balance requirements;

o which are qualifying redemptions of Class B Shares under a Systematic
Withdrawal Program;

o of Shares that represent a reinvestment within 120 days of a previous
redemption;

o of Shares held by the Directors, employees, and sales representatives of
the Fund, the Adviser, the Distributor and their affiliates; employees of
any investment professional that sells Shares according to a sales
agreement with the Distributor; and the immediate family members of the
above persons; and

o of Shares originally purchased through a bank trust department, a
registered investment adviser or retirement plans where the third party
administrator has entered into certain arrangements with the Distributor or
its affiliates, or any other investment professional, to the extent that no
payments were advanced for purchases made through these entities.

HOW IS THE FUND SOLD?

Under the Distributor's Contract with the Fund, the Distributor (Federated
Securities Corp.), located at Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779, offers Shares on a continuous, best-efforts basis.

FRONT-END SALES CHARGE REALLOWANCES

The Distributor receives a front-end sales charge on certain Share sales.
The Distributor generally pays up to 90% (and as much as 100%) of this charge to
investment professional for sales and/or administrative services. Any payments
to investment professional in excess of 90% of the front-end sales charge are
considered supplemental payments. The Distributor retains any portion not paid
to a investment professional.

RULE 12B-1 PLAN

As a compensation-type plan, the Rule 12b-1 Plan is designed to pay the
Distributor (who may then pay investment professional such as banks,
broker/dealers, trust departments of bank, and registered investment advisers)
for marketing activities (such as advertising, printing and distributing
prospectuses, and providing incentives to investment professionals) to promote
sales of Shares so that overall Fund assets are maintained or increased. This
helps the Fund achieve economies of scale, reduce per share expenses, and
provide cash for orderly portfolio management and Share redemptions. Also, the
Fund's service providers that receive asset-based fees also benefit from stable
or increasing Fund assets.

The Fund may compensate the Distributor more or less than its actual
marketing expenses. In no event will the Fund pay for any expenses of the
Distributor that exceed the maximum Rule 12b-1 Plan fee. For some classes of
Shares, the maximum Rule 12b-1 Plan fee that can be paid in any one year may not
be sufficient to cover the marketing related expenses the Distributor has
incurred. Therefore, it may take the Distributor a number of years to recoup
these expenses. Federated and its subsidiaries may benefit from arrangements
where the Rule 12b-1 Plan fees related to Class B Shares may be paid to
third-parties who have advanced commissions to investment professional.

SHAREHOLDER SERVICES

The Fund may pay Federated Shareholder Services Company, a subsidiary of
Federated Investors, Inc. (Federated) for providing shareholder services and
maintaining shareholder accounts. Federated Shareholder Services Company may
select others to perform these services for their customers and may pay them
fees.

SUPPLEMENTAL PAYMENTS

Investment professionals may be paid fees out of the assets of the
Distributor and/or Federated Shareholder Services Company (but not out of Fund
assets). The Distributor and/or Federated Shareholder Services Company may be
reimbursed by the Adviser or its affiliates.

Investment professionals receive such fees for providing
distribution-related or shareholder services such as sponsoring sales, providing
sales literature, conducting training seminars for employees, and engineering
sales-related computer software programs and systems. Also, investment
professionals may be paid cash or promotional incentives, such as reimbursement
of certain expenses relating to attendance at informational meetings about the
Fund or other special events at recreational-type facilities, or items of
material value. These payments will be based upon the amount of Shares the
investment professional sells or may sell and/or upon the type and nature of
sales or marketing support furnished by the investment professional.

When a investment professional's customer purchases shares, the investment
professional may receive:

o an amount equal to 0.50% of the NAV of Class A Shares under certain
qualified retirement plans as approved by the Distributor. (Such payments are
subject to a reclaim from the investment professional should the assets leave
the program within 12 months after purchase.)

o an amount up to 5.50% and 1.00%, respectively, of the NAV of Class B and
C Shares.

In addition, the Distributor may pay investment professionals 0.25% of the
purchase price of $1 million or more of Class A Shares that its customer has not
redeemed over the first year.

<PAGE>

CLASS A SHARES.

Investment professionals purchasing Class A Shares for their customers are
eligible to receive an advance payment from the Distributor based on the
following breakpoints:

Advance Payments
as a Percentage of

AMOUNT PUBLIC OFFERING PRICE

First $1 - $5 million 0.75%
Next $5 - $20 million 0.50%
Over $20 million 0.25%

For accounts with assets over $1 million, the dealer advance payments
resets annually to the first breakpoint on the anniversary of the first
purchase.

Class A Share purchases under this program may be made by Letter of Intent
or by combining concurrent purchases. The above advance payments will be paid
only on those purchases that were not previously subject to a front-end sales
charge and dealer advance payments. Certain retirement accounts may not be
eligible for this program.

A contingent deferred sales charge of 0.75% of the redemption amount
applies to Class A Shares redeemed up to 24 months after purchase. The CDSC does
not apply under certain investment programs where the investment professional
does not receive an advance payment on the transaction including, but not
limited to, trust accounts and wrap programs where the investor pays an account
level fee for investment management.

EXCHANGING SECURITIES FOR SHARES

You may contact the Distributor to request a purchase of Shares in an
exchange for securities you own. The Fund reserves the right to determine
whether to accept your securities and the minimum market value to accept. The
Fund will value your securities in the same manner as it values its assets. This
exchange is treated as a sale of your securities for federal tax purposes.

SUBACCOUNTING SERVICES

Certain investment professionals may wish to use the transfer agent's
subaccounting system to minimize their internal recordkeeping requirements. The
transfer agent may charge a fee based on the level of subaccounting services
rendered. Investment professionals holding Shares in a fiduciary, agency,
custodial, or similar capacity may charge or pass through subaccounting fees as
part of or in addition to normal trust or agency account fees. They may also
charge fees for other services that may be related to the ownership of Shares.
This information should, therefore, be read together with any agreement between
the customer and the investment professional about the services provided, the
fees charged for those services, and any restrictions and limitations imposed.

REDEMPTION IN KIND

Although the Fund intends to pay Share redemptions in cash, it reserves the
right, as described below, to pay the redemption price in whole or in part by a
distribution of the Fund's portfolio securities.

Because the Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940, the Fund is obligated to pay Share redemptions
to any one shareholder in cash only up to the lesser of $250,000 or 1% of the
net assets represented by such Share class during any 90-day period.

Any Share redemption payment greater than this amount will also be in cash
unless the Fund's Board determines that payment should be in kind. In such a
case, the Fund will pay all or a portion of the remainder of the redemption in
portfolio securities, valued in the same way as the Fund determines its NAV. The
portfolio securities will be selected in a manner that the Fund's Board deems
fair and equitable and, to the extent available, such securities will be readily
marketable.

Redemption in kind is not as liquid as a cash redemption. If redemption is
made in kind, shareholders receiving the portfolio securities and selling them
before their maturity could receive less than the redemption value of the
securities and could incur certain transaction costs.

ACCOUNT AND SHARE 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 the Fund
have equal voting rights, except that in matters affecting only a particular
class, only Shares of that class are entitled to vote.

Directors may be removed by the Board or by shareholders at a special
meeting. A special meeting of shareholders will be called by the Board upon the
written request of shareholders who own at least 10% of the Fund's outstanding
shares of all series entitled to vote.

As of December 8, 1998, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Shares: MLPF&S, Jacksonville,
FL, owned 5.72% of Class C Shares; Ingersoll & Co., Des Moines, IA, owned 8.58%
of the Class C Shares; and The Provident Bank, Cincinnati, OH, owned 6.39% of
Class C Shares.

TAX INFORMATION

FEDERAL INCOME TAX

The Fund intends to meet requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies. If these requirements
are not met, it
will not receive special tax treatment and will pay federal income tax.

FOREIGN INVESTMENTS.

If the Fund purchases foreign securities, their investment income may be
subject to foreign withholding or other taxes that could reduce the return on
these securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the Fund
would be subject. The effective rate of foreign tax cannot be predicted since
the amount of Fund assets to be invested within various countries is uncertain.
However, the Fund intends to operate so as to qualify for treaty-reduced tax
rates when applicable.

Distributions from a Fund may be based on estimates of book income for the
year. Book income generally consists solely of the coupon income generated by
the portfolio, whereas tax basis income includes gains or losses attributable to
currency fluctuation. Due to differences in the book and tax treatment of fixed
income securities denominated in foreign currencies, it is difficult to project
currency effects on an interim basis. Therefore, to the extent that currency
fluctuations cannot be anticipated, a portion of distributions to shareholders
could later be designated as a return of capital, rather than income, for income
tax purposes, which may be of particular concern to simple trusts.

If the Fund invests in the stock of certain foreign corporations, they may
constitute Passive Foreign Investment Companies (PFIC), and the Fund may be
subject to Federal income taxes upon disposition of PFIC investments.

If more than 50% of the value of the Fund's assets at the end of the tax
year is represented by stock or securities of foreign corporations, the Fund
intends to qualify for certain Code stipulations that would allow shareholders
to claim a foreign tax credit or deduction on their U.S. income tax returns. The
Code may limit a shareholder's ability to claim a foreign tax credit.
Shareholders who elect to deduct their portion of the Fund's foreign taxes
rather than take the foreign tax credit must itemize deductions on their income
tax returns.

WHO MANAGES AND PROVIDES SERVICES TO THE FUND?

BOARD OF DIRECTORS

The Board is responsible for managing the Fund's business affairs and for
exercising all the Fund's powers except those reserved for the shareholders.
Information about each Board member is provided below and includes each
person's: name, address, birthdate, present position(s) held with the Fund,
principal occupations for the past five years and other notable positions held,
total compensation received as a Director from the Fund for its most recent
fiscal year, and the total compensation received from the Federated Fund Complex
for the most recent calendar year. The Federated Fund Complex is comprised of 56
funds, whose investment advisers are affiliated with the Fund's Adviser. As of
December 8, 1998, the Fund's Board and Officers as a group owned less than 1% of
the Fund's outstanding Class A, B, C Shares.

An asterisk (*) denotes a Director who is deemed to be an interested person
as defined in the Investment Company Act of 1940. The following symbol (#)
denotes a Member of the Board's Executive Committee, which handles the Board's
responsibilities between its meetings.

NAME
BIRTHDATE AGGREGATE TOTAL
ADDRESS COMPENSATION COMPENSATION
POSITION WITH PRINCIPAL OCCUPATIONS FROM FROM CORPORATION
CORPORATION FOR PAST 5 YEARS CORPORATION AND FUND COMPLEX
<S> <C> <C> <C>
JOHN F. DONAHUE*+ Chief Executive Officer and Director or $0 $0 for the
Birthdate: July 28, 1924 Trustee of the Federated Fund Complex; Corporation and
Federated Investors Chairman and Director, Federated Investors, 56 other
Tower Inc.; Chairman and Trustee, Federated investment
1001 Liberty Avenue Advisers, Federated Management, and companies
Pittsburgh, PA Federated Research; Chairman and Director, in the Fund
DIRECTOR AND PRESIDENT Federated Research Corp., and Federated Complex
Global Research Corp.; Chairman, Passport
Research, Ltd.

THOMAS G. BIGLEY Director or Trustee of the Federated Fund $1,143.62 $111,222 for
Birthdate: February 3, Complex; Director, Member of Executive the
1934 Committee, Children's Hospital of Corporation and
15 Old Timber Trail Pittsburgh; formerly: Senior Partner, Ernst 56 other
Pittsburgh, PA & Young LLP; Director, MED 3000 Group, investment
DIRECTOR Inc.; Director, Member of Executive companies
Committee, University of Pittsburgh. in the Fund
Complex

JOHN T. CONROY, JR. Director or Trustee of the Federated Fund $1,258.17 $122,362 for
Birthdate: June 23, 1937 Complex; President, Investment Properties the
Wood/IPC Commercial Corporation; Senior Vice President, Corporation and
Dept. John R. Wood and Associates, Inc., 56 other
John R. Wood Realtors; Partner or Trustee in private investment
Associates, Inc. real estate ventures in Southwest Florida; companies
Realtors formerly: President, Naples Property in the Fund
3255 Tamiami Trial Management, Inc. and Northgate Village Complex
North Naples, FL Development Corporation.

DIRECTOR

WILLIAM J. COPELAND Director or Trustee of the Federated Fund $1,258.17 $122,362 for
Birthdate: July 4, 1918 Complex; Director and Member of the the
One PNC Plaza-23rd Floor Executive Committee, Michael Baker, Inc.; Corporation and
Pittsburgh, PA formerly: Vice Chairman and Director, PNC 56 other
DIRECTOR Bank, N.A., and PNC Bank Corp.; Director, investment
Ryan Homes, Inc. companies
in the Fund

Retired: Director, United Refinery; Complex
Director, Forbes Fund; Chairman, Pittsburgh
Foundation; Chairman, Pittsburgh Civic

Light Opera.

JAMES E. DOWD, ESQ. Director or Trustee of the Federated Fund $1,258.17 $122,362 for
Birthdate: May 18, 1922 Complex; Attorney-at-law; Director, The the
571 Hayward Mill Road Emerging Germany Fund, Inc. Corporation and
Concord, MA 56 other
DIRECTOR Retired: President, Boston Stock Exchange, investment

Inc.; Regional Administrator, United States companies
Securities and Exchange Commission. in the Fund

Complex

LAWRENCE D. ELLIS, M.D.* Director or Trustee of the Federated Fund $1,143.62 $111,222 for
Birthdate: October 11, Complex; Professor of Medicine, University the
1932 of Pittsburgh; Medical Director, University Corporation and
3471 Fifth Avenue of Pittsburgh Medical Center - Downtown; 56 other
Suite 1111 Hematologist, Oncologist, and Internist, investment
Pittsburgh, PA Presbyterian and Montefiore Hospitals; companies
DIRECTOR Member, National Board of Trustees, in the Fund
Leukemia Society of America. Complex

EDWARD L. FLAHERTY, Director or Trustee of the Federated Fund $1,258.17 $122,362 for
JR., ESQ. # Complex; Attorney, of Counsel, Miller, the
Birthdate: June 18, 1924 Ament, Henny & Kochuba; Director, Eat'N Corporation and
Miller, Ament, Henny & Park Restaurants, Inc.; formerly: Counsel, 56 other
Kochuba Horizon Financial, F.A., Western Region; investment
205 Ross Street Partner, Meyer and Flaherty. companies
Pittsburgh, PA in the Fund
DIRECTOR Complex

PETER E. MADDEN Director or Trustee of the Federated Fund $1,143.62 $111,222 for
Birthdate: March 16, Complex; formerly: Representative, the
1942 Commonwealth of Massachusetts General Corporation and
One Royal Palm Way Court; President, State Street Bank and 56 other
100 Royal Palm Way Trust Company and State Street Corporation. investment
Palm Beach, FL companies
DIRECTOR Retired: Director, VISA USA and VISA in the Fund
International; Chairman and Director, Complex
Massachusetts Bankers Association;

Director, Depository Trust Corporation.

JOHN E. MURRAY, JR., Director or Trustee of the Federated Fund $1,143.62 $111,222 for
J.D., S.J.D. Complex; President, Law Professor, Duquesne the
Birthdate: December 20, University; Consulting Partner, Mollica & Corporation and
1932 Murray. 56 other
President, Duquesne investment
University Retired: Dean and Professor of Law, companies
Pittsburgh, PA University of Pittsburgh School of Law; in the Fund
DIRECTOR Dean and Professor of Law, Villanova Complex
University School of Law.

WESLEY W. POSVAR Director or Trustee of the Federated Fund $1,143.62 $111,222 for
Birthdate: September Complex; President, World Society of the
14, 1925 Ekistics, Athens; Professor, International Corporation and
1202 Cathedral of Politics; Management Consultant; Trustee, 56 other
Learning Carnegie Endowment for International Peace, investment
University of Pittsburgh RAND Corporation, Online Computer Library companies
Pittsburgh, PA Center, Inc., National Defense University in the Fund
DIRECTOR and U.S. Space Foundation; President Complex
Emeritus, University of Pittsburgh;
Founding Chairman, National Advisory
Council for Environmental Policy and
Technology, Federal Emergency Management
Advisory Board and Czech Management Center,

Prague.

Retired: Professor, United States Military
Academy; Professor, United States Air Force

Academy.

MARJORIE P. SMUTS Director or Trustee of the Federated Fund $1,143.62 $111,222 for
Birthdate: June 21, 1935 Complex; Public the
4905 Bayard Street Relations/Marketing/Conference Planning. Corporation and
Pittsburgh, PA 56 other
DIRECTOR Retired: National Spokesperson, Aluminum investment
Company of America; business owner. companies

in the Fund
Complex

J. CHRISTOPHER DONAHUE+ President or Executive Vice President of $0 $0 for the
Birthdate: April 11, the Federated Fund Complex; Director or Corporation and
1949 Trustee of some of the Funds in the 18 other
Federated Investors Federated Fund Complex; President and investment
Tower Director, Federated Investors, Inc.; companies
1001 Liberty Avenue President and Trustee, Federated Advisers, in the Fund
Pittsburgh, PA Federated Management, and Federated Complex
EXECUTIVE VICE PRESIDENT Research; President and Director, Federated
Research Corp. and Federated Global
Research Corp.; President, Passport
Research, Ltd.; Trustee, Federated
Shareholder Services Company; Director,
Federated Services Company.

<PAGE>

EDWARD C. GONZALES Trustee or Director of some of the Funds in $0 $0 for the
Birthdate: October 22, the Federated Fund Complex; President, Corporation and
1930 Executive Vice President and Treasurer of 1 other
Federated Investors some of the Funds in the Federated Fund investment
Tower Complex; Vice Chairman, Federated companies
1001 Liberty Avenue Investors, Inc.; Vice President, Federated in the Fund
Pittsburgh, PA Advisers, Federated Management, Federated Complex
EXECUTIVE VICE PRESIDENT Research, Federated Research Corp.,
Federated Global Research Corp. and
Passport Research, Ltd.; Executive Vice
President and Director, Federated
Securities Corp.; Trustee, Federated
Shareholder Services Company.

JOHN W. MCGONIGLE Executive Vice President and Secretary of $0 $0 for the
Birthdate: October 26, the Federated Fund Complex; Executive Vice Corporation and
1938 President, Secretary, and Director, 56 other
Federated Investors Federated Investors, Inc.; Trustee, investment
Tower Federated Advisers, Federated Management, companies
1001 Liberty Avenue and Federated Research; Director, Federated in the Fund
Pittsburgh, PA Research Corp. and Federated Global Complex
EXECUTIVE VICE Research Corp.; Director, Federated
PRESIDENT AND SECRETARY Services Company; Director, Federated
Securities Corp.

RICHARD J. THOMAS Treasurer of the Federated Fund Complex; $0 $0 for the
Birthdate: June 17, Vice President - Funds Financial Services Corporation and
1954 Division, Federated Investors, Inc.; 56 other
Federated Investors Fomerly: various management positions investment
Tower within Funds Financial Services Division of companies
1001 Liberty Avenue Federated Investors, Inc. in the Fund
Pittsburgh, PA Complex
TREASURER

RICHARD B. FISHER President or Vice President of some of the $0 $0 for the
Birthdate: May 17, 1923 Funds in the Federated Fund Complex; Corporation and
Federated Investors Director or Trustee of some of the Funds in 6 other
Tower the Federated Fund Complex; Executive Vice investment
1001 Liberty Avenue President, Federated Investors, Inc.; companies
Pittsburgh, PA Chairman and Director, Federated Securities in the Fund
VICE PRESIDENT Corp. Complex

</TABLE>

J. THOMAS MADDEN Chief Investment Officer of this Fund and $0 $0 for the
Birthdate: October 22, various other Funds in the Federated Fund Corporation and
1945 Complex; Executive Vice President, 12 other Federated Investors Federated
Investment Counseling, Federated investment Tower Global Research Corp.,
Federated Advisers, companies 1001 Liberty Avenue Federated Management,
Federated Research, in the Fund Pittsburgh, PA and Passport Research, Ltd.; Vice
Complex CHIEF INVESTMENT OFFICER President, Federated Investors, Inc.; Formerly:
Executive Vice President and Senior Vice President, Federated Investment
Counseling Institutional Portfolio Management Services Division; Senior Vice
President, Federated Research Corp., Federated Advisers, Federated Management,
Federated Research, and Passport Research, Ltd. + Mr. Donahue is the father of
J. Christopher Donahue, Executive Vice President of the Corporation.

INVESTMENT ADVISER

The Adviser conducts investment research and makes investment decisions for
the Fund. The Adviser is a wholly-owned subsidiary of Federated.

The Adviser shall not be liable to the Fund or any Fund shareholder for any
losses that may be sustained in the purchase, holding, or sale of any security
or for anything done or omitted by it, except acts or omissions involving
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties imposed upon it by its contract with the Fund.

OTHER RELATED SERVICES.

Affiliates of the Adviser may, from time to time, provide certain
electronic equipment and software to institutional customers in order to
facilitate the purchase of Fund Shares offered by the Distributor.

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. 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. The Adviser may select brokers and dealers
based on whether they also offer research services (as described below). 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 the Distributor and its affiliates. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.

RESEARCH SERVICES

Research services may include advice as to the advisability of investing in
securities; security analysis and reports; economic studies; industry studies;
receipt of quotations for portfolio evaluations; and similar services. Research
services may be used by the Adviser or by affiliates of Federated in advising
other accounts. To the extent that receipt of these services may replace
services for which the Adviser or its affiliates might otherwise have paid, it
would tend to reduce their expenses. The Adviser and its affiliates exercise
reasonable business judgment in selecting those brokers who offer brokerage and
research services to execute securities transactions. They determine in good
faith that commissions charged by such persons are reasonable in relationship to
the value of the brokerage and research services provided.

Investment decisions for the Fund are made independently from those of
other accounts managed by the Adviser. When the Fund and one or more of those
accounts invests in, or disposes of, the same security, available investments or
opportunities for sales will be allocated among the Fund and the account(s) in a
manner believed by the Adviser to be equitable. While the coordination and
ability to participate in volume transactions may benefit the Fund, it is
possible that this procedure could adversely impact the price paid or received
and/or the position obtained or disposed of by the Fund.

ADMINISTRATOR

Federated Services Company, a subsidiary of Federated, provides
administrative personnel and services (including certain legal and financial
reporting services) necessary to operate the Fund. Federated Services Company
provides these at the following annual rate of the average aggregate daily net
assets of all Federated Funds as specified below:

MAXIMUM ADMINISTRATIVE FEE AVERAGE AGGREGATE DAILY NET ASSETS OF
THE FEDERATED FUNDS

.15 of 1% on the first $250 million
.125 of 1% on the next $250 million
.10 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million

The administrative fee received during any fiscal year shall be at least
$125,000 per portfolio and $30,000 per each additional class of Shares.
Federated Services Company may voluntarily waive a portion of its fee and may
reimburse the Fund for expenses.

Federated Services Company also provides certain accounting and
recordkeeping services with respect to the Fund's portfolio investments for a
fee based on Fund assets plus out-of-pocket expenses.

CUSTODIAN

State Street Bank and Trust Company, Boston, Massachusetts, is custodian
for the securities and cash of the Fund. Foreign instruments purchased by the
Fund are held by foreign banks participating in a network coordinated by State
Street Bank.

TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

Federated Services Company, through its registered transfer agent
subsidiary, Federated Shareholder Services Company, maintains all necessary
shareholder records. The Funds pays the transfer agent a fee based on the size,
type, and number of accounts and transactions made by shareholders.

INDEPENDENT PUBLIC ACCOUNTANTS

Deloitte & Touche LLP is the independent public accountant for the Fund.

FEES PAID BY THE FUND FOR SERVICES

FOR THE YEAR ENDED

OCTOBER 31,

1998 1997 1996

Advisory Fee Earned.........$1,476,808......$1,138,430.......$1,028,943
Advisory Fee Reduction........$144,801........$248,204.........$206,429
Brokerage Commissions.........$136,728........$178,864.........$142,462
Administrative Fee............$185,000........$185,000.........$135,000
12b-1 Fee

Class A Shares..................$0
Class B Shares............$108,597
Class C Shares.............$32,704

Shareholder Services Fee
Class A Shares............$451,137
Class B Shares.............$36,199
Class C Shares.............$10,901

Fees are allocated among Classes based on their pro rata share of Fund
assets, except for marketing (Rule 12b-1) fees and shareholder services fees,
which are borne only by the applicable Class of Shares.

HOW DOES THE FUND MEASURE PERFORMANCE?

The Fund may advertise Share performance by using the Securities and
Exchange Commission's (SEC) standard method for calculating performance
applicable to all mutual funds. The SEC also permits this standard performance
information to be accompanied by non-standard performance information.

Unless otherwise stated, any quoted Share performance reflects the effect
of non-recurring charges, such as maximum sales charges, which, if excluded,
would increase the total return and yield. The performance of Shares depends
upon such variables as: portfolio quality; average portfolio maturity; type and
value of portfolio securities; changes in interest rates; changes or differences
in the Fund's or any class of Shares' expenses; and various other factors.

Share performance fluctuates on a daily basis largely because net earnings
and offering price per Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of yield and total return.

AVERAGE ANNUAL TOTAL RETURNS AND YIELD

Total returns given for the one-, five- and ten-year or since inception
periods ended October 31, 1998.

Yield given for the 30-day period ended October 31, 1998.

- --------------------- -------------- -------------- --------------
CLASS A CLASS B CLASS C
SHARES SHARES SHARES

- --------------------- -------------- -------------- --------------
- ------------------------------------------------------------------
TOTAL RETURN

- ------------------------------------------------------------------
- --------------------- -------------- -------------- --------------
One Year: 11.09% 10.26% 10.21%
Five Year: 12.95% NA NA
Ten Year: 11.25% NA NA
Since Inception: NA 17.82%* 9.28%*

- --------------------- -------------- -------------- --------------
- ------------------------------------------------------------------
YIELD

- ------------------------------------------------------------------
- --------------------- -------------- -------------- --------------
3.01% 2.29% 2.29%
- --------------------- -------------- -------------- --------------

*Class B Shares and Class C Shares inception date was August 29, 1996.

TOTAL RETURN

Total return represents the change (expressed as a percentage) in the value
of Shares over a specific period of time, and includes the investment of income
and capital gains distributions.

The average annual total return for Shares is the average compounded rate
of return for a given period that would equate a $1,000 initial investment to
the ending redeemable value of that investment. The ending redeemable value is
computed by multiplying the number of Shares owned at the end of the period by
the NAV per Share at the end of the period. The number of Shares owned at the
end of the period is based on the number of Shares purchased at the beginning of
the period with $1,000, less any applicable sales charge, adjusted over the
period by any additional Shares, assuming the annual reinvestment of all
dividends and distributions.

YIELD

The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a thirty-day period; by (ii) the
maximum offering price per Share on the last day of the period. This number is
then annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated each
month over a 12-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by Shares because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in Shares,
the Share performance is lower for shareholders paying those fees.

<PAGE>

PERFORMANCE COMPARISONS

Advertising and sales literature may include:

o references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;

o charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment;

o discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views on how
such developments could impact the Funds; and

o information about the mutual fund industry from sources such as the
Investment Company Institute.

The Fund may compare its performance, or performance for the types of
securities in which it invests, to a variety of other investments, including
federally insured bank products such as bank savings accounts, certificates of
deposit, and Treasury bills.

The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and demographic
statistics.

You may use financial publications and/or indices to obtain a more complete
view of Share performance. When comparing performance, you should consider all
relevant factors such as the composition of the index used, prevailing market
conditions, portfolio compositions of other funds, and methods used to value
portfolio securities and compute offering price. The financial publications
and/or indices which the Fund uses in advertising may include:

LIPPER ANALYTICAL SERVICES, INC. Ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specified period of time.

MORNINGSTAR, INC. An independent rating service, is the publisher of the
bi-weekly MUTUAL FUND VALUES, which rates more than 1,000 NASDAQ-listed mutual
funds of all types, according to their risk-adjusted returns. The maximum rating
is five stars, and ratings are effective for two weeks.

STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS (S&P 500).
Composite index of common stocks in industry, transportation, and financial and
public utility companies. Can be used to compare to the total returns of funds
whose portfolios are invested primarily in common stocks. In addition, the S & P
500 assumes reinvestments of all dividends paid by stocks listed on its index.
Taxes due on any of these distributions are not included, nor are brokerage or
other fees calculated in the S & P figures.

SALOMON BROTHERS AAA-AA CORPORATES calculates total returns of
approximately 775 issues, which include long-term, high-grade domestic corporate
taxable bonds, rated AAA-AA, with maturities of twelve years or more. It also
includes companies in industry, public utilities, and finance.

LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) INDEX is comprised of
approximately 5,000 issues which include non-convertible bonds publicly issued
by the U.S. government or its agencies; corporate bonds guaranteed by the U.S.
government and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked by
Lehman Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.

S&P 500/LEHMAN BROTHERS GOVERNMENT/CORPORATE (WEIGHTED INDEX) AND THE S&P
500/ LEHMAN BROTHERS GOVERNMENT (WEIGHTED INDEX) combine the components of a
stock-oriented index and a bond-oriented index to obtain results which can be
compared to the performance of a managed fund. The indices' total returns will
be assigned various weights depending upon the Fund's current asset allocation.

Investors may also consult the fund evaluation consulting universe listed
below. Consulting universes may be composed of pension, profit-sharing,
commingled, endowment/foundation and mutual funds.

SEI BALANCED UNIVERSE is composed of 916 portfolios managed by 390 managers
representing $86 billion in assets. To be included in the universe, a portfolio
must contain a 5% minimum commitment in both equity and fixed income securities.

WHO IS FEDERATED INVESTORS, INC.?

Federated is dedicated to meeting investor needs by making structured,
straightforward and consistent investment decisions. Federated investment
products have a history of competitive performance and have gained the
confidence of thousands of financial institutions and individual investors.

Federated's disciplined investment selection process is rooted in sound
methodologies backed by fundamental and technical research. At Federated,
success in investment management does not depend solely on the skill of a single
portfolio manager. It is a fusion of individual talents and state-of-the-art
industry tools and resources. Federated's investment process involves teams of
portfolio managers and analysts, and investment decisions are executed by
traders who are dedicated to specific market sectors and who handle trillions of
dollars in annual trading volume.

FEDERATED FUNDS OVERVIEW

MUNICIPAL FUNDS.

In the municipal sector, as of December 31, 1997, Federated managed 11 bond
funds with approximately $2.1 billion in assets and 22 money market funds with
approximately $10.9 billion in total assets. In 1976, Federated introduced one
of the first municipal bond mutual funds in the industry and is now one of the
largest institutional buyers of municipal securities. The Funds may quote
statistics from organizations including The Tax Foundation and the National
Taxpayers Union regarding the tax obligations of Americans.

EQUITY FUNDS.

In the equity sector, Federated has more than 27 years' experience. As of
December 31, 1997, Federated managed 29 equity funds totaling approximately
$11.7 billion in assets across growth, value, equity income, international,
index and sector (i.e. utility) styles. Federated's value-oriented management
style combines quantitative and qualitative analysis and features a structured,
computer-assisted composite modeling system that was developed in the 1970s.

CORPORATE BOND FUNDS.

In the corporate bond sector, as of December 31, 1997, Federated managed 11
money market funds and 16 bond funds with assets approximating $17.1 billion and
$5.6 billion, respectively. Federated's corporate bond decision making--based on
intensive, diligent credit analysis--is backed by over 22 years of experience in
the corporate bond sector. In 1972, Federated introduced one of the first
high-yield bond funds in the industry. In 1983, Federated was one of the first
fund managers to participate in the asset-backed securities market, a market
totaling more than $200 billion.

GOVERNMENT FUNDS.

In the government sector, as of December 31, 1997, Federated manages 9
mortgage-backed, 6 government/ agency and 18 government money market mutual
funds, with assets approximating $5.9 billion, $1.5 billion and $35 billion,
respectively. Federated trades approximately $400 million in U.S. government and
mortgage-backed securities daily and places approximately $23 billion in
repurchase agreements each day. Federated introduced the first U.S. government
fund to invest in U.S. government bond securities in 1969. Federated has been a
major force in the short- and intermediate-term government markets since 1982
and currently manages approximately $36 billion in government funds within these
maturity ranges.

<PAGE>

MONEY MARKET FUNDS.

In the money market sector, Federated gained prominence in the mutual fund
industry in 1974 with the creation of the first institutional money market fund.
Simultaneously, the company pioneered the use of the amortized cost method of
accounting for valuing shares of money market funds, a principal means used by
money managers today to value money market fund shares. Other innovations
include the first institutional tax-free money market fund. As of December 31,
1997, Federated managed more than $63.1 billion in assets across 51 money market
funds, including 18 government, 11 prime and 22 municipal with assets
approximating $35 billion, $17.1 billion and $10.9 billion, respectively.

The Chief Investment Officers responsible for oversight of the various
investment sectors within Federated are: U.S. equity and high yield - J. Thomas
Madden; U.S. fixed income -William D. Dawson, III; and global equities and fixed
income - Henry A. Frantzen. The Chief Investment Officers are Executive Vice
Presidents of the Federated

advisory companies.

MUTUAL FUND MARKET.

Thirty-seven percent of American households are pursuing their financial
goals through mutual funds. These investors, as well as businesses and
institutions, have entrusted over $4 trillion to the more than 6,700 funds
available, according to the Investment Company Institute.

Federated distributes mutual funds through its subsidiaries for a variety
of investment purposes. Specific markets include:

FEDERATED CLIENTS OVERVIEW

INSTITUTIONAL CLIENTS.

Federated meets the needs of approximately 900 institutional clients
nationwide by managing and servicing separate accounts and mutual funds for a
variety of purposes, including defined benefit and defined contribution
programs, cash management, and asset/liability management. Institutional clients
include corporations, pension funds, tax-exempt entities,
foundations/endowments, insurance companies, and investment and financial
advisers. The marketing effort to these institutional clients is headed by John
B. Fisher, President, Institutional Sales Division, Federated Securities Corp.

BANK MARKETING.

Other institutional clients include more than 1,600 banks and trust
organizations. Virtually all of the trust divisions of the top 100 bank holding
companies use Federated Funds in their clients' portfolios. The marketing effort
to trust clients is headed by Timothy C. Pillion, Senior Vice President, Bank
Marketing & Sales.

BROKER/DEALERS AND BANK BROKER/DEALER SUBSIDIARIES.

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

FINANCIAL INFORMATION

The Financial Statements for the Fund for the fiscal year ended October 31,
1998 are incorporated herein by reference to the Annual Report to Shareholders
of Federated
Stock and Bond Fund, Inc., dated October 31, 1998.

<PAGE>

INVESTMENT RATINGS

STANDARD AND POOR'S LONG-TERM DEBT RATING DEFINITIONS

AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
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--Debt rated BB has less near-term, vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.

B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B-rating.

CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.

C--The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

MOODY'S INVESTORS SERVICE, INC. LONG-TERM 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 by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.

<PAGE>

A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA--Bonds which are rated BAA are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA--Bonds which are BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the 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 rated 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 IBCA, INC. LONG-TERM DEBT 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 to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. 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 imminent default in payment of interest or principal.

MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATINGS

PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:

o Leading market positions in well established industries.

o High rates of return on funds employed.

o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

o Broad margins in earning coverage of fixed financial charges and high
internal cash generation.

o Well established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2--Issuers rated Prime-1 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.

STANDARD AND POOR'S COMMERCIAL PAPER RATINGS

A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.

A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.

FITCH IBCA, INC. COMMERCIAL PAPER RATING DEFINITIONS

FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.

FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.

<PAGE>

ADDRESSES

FEDERATED STOCK AND BOND FUND, INC.

Class A Shares, Class B Shares, Class C Shares Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000

Distributor

FEDERATED SECURITIES CORP. Federated Investors Tower

1001 Liberty Avenue
Pittsburgh, PA15222-3779

Investment Adviser

FEDERATED MANAGEMENT Federated Investors Tower

1001 Liberty Avenue
Pittsburgh, PA 15222-3779

Custodian

STATE STREET BANK AND TRUST COMPANY P.O. Box 8600
Boston, MA 02266-8600

Transfer Agent and Dividend Disbursing Agent
FEDERATED SHAREHOLDER SERVICES COMPANY P.O. Box 8600

Boston, MA 02266-8600

Independent Auditors

DELOITTE & TOUCHE LLP 2500 One PPG Place

Pittsburgh, PA 15222-5401